Best Practices for Documenting and Reviewing Endowment Spending Policies

 

Managing endowment funds prudently is both a legal responsibility and a cornerstone of long-term sustainability for nonprofit organizations. The Uniform Prudent Management of Institutional Funds Act (UPMIFA) provides clear guidance for charitable institutions on the investment and spending of endowment funds. As stewards of donor intent and fiduciary responsibility, nonprofit boards must implement well-documented, board-reviewed endowment spending policies that reflect UPMIFA’s principles of prudence, purpose, and preservation.

Here’s how nonprofit leaders can align their policies and practices with UPMIFA requirements:

1. Establish a Written Endowment Spending Policy

UPMIFA requires organizations to spend from endowment funds in a manner that is prudent, taking into account the duration and preservation of the fund. A written policy is essential to:

• Codify spending rates (typically a percentage of a trailing average of market value).
• Define how and when the fund’s principal may be accessed.
• Reference relevant considerations such as donor restrictions, inflation, investment returns, and the institution’s overall resources.

Best Practice: Include in the policy the seven factors outlined by UPMIFA for prudent spending decisions, such as the purposes of the fund, the duration of the endowment, expected total return, and the organization's overall investment policy.

2. Perform Regular Board Reviews and Approvals

UPMIFA expects a high level of oversight. The board (or a delegated finance or investment committee) must regularly review the endowment’s spending policy, particularly in response to:

• Material changes in the financial markets.
• Shifts in organizational needs or priorities.
• Receipt of new permanently restricted gifts.

Best Practice: Document board-level approval of endowment spending policies annually in board or committee minutes. Include the rationale for any changes or reaffirmation of current policy.

3. Maintain Documentation of Spending Calculations

To ensure transparency and accountability, institutions should maintain thorough documentation of:

• Annual spending calculations, showing how the policy was applied.
• Board minutes reflecting approval or acknowledgment of the spending amount.
• Justification for any deviations from standard practice (e.g., exceeding the policy rate during a capital campaign).

Best Practice: Create an “Endowment Spending File” for each fiscal year that consolidates investment statements, spending calculations, board approvals, and correspondence with investment advisors.

4. Incorporate Donor Intent into Governance Framework

Donor-restricted endowments are subject not only to UPMIFA but also to specific gift agreements. The policy must ensure donor intent is not only respected but clearly referenced in governance documents and investment procedures.

Best Practice: Maintain a digital archive of original gift agreements and cross-reference each endowment fund’s spending parameters with donor restrictions annually.

5. Train Board Members on UPMIFA Fiduciary Duties

Nonprofit board members are fiduciaries and must understand UPMIFA’s requirements. Regular training helps them make informed decisions and ask critical questions about fund performance and spending.

Best Practice: Include an annual board education session on fiduciary obligations under UPMIFA, focusing on the interplay between investment policy, spending, and organizational mission.

Prudent Governance Builds Donor Confidence

UPMIFA offers flexibility to manage endowment resources over time, but it also demands consistent and disciplined oversight. Institutions that document policies, review them regularly, and respect donor intent not only meet compliance obligations they demonstrate responsible stewardship to donors, grant makers and the communities they serve.

By implementing these best practices into board governance, nonprofit leaders can ensure that endowment resources are preserved and used wisely to advance mission impact for generations to come.

About the Author: Ahmed Hussein, CPA, advises nonprofit organizations on financial management, governance and audit readiness. For inquiries about endowment compliance or board training under UPMIFA, message me today and follow our website at AssertionPro.com. For immediate assistance call (404) 287-8042.