The concept of an endowment is well known to anyone in the nonprofit world — restricted funds that create indefinite investment income for a specific purpose.
But more nonprofits are now utilizing what is known as a “quasi-endowment” to gain some flexibility in funding special expenditures or future projects.
Quasi-endowments — also known as “board designated endowments” and “funds functioning as endowments” — are established by the nonprofit organization, not by specific donor intent. Principal and income may be utilized at the discretion of the organization.
Unlike permanent and term endowments, the board can end its restriction for any reason and remove any funds from the quasi-endowment at any time it chooses. Quasi-endowments are established using either donor or institutional funds — typically excess operating support and revenue or unrestricted bequests. A more specific definition can be found in Statement of Financial Accounting Standards (SFAS) 117:
“An organization’s governing board may earmark a portion of its unrestricted net assets as a board-designated endowment (sometimes called “funds functioning as endowment” or “quasi- endowment”) to be invested to provide income for a long but unspecified period. The principal of a board-designated endowment, which results from an internal designation, is not donor restricted and is classified as unrestricted net assets.”
There are a variety of reasons a board might establish a quasi-endowment. For example, a nonprofit may not be ready to launch a true endowment campaign, yet it wants to provide some stability by investing resources and using only the interest for operating expenditures. Likewise, a board might establish a quasi-endowment if a donor is not ready to establish a true endowment (i.e., a donor restricted endowment).
Whatever the reason for establishing a quasi-endowment, boards are well advised to first take some appropriate steps:
Quasi-endowment funds are earmarked by the board — rather than by donors or regulators — to act like permanently restricted funds from which income is available for general operations or certain specific purposes. Accounting standards established by the Financial Accounting Standards Board (FASB) require nonprofits to report quasi-endowments as unrestricted funds.
Quasi-endowments are reported on Line 27 (unrestricted net assets) at Part X of IRS Form 990. They are also reported on Part V (Endowment Funds) of Schedule D (Supplemental Financial Statements).
The timing may never be better to cultivate traditional endowments for your nonprofit. Researchers say the generational transfer of baby boomer wealth could result in at least $6 trillion for charity during the next 50 years.
Starting an endowment takes time, and nonprofits should move carefully. But your organization may be ready if it:
For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.