Quasi Endowment: How They Work & Are They Right For You?

Endowment funds, often managed by institutions like universities and foundations, operate with a focus on long-term growth. Unlike traditional endowments, a quasi endowment, sometimes referred to as a ‘board-designated’ fund, typically involves assets that the organization itself has decided to treat as an endowment, providing flexibility in asset allocation. Understanding the difference between quasi endowment and true endowment funds is vital when making financial decisions, especially regarding how these mechanisms can contribute to an organization’s financial sustainability and strategic investments, often guided by financial advisor.

Understanding Quasi Endowments: A Comprehensive Guide

Quasi endowments are a powerful tool for organizations seeking long-term financial stability. Unlike true endowments, which are permanently restricted, quasi endowments offer more flexibility. This guide breaks down how quasi endowments work and whether they are suitable for your specific situation.

What is a Quasi Endowment?

A quasi endowment, also known as a "board-designated endowment" or "funds functioning as endowment," represents unrestricted funds that an organization’s governing body (e.g., the board of directors) has voluntarily set aside for long-term investment. This designation is internal, meaning the organization decides to treat these funds as an endowment, even though there are no external donor restrictions. The key difference between a quasi endowment and a true endowment lies in its flexibility: the board retains the right to "undesignate" the funds and use them for other purposes if necessary.

Key Characteristics of Quasi Endowments:

• Internal Designation: Created by the organization itself, not by external donors.
• Board Control: The governing body retains ultimate control over the funds.
• Investment Focus: Managed with a long-term investment horizon.
• Spending Policy: Subject to a spending policy similar to that of true endowments (more on this below).
• Flexibility: Can be undesignated and used for other organizational needs.

How Quasi Endowments Work

The process of establishing and managing a quasi endowment involves several key steps:

1. Funding: The organization allocates a portion of its unrestricted funds (e.g., surplus operating revenue, unrestricted gifts) to the quasi endowment.

2. Investment Policy: The board develops an investment policy statement (IPS) that outlines the investment objectives, risk tolerance, and asset allocation strategy for the quasi endowment. This IPS is crucial for guiding investment decisions.

   • Example Investment Policy Guidelines:
     • Objective: Achieve a real return (after inflation and spending) of 5% per year over the long term.
     • Risk Tolerance: Moderate risk, with a focus on capital preservation and income generation.
     • Asset Allocation:
       • Equities: 60% (diversified across various market capitalization and geographic regions)
       • Fixed Income: 30% (high-quality bonds with varying maturities)
       • Alternative Investments: 10% (real estate, private equity)

3. Investment Management: The organization either manages the quasi endowment internally or hires an external investment manager to implement the investment policy.

4. Spending Policy: The board establishes a spending policy that determines how much of the quasi endowment’s earnings can be used for current operations each year. A common spending policy is a percentage of the endowment’s average market value over a trailing period (e.g., 3-5% of the average market value over the past three years).

   • Example Spending Rule (Illustrative):
     • 5% of the average market value of the quasi endowment calculated over the preceding 12 calendar quarters, paid out quarterly.

5. Monitoring and Reporting: The board regularly monitors the performance of the quasi endowment and receives reports on its investment results and spending activities.

Benefits of Establishing a Quasi Endowment

There are several advantages to establishing a quasi endowment:

• Long-Term Financial Stability: Creates a dedicated pool of assets to support the organization’s mission over the long term.
• Budget Smoothing: The spending policy can help to smooth out fluctuations in operating revenue.
• Enhanced Credibility: Demonstrates a commitment to financial stewardship to donors and stakeholders.
• Improved Investment Discipline: Encourages a disciplined, long-term approach to investing.
• Flexibility: The ability to undesignate the funds provides a safety net in times of financial crisis.

Potential Drawbacks

While beneficial, quasi endowments also have potential downsides:

• Temptation to Undesignate: The flexibility to undesignate funds can be a double-edged sword if the board is too quick to tap into the endowment for short-term needs.
• Management Costs: Managing a quasi endowment involves costs, including investment management fees and administrative expenses.
• Complexity: Establishing and managing a quasi endowment requires expertise in investment management, accounting, and legal matters.

Is a Quasi Endowment Right for Your Organization?

To determine if a quasi endowment is appropriate, consider the following factors:

• Financial Stability: Does your organization have a history of generating surplus operating revenue?
• Long-Term Vision: Is your organization committed to its mission over the long term?
• Board Governance: Does your board have the expertise and discipline to manage a quasi endowment effectively?
• Risk Tolerance: What is the organization’s tolerance for investment risk?
• Alternative Funding Sources: Are there other, more appropriate sources of funding available?

Decision-Making Table:

Factor	Considerations	Recommendation
Financial Stability	Consistent surpluses, healthy reserves	Strongly Consider
Long-Term Vision	Clearly defined mission, strategic plan with a long-term horizon	Strongly Consider
Board Governance	Experienced board members, financial expertise, commitment to oversight	Strongly Consider
Risk Tolerance	Comfortable with moderate investment risk, focus on long-term growth	Consider
Alternative Funding	Grants, fundraising campaigns, unrestricted gifts (assess their reliability and sustainability)	May reduce the urgency; still consider if seeking to establish a permanent funding source for specific programs/initiatives
Size of Org	Larger Organizations with multiple functions	Well-suited for orgs of this size
Size of Org	Smaller organizations with fewer functions	Need to thoroughly understand cost/benefits before implementation

If your organization meets most of these criteria, a quasi endowment could be a valuable tool for ensuring its long-term financial health. However, it’s crucial to carefully weigh the benefits and drawbacks and seek expert advice before making a decision.

So, what’s the verdict on quasi endowments? They can be a smart move, but like any financial strategy, it’s all about whether a quasi endowment aligns with *your* specific goals. Hope this helped you get a better handle on what a quasi endowment is all about!