Article
Craft effective spending policies for your foundation or not-for-profit organization
June 25, 2019 · Authored by Patty Mayer
A spending policy is an important component of a not-for-profit’s short- and long-term financial planning. When well crafted, a spending policy can benefit an organization’s board members, donors, and overall mission by:
- Aligning expenditures with the organization’s mission and goals for longevity
- Instilling discipline when an organization is developing a budget and investing assets
- Reassuring donors that there’s a strategic plan for their contributions
Once created, a spending policy can be reviewed annually and used to help an organization determine its investment plan.
Following are requirements, parameters, and other key factors to considerations when creating your not-for-profit spending policy.
Charitable distribution requirements
A spending policy should allow an organization to meet its minimum charitable distribution requirements each year. In general, a private foundation is required to pay out 5% of the average market value of its noncharitable-use assets. This must be paid out by the foundation’s succeeding tax year-end.
The annual distributions depend on its average cash balances, average market value of investments, and noncharitable use assets.
Reasonable withdrawal rates
It’s important to determine an appropriate, sustainable withdrawal rate from the endowment, even though this can be difficult in volatile markets. With low interest rates, income alone likely won’t be enough; the spending rate will instead need to be based on total return. That rate can be either a percentage of assets or a fixed dollar amount.
The 2017 National Association of College and University Business Officers (NACUBO)-Commonfund Study of Endowments found that a majority of organizations — endowed as well as non-endowed — compute their spending by applying their spending rate to a percentage of moving average assets.
Regulatory parameters
To help an organization maintain not-for-profit charitable status and avoid certain excise taxes, there are several stipulations that should be outlined in the spending policy. The spending policy should prohibit political spending, self-dealing, jeopardizing investments, and the purchase of excess business holdings.
Further your foundation’s purpose with program- and mission-related investments
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.