Endowments, R30

For Example 11 (V2, pp. 403-5), I disagree with part of the answer key: (Risk of inability to provide reliable/stable funding for programs in the short term is lessened by) the endowment’s spending is not a very large part of the school’s annual operating budget - less than 14% of revenues. Right, but it’s a tiny operating budget - $10MM. Given their small size, they would limited means to tolerate a possible shortfall of $1.35MM of income from their endowment? notwithstanding it’s a relatively small percentage of spending, 13.5%. I know it’s pointless to argue, but curious what others think?

The smaller the percentage of endowment funding of the total operational revenues the less focus needs to be spent on providing a reliable/stable funding. Your loss of $1.35MM assumes that they lose the ENTIRE amount of funding. The more likely scenario is much less than that, so it wouldn’t be catastrophic (although would be a hardship to the org). I chair the board of a local non-profit dealing with land protection/environmental education and our annual budget is just over $500K, but the endowment supports about $200K of that. I think you can easily imagine disruptions in our endowment funding would be much more difficult when it is 40% of the revenue sources, than if it was 20% or less.

Thanks SB-CFA, very helpful background. Also, not a bad cause.

Most organizations also use a 12 rolling quarter average when applying their spend %, to help smooth things. If that is the case you shouldn’t be surprised by severe shocks, as a bad year will not fully impact things…it will be spread over 3 years.