Restricted vs. Unrestricted Endowments
Definitions of “True” (Restricted) and “Quasi” (Unrestricted) Endowments
A “true” or restricted endowment is established if a donor makes a gift to the Endowment Fund, often defining its use.
If the church promotes its Endowment Fund and receives gifts of any size for the Fund, those funds are equally restricted. If a purpose is announced and donors give to an Endowment Fund for a named purpose, the funds are restricted as to purpose as well.
If the church receives an unrestricted bequest, or receives funds from the sale of property, or if it has excess cash which the Vestry decides to put into the Endowment Fund, those funds are called a “quasi” or unrestricted endowment. This part of the Endowment Fund can be spent down by the Vestry within established distribution rules.
The Difference between the Types of Funds
Restricted endowments originate with a donor, or with a church that has identified its endowment fund as a “true” or restricted endowment to which donors gave.
Both the restricted portion and unrestricted portion of an endowment can be comingled for investment purposes. A common spending rule can be applied to both – usually a total return spending rule which draws down three to five percent of a rolling three-year average value of the fund.
The difference comes in the protection of the “corpus.” The corpus, or spending power of the restricted endowment, is protected by the Uniform Prudent Management of Institutional Funds Act (UPMIFA) – a state law passed in 49 of 50 states. UPMIFA speaks to the restricted funds of all non-profit organizations, including churches. It defines what the law means by prudent investing and prudent spending, implementing a total return spending policy as the preferred means of making funds available for whatever purpose was defined by the donor or the fund. By this means the corpus is protected over time.
The corpus of the unrestricted endowment is protected only by whatever policies the church enacts. We suggest that a draw from the unrestricted endowment of more than the normal spending rule – 3% to 5% of a three-year average – be approved by a two-thirds vote of the Vestry at two consecutive meetings, and a two-thirds vote of the full congregation attending a meeting.