Nonprofits seek OK to spend endowment funds

While individuals and businesses that need a little extra money can dip into their savings, state law allows nonprofits to spend only from the earnings off their endowments and prohibits spending the "historic value" – the initial amount – of a fund.

In the recession, the values of many endowments that invested heavily in the stock market have dropped below their historic value, putting a crimp in the activities of organizations like the North Carolina Museum of Art.

"When you hit historic dollar value, you can't spend from the endowment from that point until it rises above (that level)," said Caterri Woodrum, the art museum's chief financial officer. "It affects programs, and most institutions are suffering from this."

The North Carolina Center for Nonprofits is backing legislation that would create a Uniform Prudent Management of Institutional Funds Act, allowing organizations to spend up to 7 percent of the endowment principle each year, if needed. Twenty-six other states have adopted similar laws to give nonprofits more financial flexibility.

"If they can tap some of those endowment funds now in a prudent way, that would allow them to continue the services they provide in the communities," said David Heinen, director of public policy and advocacy for the nonprofits group. "For some organizations, particularly smaller ones that are really struggling, if they don't do this, it might cut at the core of what they do and the services that they provide."

Critics argue that the proposal would only make it more difficult for nonprofits to get out of the red in the future, but Woodrum said most organizations would adopt a conservative approach under eased restrictions.

"I think that, when used wisely, it will probably benefit most organizations," she said.