Permanent Endowment Background Information
by Andy Pettigrew, Former Endowment Trustee
This information first appeared as a series of articles in our newsletter, the Current, July 2004-November 2004
The history of the Endowment Fund begins with the 1987 Capital Fund Raising Campaign. This campaign had two objectives: to fund improvements to the church and to create a fund to support the church’s outreach programs. In 1989, $145,000 from this fund raising campaign was designated as the 75th Jubilee Fund, which will be discussed later in this article.
The next significant gift to All Saints came in 1994. The Donnelly Bequest gave $800,000 in unrestricted funds to the church. At this point, the Staff and Vestry decided to create the Permanent Endowment fund with the monies from the Jubilee Fund and the Donnelly bequest.
The Endowment Fund was established in 1995 under the management of the Endowment Trustees. At that time, five component funds were set up as part of the Endowment. These components are:
Building and Grounds Fund
Ministry and Music Fund
Christian Education Fund
Each component fund makes up a percentage of the whole and earns income based on that percentage. The Ministry and Music Fund, for example, makes up 1.6% of the entire Endowment and thus earns 1.6% of the total income from the Endowment income.
Each year, the Trustees of the Endowment Fund recalculate the percentages for each of the component funds and report these with the expected income for each component to the Vestry. The Vestry then allocates these funds to the designated budget accounts for use during the year.
The purpose of each of the funds is directed by the Endowment’s governing document and enforced by the Trustees. These purposes are:
75th Jubilee Community Fund – Do God’s work for those other than ourselves and to enhance the mission outreach of the church
Building and Grounds Fund – Capital improvements, expansion and construction of church properties
Ministry and Music Fund – Spiritual and musical support to the people of the church and the community
Christian Education Fund – Support special Christian education, events or programs for persons of all ages
Unrestricted Fund – Assist, encourage and promote the overall purpose of the church
In 2000, the most significant gift to the Endowment was made by the Jensen Family. The Jensen bequest, approximately $2.3M, was given to All Saints as an unrestricted gift and was added to the unrestricted component of the Endowment Fund. Today, the value of the All Saints Permanent Endowment Fund is approximately $3M. Annually, the Fund provides a significant portion of the income necessary to support All Saints mission in the Ft. Lauderdale Community.
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THE 75TH JUBILEE COMMUNITY FUND
The Jubilee Fund is a component fund of the endowment and its purpose is to “Do God’s work for those other than ourselves and to enhance the mission outreach of the church”. A further stipulation is that the Vestry must spend at least 25% of the income each year and any unspent funds can be either carried forward into the next years outreach budget or reinvested to grow principal.
The 75th Jubilee Community Fund grew out of the 1987 Capital Fund Raising campaign for All Saints. The intent of the campaign was to support renovations to the Church and build a sustained funding source for the outreach goals. The money raised in the campaign was to be evenly split between the two initiatives. Various dollar figures are available on exactly how much money was raised, but there is general agreement that $800,000 was pledged during the campaign. It is easy to assume that half of this money would go to the Jubilee Fund but this did not happen.
Early on in the 1987 capital campaign, the agreement that pledges would be evenly split between the building fund and the Jubilee Fund broke down. Named memorials to the building fund were allowed and encouraged. Renovation of the church began before the capital campaign was completed and, to compound issues, later there was a significant cost overrun for the project. Also, approximately $170,000 in pledges to the 1987 capital campaign was never received. On the positive side, as the 1987 Capital Fund Raising Campaign closed, the Jubilee Fund was established in 1989 with an initial value of $145,000.
The construction cost overruns and the shortfall in pledge collections created a large bill for the church. To cover this expense, All Saints’ leadership decided to borrow against the Jubilee Fund. A mortgage was taken against the Jubilee Fund in the amount of $117,000. Under the terms of the mortgage, the Jubilee Fund was to be paid $20,000 per year for five years. The church did make some payments to the Fund but soon decided, due to a variety of budget and stewardship shortfalls, to forgive that debt.
The history of the Jubilee Fund from that point until the creation of the current Endowment Fund is not easily reconstructed. However, based on the current value of the Jubilee Fund, it appears that the $117,000 debt was repaid and additional funds were contributed from the bequests that make up the Endowment Fund. Today, the Jubilee Fund Component of the All Saints Endowment is approximately $207,000 and contributes approximately $5,800 annually to the All Saints Outreach Program.
In retrospect there were a number of questionable decisions made concerning the 1987 Capital Fund Raising Campaign and the 75th Jubilee Community Fund. However, we must assume that those decisions were based on the best information and best intentions. As we look to the future of our current Capital Fund Raising and Building campaigns, we must remember those missteps. We must constantly work to be prudent stewards of our resources and always with a mindful eye on All Saints’ Mission, Vision and Goals.
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GOVERNING DOCUMENT ALLOWS FOR CHANGES
Changing the endowment’s governing document is no trivial manner. The original crafters of the document recognized that it must change from time to time as the church and its resources changed, but wanted to create a process to help preserve an enduring resource for the church. The process they created, which is still in place and being enforced by the Endowment Trustees, helps ensure thoughtful and well considered changes.
In a nutshell, a proposed change to the governing document must be presented to the parish at the annual meeting for vote and pass with a simple majority. A change must be approved by the parish at three consecutive annual meetings for final adoption. Since the start of the endowment fund in 1995, the governing document has been changed twice. There is a third change being considered and the upcoming annual meeting will be the third and final reading for this proposal.
The first change to the document was made in December, 2001. This change established a set-aside of $1.08M from the unrestricted component fund. This money was to be used for two purposes: first, to retire certain debts incurred during the creation of the endowment fund and second, to assist in renovations to the Parish Hall as a Jensen named memorial. As you know, the renovation plans were changed to new construction, but there are plans within the current building campaign to fulfill the commitment for a Jensen Memorial. At this time, the bulk of the set-aside remains unspent but has funded design and architectural work which are the central part of the current building campaign.
In January 2003, the church approved the adoption of the total return concept to change the definition of income received from the Endowment Fund. This is a complex subject and a separate article will be devoted to this discussion. The total return concept considers capital gains as part of income from the Endowment.
This more inclusive definition helps to increase the income generated by the endowment for the church while preserving the principal. This change also incorporated the stipulation that no more than 5% of the total value of the endowment as reported on January 1 each year could be withdrawn as income for the church. A further stipulation of this change is that the total return concept does not affect income from the Jubilee fund. In this case only the income generated by the $207K in the Jubilee Fund, excluding capital gains, is available for outreach projects.
The proposed third change to the endowment document will be read for its final vote at the upcoming annual meeting. This topic is also a complex issue and the final article in this series will be devoted to this issue. This proposed change will remove the restriction on use of income from the unrestricted component of the endowment fund. The change will allow use of this income for normal operating budged expenses. Under the current endowment guidelines, income from the unrestricted fund can only fund one-time or short duration programs. The change would allow long term sustainment of the church’s new ministries.
These difficult issues have each been met with deliberate and thoughtful consideration by the entire church before any changes to the Endowment’s managing document were made. The process that allows these changes continues to preserve the endowment and create a flexible resource for All Saints.
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UNDERSTANDING THE TOTAL RETURN CONCEPT
In January 2003, All Saints adopted the “total return concept” to redefine income drawn from the Permanent Endowment Fund. While this change has allowed flexibility in the way All Saints manages the Endowment Fund, it has and continues to be the source of much confusion concerning the core funds composing the endowment. This confusion was very evident at last year’s annual parish meeting. The Endowment Trustees presented the second reading of the proposed change to the fund which would remove the restriction on use of income from the fund for normal operating expenses. One of the concerns voiced about this change was that the church would be using up the principle, or core, of the Endowment Fund. This concern is directly related to the total return concept.
Before the adoption of the total return concept, the trustees were only allowed to make available to the vestry the interest and dividends earned by the Endowment Fund. While this represented a substantial funding source, income from the endowment was not consistent from year to year. Additionally, growth of the principle value of the fund was untouchable. At one point in time, All Saints was seeing a growth in the principle value of the endowment but interest and dividends were decreasing. In an effort to take advantage of the value growth, the church adopted the total return concept.
The total return concept is a widely accepted practice for endowment fund management that allows a greater and consistent income while preserving the fund principle. Under the total return concept, income is defined as the sum of interest, dividends and principle value increases. This concept works best when there is a limit on the total annual income drawn from the fund. In general practice, a limit of 5% annual income withdrawal from the fund will help ensure preservation of the core value of the fund.
This standard has been adopted by All Saints. However, we take this standard a step further. The income that is made available to the All Saints Vestry by the Endowment Trustees is an annual amount not to exceed 5% of the average market value of the endowment for the prior three years. This allows a more consistent income from year to year as well as better assurances of preserving the endowment principle.
The total return concept offers advantages to both management and income for the endowment fund, but, is it possible to use up the endowment? In theory it is possible, however, All Saints has taken additional steps to help ensure the long term availability of the Permanent Endowment Fund. The governing document provides restrictions on the use of endowment principle. If we take from the corpus of the endowment then a loan is made to the church from the endowment, which must be repaid. This restriction along with the total return concept helps assures preservation of the endowment for our future.
So, how is the total return concept working? In FY03, first year under the total return concept, All Saints Permanent Endowment Fund returned 7.7% from growth, interest and dividends. The Vestry withdrew 4.8% as income for the church resulting in 2.9% net principal increase to the fund. As the total return concept matures in use, we expect to see similar results over the life of the Endowment Fund.
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PROVIDING "QUALITY, SUPPORTED, AND SUSTAINED MINISTRIES"
About two years ago, the Long Range Planning Committee took up the challenge of creating a vision and goals to help the church fulfill its mission:
We are being called to transform our community in the image of Christ, made visible to all people, by the way we live our life in faith.
The long range planning committee developed the following vision for All Saints:
A Christian community that shares its God given resources to love and serve all through quality, supported and sustained ministries.
The current proposed change to the Endowment Fund governing document will help the church realize that vision. This change removes the restriction on use of the income from the Unrestricted Component of the fund for normal operating expenses. The change will to allow All Saints to not only begin new and innovative programs but to sustain them as well.
Under the current wording of the fund’s governing document, All Saints cannot apply any of the income generated by the Unrestricted Component to the normal operating budget. The original crafters of the endowment document intended for this component to fund one time and short term projects. Their intent was to provide a “ministry investment” with the expectation that the good programs would become self sufficient.
The income from the Unrestricted Component has been used to start a number of quality programs including church staff increases, the Amahl production, and the Catechesis of the Good Shepherd to name a few of the recent activities. While this income can start these programs, after a short period of time, these programs must be funded from another source of revenue or risk being dropped. The original crafters of the governing document felt that the use of the endowment revenue for such mundane expenses as electricity and water and even salaries would dilute the goal of ministering to the church and the community.
As noble as this reasoning is, it falls short of ensuring that the good programs begun through the Endowment Fund, continue after the start-up funding stops. Unfortunately, these programs are rarely revenue generating. By their very nature, ministry programs not only provide but also require long term care and feeding. They also require the mundane support of electricity, and water and even salaries.
To expect a good ministry program to be self sustaining over the long term fails to payback the basic support for the church infrastructure that started the program in the first place. In other words, good ministries grow out of a strong support base and good ministries require a strong support base to continue.
At the last Annual Parish Meeting, the main concern raised about the proposed change to the governing document was: are we using the endowment and its revenue as the original donors intended? The short answer is yes. Although gifts to the endowment may be designated to any of the component funds, gifts that have no designation are usually put in the Unrestricted Component. The revenues generated by the component funds are used by the Vestry according to the endowment restrictions and enforced by the Trustees of the Endowment Fund.
As stated earlier, the two major gifts to the Endowment Fund that were given with no restrictions were put in the Unrestricted Component of the fund and therefore have no restrictions on use. So, we go back to the original question. Since the gifts were freely given for the good of the church, the Vestry uses those funds as the original donors intended; that is, for the good of the church.
Another concern raised at the Annual Meeting was over spending the principal of the endowment fund. Please remember that this was discussed in relation to the total return concept in a previous article. The total return concept helps the church maximize the revenue available from the endowment while preserving the principal. Also, any removal from the principal is treated as a loan to the church and is to be repaid. Both the rules of the endowment and the total return concept ensure that the church does not spend the Endowment principal.
The question that will be before the church for the third and final reading at the next Annual Meeting is whether to remove the use restriction on revenues generated by the Unrestricted Component of the Endowment Fund. All Saints needs the flexibility to be able to use its resources to both start and continue our ministry programs. The church needs the restriction on revenue expenditures removed to allow us to better budget for and sustain all our ministry programs.
All Saints needs to be able to use all its resources to build a strong support base so our vision for “quality, supported and sustained ministries” can be fully realized.
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