financial-disaster pic

Endowment follies abound!

Throughout my 20+ year career in law and planned giving, I see various patterns that emerge that are sometimes frightening and clearly give us (nonprofit fundraisers) reason for concern.

One such area of frightening incompetence (as it turns out) is simple endowment management.

That includes the investment of “endowment” monies.  Sure, it is very troubling when institutional leadership violate every rule in the book regarding investment of endowment funds: over investing in hedge funds, allowing investment committee members to manage part of the pool, lack of independent oversight, etc… Yes, very troubling but not why I am writing this post.

My issue today is something even more basic: bookkeeping and record keeping and just following the law!

How hard are these tasks? Finance folks must be able to handle them?

Well, I have found in most cases the answer is that apparently bookkeeping and record keeping are not so easy – at least for those tasked with doing it!

Yesterday, I glanced at some endowment fund totals for a client going through an extensive entity merger that required filings with the attorney general, clarifications about which funds can have their restrictions released, etc… Actually, a very complex process in New York, by the way.

What did I see yesterday that has me all in a tilly?  I saw one endowment fund’s initial principal was around $500,000 and its appreciation was over $1.5 million.  Hmmmm.  A permanent endowment? Yes, probably close to 30 years old. Their supposed spending rate? 5% or more.  Hmmmm. Yes, this endowment pool was invested very aggressively (your draw would drop if you knew what percentage of this particular endowment had been in hedge funds going into 2008).  Ok, maybe it just grew tons, lost 50% of its value in 2008 and the winnings were still $1.5 million on their $500,000 principal?

I am not going to bother with the math.  There is something wrong with this picture.  If the organization actually withdrew any spending rate, it would be nearly impossible for the fund to more than triple in value, especially after they got killed in 2008 (and didn’t recover because hedge funds are probably not the best option for investment recovery).

My guess?  Maybe they withdrew the spending rate from other funds and didn’t subtract the distributions from the particular fund’s ledger page? Maybe they didn’t spend anything?

What else did I see? Some funds without any documents at all.  Numerous funds whose restrictions should have been released 20 years ago. A complete and utter disregard for the state’s legal requirements regarding managing those endowments (this is NY and NY has the most complex endowment management law).

In yesterday’s meeting, I am estimating that the initial entity that brought in the endowments – and which has been suffering due to its endowment market losses – blew its chance at sorely needed budget relief to the tune of $100 million or more!  What I mean is that if finance/legal staff at that institution had been doing their jobs well, they could have seen that much or more cash flow into their operating expenses that were severely needed through proper endowment spending and freeing up of old/outdated funds.  Instead, they borrowed more money, sold more property and finally were forced into the merger situation that I’m peripherally advising on.

Of course, yesterday’s revelation was no surprise to me.  I have seen endowment managers who use laws that were out of date by 20 years or more. And, I have seen cases where magically an endowment fund kicks off the exact same dollar amount each year and they tell them the funds are there and invested. In fact, I can not recall seeing an endowment program managed properly – from bookkeeping, records, the law, etc.. – EVER.

This blog got a huge boost when New York finally passed its version of UPMIFA – in fact, that was the single largest day of viewers for several years.  So, I put together a great presentation on NYPMIFA and assumed plenty of NY nonprofits would need my help (as it was and is so clearly needed).  Well, I did not sell one NYPMIFA audit.  People tuned in, asked questions, and then went about their way of ignoring the law and screwing up their endowments further.

So, why did the above nonprofit have to actually clean up a mess?  They were going through a complex merger that involved moving of endowment funds from one entity to another.  And, lo and behold, they now have a major law firm helping them address the issues because there are so many.

What’s my point?  Maybe it is the nature of those tasked with simple bookkeeping and record keeping and following endowment law?  Maybe they are just stubborn and/or lazy or just uninformed?  Maybe it is human nature to wait until you are forced to address something?  New York, for instance, could put together a SWAT team of auditors and easily bring down over 90% of NY’s nonprofits for utterly spitting in the face of their law. Very, very few NY nonprofits follow NY endowment law but until the NY attorney general’s office decides to actively enforce NY state law, nonprofits will continually do themselves the major disservice of totally botching their endowments.

I guess my frustration is that virtually none of these nonprofits sought help in this area. Thousands checked out this blog, picked up all of the advice I flooded them with. But, none – zilch – actually took the step to even discuss fixing their problems.  At least not with me!  And, my guess is that very few actually implemented what they were supposed to.

Of course, by the time you are forced to address your endowment issues, you’ll likely be forced to hire one of those white shoe law firms who will easily charge 100 times more them me. Or, in this case, one entity will be left lamenting why they didn’t address their problems earlier – it could have actually help salvage their situation. Instead, a new entity is cleaning up (both literally and figuratively!).

nypost story

To Sue or Not, That is the Question!

Your nonprofit has an ironclad gift – in some trust or an irrevocable pledge for a bequest intent.  Things do NOT go as expected and in fact, your institution is entitled to go after someone or an estate to recover funds.

Do you sue?

My experience has shown that nonprofits usually do NOT go after the money.  Who needs an article about your suit in the New York Post?

Well, here is a link to one case where the charity decided to sue (and look where the story is!):  http://nypost.com/2015/04/07/real-estate-heir-blows-3-5m-meant-for-charity-on-cars-hotels-suit/

This story is light on details. From what I can tell, UJA NY was named remainder beneficiary of a standard testamentary trust (NOT a charitable remainder trust, which would have actually helped in this case).  Typical non-charitable testamentary trusts allow the income beneficiaries a limited right to invade principal in case of various needs.  Of course, if you read those needs broadly, you realize that not much might be left at the end of the day.  And, this is what happened here!

Wealthy guy’s brother-in-law ends up with control of the trust and he uses it.  Honestly, we can’t tell whether UJA NY has a good case or not.  These things are not very clear and these trusts do offer invasion of principal for its beneficiaries.

What would you do?

Have a great planned giving weekend!