Carnegie Investment Counsel Blog

How to Improve Your Nonprofits’ Spending Policy Statement

Posted by Meg Halloran on Jun 29, 2021 1:30:00 PM

Non-profit spending blog June

A spending policy statement (SPS) is crucial for nonprofits to ensure their funds are being spent in a way that benefits their mission, pleases their donors and adheres to legal policies. I see this firsthand as I serve as an investment committee member for my church. We meet quarterly to make investment decisions for the endowment and scholarship funds. As a Senior Portfolio Manager at Carnegie Investment Counsel’s Cleveland location, I am happy to share more information on improving a nonprofit spending policy.

 

What Is a Spending Policy Statement (SPS)?

An SPS outlines how much of an organization’s investments and endowment will be used annually to fund operations and pay for capital expenditures. Many nonprofits plan to stay in business for years to come, so they must thoughtfully craft a spending policy for such longevity.

 

Why Is It Important for a Nonprofit to Have a Spending Policy Statement?

A spending policy statement is important so a nonprofit can manage current distributions and plan for the future. It can also help provide more consistency across volatile market environments. While the priorities of a nonprofit are unique, most want to balance long-term and short-term needs so that the fund can be sustained, and hopefully grow, over time. By reserving funds to allow for endowment growth, the amount available to spend annually as a percentage of the fund will grow as well. Having a formal spending policy statement creates discipline and helps the nonprofit to plan expenses accordingly.

 

What Are the Key Pieces of a Spending Policy Statement (SPS)?

There are five key pieces to include in a nonprofit spending policy statement:

  1. The philosophy: Detail the purpose of spending.
  2. Spending policy: The time period and mechanism to be used to calculate the amount that the organization spends annually.
  3. Spending rate
  4. Spending methodology: Inflation-based, hybrid or moving average.
  5. Guidelines to review or modify the policy: Detail how often review will occur and who has power to initiate changes.

Remember, your board can reach out to an investment management firm such as Carnegie for help determining the best spending plan for your nonprofit.

 

What Are Smart Spending Policy Decisions for Nonprofits?

While creating a spending policy is crucial, nonprofits should consider establishing a budget and also a target withdrawal amount between 4 percent and 5 percent of a portfolio, or between 4 to 7 percent of a rolling average of endowment investments. 

Some common acceptable areas for spending include staffing, evaluation/measurement of success, communication, donor records, education, research, and financial management services.

According to Syracuse University, it is recommended that at least 65 percent of funds should be spent on total annual expenses for programs, and no more than 35 percent on fundraising and administration combined. It is recommended that there should be a 1:3 ratio between spending on administrative overhead and program expenditures.

 

What Are the Spending Policy Rules?

In most cases, a nonprofit wants its endowment proceeds to be plowed back into the nonprofit for its work. The spending policy should comply with the state’s UMIFA or UPMIFA standards. (Learn more about uniform standards here.) According to these uniform prudent management standards, which vary by state, for endowment assets that are not restricted; realized profit, interest, dividends and appreciation on invested funds are allowed to be spent.

To maintain its tax-exempt status, nonprofits generally cannot spend the majority of their endowment on employees or suppliers. 

Once you establish a policy, it's important to be disciplined; do not stray from the policy in place. Do not overspend in a good market return year or else you will not have enough in down market years. It is also important for a nonprofit to review its spending policy statement on a regular basis (annually). The capital markets assumptions used to create the spending policy can change over time, making the spending policy out of date. For example, interest rates on bonds were significantly higher in the ‘80s, ‘90s and up through 2008. Bonds could easily pay an annual interest rate of 5 to 7 percent with very little risk. In today’s world, these same types of bonds are now yielding between 1 and 2 percent. That’s not even enough to keep up with inflation. Some nonprofits have had to adjust their spending rates down in order to keep the investment fund sustainable.

 

How Can You Use Your SPS to Inspire Funders?

Besides being a crucial strategic plan, a spending policy lets donors know that you have a well-thought-out plan to use their gifts that is also compliant with legal procedures. Refer to your strategic spending plan when calling for donations to reassure donors that you will responsibly use their contributions. Provide fund statements to donors, too, to confirm where their funds are being used.

Drive home your nonprofit’s vision in your SPS to inspire your funders and describe the outcome of the donor’s investment. Emphasize the joy of giving and its long-lasting legacy.

 

How Can Carnegie Help Nonprofits With an SPS?

Carnegie can help nonprofits develop a spending policy statement by providing important capital markets guidance. That may include both historical and future (projected) rates of return for various asset classes, inflation, interest rates and business cycle insights. Those capital markets assumptions can then help formulate a sustainable spending policy statement that is also in alignment with (or can help shape) the asset allocation of the fund that is outlined in the investment policy statement.

Our team can guide you through the following principal questions as you craft an SPS:

  • Is the spending rate sustainable?  
  • Can the spending rate be met without taking undue investment risk?  
  • What impact will a negative market have? 
  • What steps/mechanisms can be put in place to “smooth out” investment volatility to allow for a more predictable annual distribution? 
  • Is there room for growth for the future?

For more information on how hiring a financial advisor for your nonprofit can help you make a greater impact, read this article from Bob Carroll, Managing Director in our Cincinnati office.

 

Looking to Craft a Nonprofit Spending Policy Statement?

Carnegie is pleased to offer help for foundations and nonprofits in establishing spending policy statements. If you are looking for financial help for your nonprofit, please contact us by booking an appointment.

We also have financial services for individuals, including investment management and financial planning.

Book an Appointment

 

 

 

Topics: nonprofit financial advisors, ESG, Nonprofits

Meg Halloran

Written by Meg Halloran

Meg Halloran serves as Senior Portfolio Manager. Meg works with high net worth individuals, foundations and retirement plans to build an individualized portfolio to meet the client’s objectives.

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