Crafting A Local Church Endowment Resolution

Crafting a Local Church Endowment Resolution

A MODEL RESOLUTION TO ESTABLISH AN ENDOWMENT FUND Annotations for Greater Understanding THE [FIRST] UNITED METHODIST CHURCH, [ANYTOWN], MICHIGAN ESTABLISHMENT OF AN ENDOWMENT FUND We, the Charge/Church Conference of [First] United Methodist Church of [Anytown}, Michigan, move to establish The [First] United Methodist Church Endowment Fund, (hereinafter referred to as "The Endowment Fund," as a permanent fund of the [First] United Methodist Church, [Anytown], Michigan, hereinafter referred to as "The Church." The Endowment Fund shall be subject to the laws of the State of Michigan, the Articles of Incorporation of The Church, the Discipline of the United Methodist Church, the actions of the Charge/Church Conference of The Church, and the following covenants: This opening statement assures that the Charge/Church Conference will be the ultimate authority for the direction of the Endowment Fund. It also assures that the Fund will operate within the structure of the United Methodist Church and the laws of the State of Michigan. I. The Endowment Fund is created and exists solely for the charitable purposes of The Church, with its principal objectives being the promotion and development of religious, charitable and educational activities, and for non-recurring purposes not regularly budgeted by The Church. The language regarding "religious, charitable and educational purposes" provides that the fund may support a variety of ministries for which The Church is organized by law. This language is usually a part of the Articles of Incorporation which each church has submitted to the State of Michigan. *The "non-recurring purposes" item is designed to ensure that The Endowment Fund will not support the current operating budget of The Church. It is generally understood that an endowment fund should not be used to fund the ordinary operations of The Church. II. The Endowment Fund shall receive and hold all gifts made to the church, from sources such as bequests, gift annuities, insurance policies, trusts, or other planned or deferred arrangements, as well as specific cash gifts, which are not otherwise designated. This paragraph sets forth the policy for The Church that planned and deferred gifts such as wills, gift annuities, insurance policies, trusts, etc. will come to The Endowment Fund. Such gifts should not be used immediately for the church's operations or capital needs. They should be placed in The Endowment Fund so that the principal of the gift remains whole while only the income is used.All such un-restricted gifts shall be placed in The Endowment Fund. Funds set up by donors, or by church leaders, for restricted purposes, such as scholarship funds, should not become part of The Church's Endowment Fund, even though such restricted funds may subsequently be invested alongside the monies in The Endowment Fund. III. The principal of The Endowment Fund shall not be expended. An endowment fund's purpose is to provide funds for special and "over-and-above" uses within the life of the church. Any invasion of the principal is, therefore, contrary to the generally accepted purpose of endowment. Spending any of the principal of The Endowment Fund breaches the trust of those who have already contributed to The Endowment Fund, and may deter subsequent gifts by undercutting the trust and confidence of church members in the integrity of The Endowment Fund. A key question on which careful decision-making must be focused is that of "What is principal?" Is capital gains principal? How shall we treat capital gains when it comes to distribution? If we distribute only income (dividends + interest earned), then we continually must invest a certain portion of the fund in income-producing instruments, such as bonds. You may wish to refer to the notes at the bottom of this document for an alternative way of making distributions from your endowment fund. IV. Each year a distribution will be made available to the church by the Endowment Committee from the endowment fund. This distribution will be calculated as 5% of the average balance of the previous twelve quarters. This is the way the church calculates and receives its distribution from the endowment fund each year. In former times -- and many of our UM Church documents reflect this -- we talked in terms of distributing the "income" and preserving the principal. "Income" means money earned plus dividends. It does NOT include capital gains. Under this former method of distribution all capital gains are counted as principal. In the current model, the distribution is a percentage of overall fund balance averaged over 12 quarters -- three years. This permits the fund's investors greater latitude in allocation between income-producing instruments such as bonds (which produce earned income) and equities (which typically have only produced dividends but which can produce capital gain in good markets). Especially in today's economy, restricting investment to either bonds or stocks can limit the ability of the fund to grow. V. The Endowment Fund shall exist under the authority of The Charge/Church Conference, which shall create an Endowment Fund Committee to administer the Endowment Fund. The Endowment Fund Committee shall report through the Board of Trustees of The Church to the Administrative Board and to the Charge/Church Conference. There shall be not more than five (5) nor fewer than three (3) Endowment Fund Committee members, and these shall be nominated by The Church Nominating Committee and elected by the Charge/Church Conference. At least one of these Endowment Committee members shall also be a member of The Church's Board of Trustees. The Endowment Fund Committee members shall be elected for three (3) year terms, not more than two (2) terms expiring in any given year, and may be re-elected. This paragraph sets up a direct, simple procedure for the selection and accountability of The Endowment Fund Committee. A small group can be flexible and can act quickly when needed, and can meet with a quorum present. Persons with financial or investment expertise might be good candidates for the Endowment Committee. The staggered terms indicated in the last sentence provide that not all of the investment and marketing expertise would likely go off of the Endowment Fund Committee in a single year. It also allows for the re-election of effective persons in future years. VI. The Endowment Fund Committee is empowered to act as follows: a. Be the fiscal agents for The Endowment Fund This means the Endowment Fund Committee has the authority to make the necessary financial decisions, such as opening accounts with brokers trust facilities, banks and other investment houses. A treasurer does need to be selected for Endowment Fund Committee; however, such treasurer could be the treasurer of The Church (preferred action) or, if there is a treasurer of the Board of Trustees of The Church, that person could serve without having to be a member of Endowment Fund Committee. b. Accept and acknowledge un-restricted, un-designated gifts to The Endowment Fund or other gifts as specified in paragraph c. below. The Book of Discipline (paragraph 2528.3, 1984 ed.) provides that the Charge/Church Conference entrusts the Board of Trustees with all property of The Church, including the acceptance or rejection of any such planned or deferred gift. This section of the Endowment Fund resolution provides that Endowment Fund Committee may go ahead and accept into The Endowment Fund, and acknowledge, any undesignated, unrestricted gifts to The Church without formal approval by another church body. c. Review any gifts with restrictions or designations that are proposed to be placed in The Endowment Fund with regard to their compliance with the corporate purpose and the exempt status of the church. The recommendations of The Endowment Fund Committee to accept or decline a gift for inclusion in The Endowment Fund shall be reported to an appropriate session of a Charge/Church Conference. Sometimes a donor may ask that the proceeds of their gift, where possible and advisable, be used for a particular church program area, such as "missions" or "education" or "capital improvements," etc. Such a general designation can usually be administrated by Endowment Fund Committee without great difficulty. However, any gift that bears even the most general restriction or designation, must be reviewed by Endowment Fund Committee, and their recommendation must be reported to the Board of Trustees of The church for their review; and subsequently the matter must come to the Charge/Church Conference to determine if such a gift may rightly be accepted into the Endowment Fund. This is particularly true for restricted holdings: gifts of real estate, or gifts of a particular issue of stock (that, in some cases the donor asks The Church to "hold"). Within the community of charitable organizations, it is customary for this type of gift to be liquidated by The Board of Trustees of The Church before the proceeds of the sale of the gift are placed within The Endowment Fund. In such cases, an additional reference for local church financial leaders is the Michigan Prudent Investor Rule. Receipt of such a gift could also be an occasion to contact the United Methodist Foundation's Executive Director for review of the proposed gift and clarification of the issues involved. d. Invest the monies of The Endowment Fund in such a way as to achieve a reasonable and adequate growth of the fund while not incurring significant risk to the principal of the fund. Capital growth of Endowment Fund assets may be considered part of the principal of The Endowment Fund. A very difficult function. The "prudent investor rule" states that when an individual has the responsibility to invest funds that do not belong to themselves, but for which they are given responsibility in a trustee relationship, care, skill and caution should be the approach. A reasonable current, or market level return (income from bonds and dividends from stocks) should be sought, along with capital appreciation, or growth of the fund principal, that keeps the fund's purchasing power considerably ahead of inflation. In many instances a "balanced fund" or a "growth and income" fund will achieve these objectives. Following the "prudent person rule," Endowment Fund Committee would be deemed poor managers of a fund that was invested solely in CD's or in passbook savings. They would receive poor marks as well for investments in high-risk stocks or bonds. Guidance may be obtained by calling the United Methodist Foundation's Executive Director who can discuss with Endowment Fund Committee their investment objectives. CAPITAL GAIN, the increase in the value of the investment through appreciation, allows the principal of The Endowment Fund to grow and keep well ahead of inflation. e. Maintain a record of all gifts to The Endowment Fund: the value, the donor, the date and the type of each gift, as well as any formal expression by the donor(s) of the use to which the gift might be put. A complete and thorough accounting of all gifts is critically important for the historical continuity of The Endowment Fund throughout time and changes in leadership. These records are helpful in promoting the fund; but they are even more valuable for the administration of The Endowment Fund by future generations of church leadership. f. Maintain a complete accounting of all investments, including investment vehicles used from time to time, the principal of the fund, capital gains, earned income and dividends, distributions and expenses. A complete accounting of all investments and their results needs to be maintained by Endowment Fund Committee, regardless of the type and extent of the investments. These records must be ready for the audit ordered by the Finance Committee. g. Report to the Administrative Board quarterly, and to the Charge/Conference when requested, the current state of The Endowment Fund. This reporting should be done not less than annually, and should include a statement of any distributions made from The Endowment Fund, and of the amount of money currently available for distribution. This establishes a regular reporting system. It also prevents the "hiding" of the amounts of money that are in The Endowment Fund. How much money is in the fund, and what kinds of investment vehicles are currently being employed by Endowment Fund Committee is information that must be readily available to all church members. Reports from Endowment Fund Committee should be made regularly. h. Promote and advertise The Endowment Fund frequently and consistently throughout The Church and its membership. Costs for this activity may be charged to The Endowment Fund and paid out of current income. This is a key component of the job description of Endowment Fund Committee. The fund and its availability must be consistently and persistently held up before the members of the church. Every available avenue should be used to accomplish this task. Costs associated with the promotion and advertising of the Endowment Fund are appropriately taken from the income of the Fund before any distributions are made. Thus the Endowment Fund is not made to compete with other church program for available operations budget dollars. VII. The Finance Committee in consultation with the Council on Ministries and the Board of Trustees shall recommend the projects/purposes for which funds are distributed, and these recommendations shall be ratified by the Administrative Board. The Finance Committee has overall responsibility for the finances of The Church, so it has a vested interest in the distributions of The Endowment Fund. Yet the Administrative Board and Council on Ministries represent the wide variety of persons charged with creating and maintaining church program. All these groups should be drawn together to act on the matter of how distributions from The Endowment Fund can and should be used in the life of The Church. It is prudent to keep the funds distribution from The Endowment Fund a clearly specific line item, and treated as a specific grant for a specific program or project. This is an additional safeguard against the Endowment Fund's use as a substitute for the pledges and contributions of church members in funding the ongoing operations budget. VIII. Any portion of the annual, distributable funds not distributed in any given year will be retained in The Endowment Fund for expenditure in future years, upon recommendation of the Finance Committee in consultation with the Council on Ministries and the Board of Trustees, with the ratification of the Administrative Board. Sometimes all the monies available will not be spent in any given fiscal year. Income that is "left over" from a particular project, or that hasn't been allocated in a given year, should be held in the pool of income that is spendable by The Church in future years. If The Church doesn't have enough projects to use all the distributable funds this year, the chances are that next year, or in some future year, the demand will be there, and the monies will be ready to be used.This principle is useful too in a situation where a given project may be expected to need Endowment Fund distributions for several years. IX. None of the monies of The Endowment Fund will be used to support the following: a. Propaganda or other attempts to influence legislation. b. Political campaigns on behalf of any candidate for public office. c. The programs of The Church regularly funded by pledges and contributions of members, except in cases of extreme emergency determined jointly by The Endowment Fund Committee and the Administrative Board. Such emergencies and their funding will also be reported to the Charge/Church Conference in the regular reporting of The Endowment Fund Committee. There are times when current expense emergencies occur. These may result from changes in the nature of The Church's membership or in the nature of the surrounding community. In such cases, the whole congregation, as represented at The Charge/Church Conference, needs to be involved, with the Administrative Board leading the decision on whether monies from The Endowment Fund are appropriately used in any given emergencies, and what constitutes "an emergency." X. The Finance Committee of The Church shall be responsible for an annual audit of The Endowment Fund. The findings and recommendations of said audit shall be reviewed by the Administrative Board and reported to the Charge/Church Conference. This provision ensures that the financial records kept by Endowment Fund Committee are accurate and up-to-date, and in a condition that allows maximum understanding by the congregation about the state of The Endowment Fund. X. The covenants of The Endowment Fund may be amended by a three/fourths (3/4) favorable vote of the Charge/Church Conference with a minimum of ten percent (10%) of the members of the congregation present. A representative sample of the various segments of the congregation should be present to vote on such matters. It is inappropriate for one group or faction to dominate the will of others in the church. For example, in a congregation of 200 members, it would be hoped that at least 20 to 50 members would be present and voting, and that they would represent all the various interests of The Church in order to amend this document. Some congregations require as much as 50% of the members be present. A special Charge/Church Conference might be called to take an amending action, if this is deemed appropriate. Changes to the Endowment Fund structure, purpose, policies and procedures as spelled out in this document should be clearly and precisely spelled out in writing so that all those present understand the nature and the resulting consequences of any such change in these covenants. SIGNED THIS ______ Day of ___________, 19__ by ________________________________________________ Secretary, Charge/Church Conference [First] United Methodist Church [Anytown], Michigan NOTES ON THE MODEL RESOLUTION: [...] indicates optional wording that may be chosen * If your church does not have a copy of its Articles of Incorporation, you may write to Lansing for a copy of these articles. The address is: Department of Commerce, Corporation and Securities Bureau, P.O. Box 30057, Lansing, Michigan,48909. AN OPTIONAL PARAGRAPH having to do with The Church's ability to borrow from its Endowment Fund may be added if desired. It's wording might be as follows: "The Church may borrow from the principal at a rate of interest determined by the Charge/Church Conference. Both the principal and interest shall be repaid on a fixed payment schedule determined by the Charge/Church Conference and set forth in writing." The borrowing of funds, or "serving as one's own banker," may be a helpful, short-term financing measure for major capital projects such as additions, renovations, acquisitions or buildings. Major concern arises when churches have borrowed money from their Endowment Fund but never "get around to" paying it back. Unfortunately the temptation to use funds without repaying has proved too strong for many congregations. When borrowing from The Endowment Fund occurs, an appropriate capital campaign and pledge drive should be carried out to repay the Fund completely and within the time specified in the document that sets forth the loan terms. The Endowment Fund should be treated as The Church would treat any commercial loan institution. The subject of borrowing from The Endowment Fund should be approached only with the greatest of caution and the clearest of prudent, fiduciary responsibility. Catalog Of Topics (Click on a button and go right away to:) UM Foundation Report on Fund Performance UM Foundation Investment Policy How to Set Up an Endowment Fund How to Market an Endowment Fund Endowment Primer: The Basics and Background Gifts People Can Give to Your Endowment Fund Workshops Available to Your Church Sample Endowment Resolution Stewardship Strategies & Issues for Local Churches Stewardship & the Individual Spiritual Journey Frequently Asked Questions Keeping Fund Raising "Spiritual" Financial Policy for a Local Church Fund Raising Strategies for Local Churches What is The "Case for Support?" Games Church People Play Prospect Capability Matrix: Who can Give How Much? A Capital Campaign Gift Pyramid: Where Will the $$ Come From? United Methodist Foundation Detroit Annual Conference For assistance: John G. Fike, CFRE Executive Director 313-821-0892 or Fax to 313-821-3339. This file was updated 1/21/2002