Model for Using Income from Endowment

Model for Using Income from Endowment

In the Presbyterian Church the use of income from endowment generally falls into three categories:

• sustaining and enhancing the small congregation ministering in a limited population setting.
• providing funding for missions beyond the budget and the current giving of the church’s members.
• providing supplemental income to the budget for a variety of uses.

In each of these there is a benefit to tying the amount of income from endowments to the level of giving by current members. Such an incentive creates a partnership of stewardship that brings enhanced satisfaction to today’s donors, honors the bequests of prior generations, and encourages today’s members to consider adding their bequests to the endowment as an expression of faith, knowing that the future health and ministry of the congregation will be enhanced and not harmed.

The following is an outline of a formula for such a partnership (see the next page for an actual example).

First, determine the three-year average of giving to the annual budget by today’s members. This figure is then divided into another three-year average, the hypothetical income from endowments. Calculating a three-year average of 5% of the total endowment arrives at the hypothetical income from endowment. By dividing the first average into the second average (gift income into endowment income) a factor will result that can be used for calculating how much a current pledge will be supplemented by endowment-generated income.

The enhancing or enlarging factor can be used to determine the next year’s budget, but the actual dollars available will be a reflection of actual gift income from members. In order to protect the budget from below par giving by members, four percent (4%) is the lowest percentage of a distribution or spend rate from undesignated endowments that will be available during the year. This “floor” is a means of protecting the budget from receiving too little while also protecting the church from taking too little from endowments and appearing to be simply building up savings.

By contrast, there is a need to protect the endowment for future years from the erosion of buying power by inflation. In order to accomplish this the maximum percentage or spend rate from endowments that may be used in a given year is six percent (6%). If during the year the giving by members is significant, this upper amount or “ceiling” will come into play, limiting the amount from endowments to six percent per year. (3% and 7% can be used for these margins, but caution is suggested for doing so long term.)

As an example, if the average giving by members divided into the average income from endowments creates a 12% factor (as explained above), then a current member’s pledge would be supplemented by 12% in planning for the budget year for whatever use the church determines. Thus, a family that pledges $1,500 would cause an additional $180 (12%) to be generated from endowment.

This model is offered for consideration by Mr. Kim Warner, Vice President, Texas Presbyterian Foundation, as a further expression of its mission in the ministry of permanent funds.

www.tpf.org
Formula for Using Income from Endowment © Copyright TPF with all rights reserved Endowment Income Formula: Example (Using total value of endowment in equation)

2001 contributions: $87,235
2002 contributions: $84,317
2003 contributions: $85,457

Average of these three years: $85,670 (Total of above years, $257,009 divided by three)

2001 value of endowment: $318,597
2002 value of endowment: $297,658
2003 value of endowment: $348,543

2001 endowment times 5%: $15,930
2002 endowment times 5%: $14,883
2003 endowment times 5%: $17,427

Average of these three years: $16,080 (Total of above year’s 5% figures, $48,240 divided by three)

Endowment average divided by contribution average: 19% ($16,080 divided by $85,670)

This factor is used to match any member’s next year’s pledge/contribution to determine how much income from endowment will go into the budget. Pledges can be used to create the budget. Actual contributions will be used to activate withdrawals from endowment.

For example, a couple who pledge $200 a month ($2,400 for the year) will actually cause an additional $456 ($2,400 times 19%) to go into the budget building process. Not for IRS purposes, but for the sake of the church, their pledge is now worth $2,856!

The total dollars used in the endowment will not be less than 4% of the three-year average of the endowment, nor will it be greater than 6% of that three-year average. The first protects the budget, the second protects the endowment. If 4% of endowment is not attained through contributions, then that amount goes into the budget anyway. If and when during the year the income reaches 6% of the endowment figure, then no more money comes from endowment that year. (If it would prove more interesting, a church can use 3% and 7% for these margins, but the long-term use of them will have implications.)

The above example means that no less than $12,864 (4% of endowment average) would go into the budget and no more than $19,296 (6% of endowment average.)

A date such as June 30 of each year is used to recalculate the match and be prepared for the next steward-ship campaign.