Times are changing, should your spending policy change too?

After a challenging year, many nonprofits look for ways to support their daily operations as they struggle with the effects of the COVID-19 pandemic. Revenue sources were cut short practically overnight and nonprofits needed to think fast for ways to gain access to liquidity. What helped keep them going? PPP loans, generous donors and UPMIFA granting flexibility on what’s considered prudent spending. Some organizations looked to their spending policy.

Pandemic or not, deciding what spending rate is the right number is an important consideration for nonprofits in balancing their near-term cash needs for scholarships, grant making, and operational support with long term preservation of principal. Especially now, some organizations felt pressure to increase spending to offset the significant financial challenges of 2020. Although almost half of nonprofits polled in our recent survey indicated no expected change in spending, the number of those that anticipate an increase doubled in from the same survey five years ago. But remember, no two organizations’ spending policies are alike.

Taking a look under the hood

Examining the overall goals and how investment decisions can impact long-term preservation is an important start to deciding your spending policy number. Each is very different and you need to look at the details. Here are some specific areas you can consider before setting or modifying your spending policy.

1. Stress testing to match your organization: Market changes impact each type of organization differently. When stress testing various scenarios, one size, or situation won’t match the others.

2. Set different spending policies for each investment pool: Look separately at the endowed pools versus the non-endowed, or restricted versus unrestricted.  Should they have different goals, risk tolerances and spending policies?

3. The impact of your budget: Nonprofits who frequently experience a surplus without drawing from the endowment likely have a very different budget from those who do not have a steady flow of funds. The dependency level of your budget on distributions from your investment pools is another major factor.

4. Allocation to alternative investments: It’s important to understand how much illiquidity risk the organizations can take and how the liquidity profile can change in the event of a market shock.

5. Spending methodologies: How you calculate the spending is also pertinent.  While the majority of organizations use a simpler rolling average type number, would a more specific calculation allow more flexibility and predictability?

Assessing your spending rate is an important part of your organization’s financial success. When you think about spending rate policy changes, think about how those changes can meet your current and pending institution-specific needs, while maintaining the longer term objectives of these asset pools. Understanding what trends amongst your peers can also give perspective and maybe new ideas that could be beneficial to your organization.

Information provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company. 
Investing involves risk including possible loss of principal. There can be no assurance goals will be met nor that risk can be managed successfully.

This material represents an assessment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.