Many parents know that getting their child enrolled in a private school means spending hefty amounts of money paying tuition fees.
Believe it or not, even some private schools’ tuition fees range up to six-digit figures. Despite the overwhelming tuition fees, these private schools need additional funds. Besides, private schools raise funds through donations, endowments, annual fund programs, and capital campaigns.
The protection and management of endowed funds require meticulous attention, rigorous planning, and a strategic approach. Some private schools have the discipline to follow these practices. Others don’t pay enough attention to manage them successfully.
Endowment funds are one of the most important assets that private schools possess. It has an impactful role in the school’s annual budget.
Private schools receive enormous amounts of endowments every year, out of which they spend 4.5 percent to meet certain expenses such as teachers’ salaries, operating expenses, and other overhead costs. The remaining amount is reinvested in the form of an endowment.
Though different schools follow different plans and policies for managing their endowment fund, their reason is similar- financial sustainability.
The endowment is a crucial asset that is in possession of a private institution that needs to be managed properly. But before moving further to explore the best practices, let’s discuss why these institutions need endowment and how it works:
Why Do Private Schools Need Endowment Funds?
Private schools offer an easy target for the media that runs stories of enormous funds with private institutions. This misinformation about private schools creates a feeling of jealousy among readers and listeners with no particular knowledge.
There are numerous misconceptions about it. However, endowment funds are a great source of revenue for private schools to operate properly. Because apart from these funds, the only income left with private schools is tuition fees.
Believe it or not, whatever private school earns from the admissions barely covers all the expenses a school has to incur.
Even the Private School Review has stated that these private schools can be financially fragile, and as they have two income stream tuition and fees that do not cover all the expenses a school has. Schools have numerous expenses, including salaries, insurance, utilities, and other miscellaneous expenses.
Certain private institutions offer financial aid for students who can not afford hefty tuition fees. When calculating the school’s budget, numerous factors are not even given emphasis, much like redoing the playing field, repairs in the school bus, buying a new school bus, and much more. These small expenses add up to form a huge expense, which increases the need for having more money.
How Does Endowment Works In Private Schools?
Likewise, any other endowment work for a university or other institution, private schools endowment works. It is just like a savings account.
Instead of putting money into a savings account by yourself, the only difference is that generous donors donate good amounts as substantial gifts. The schools thus invest the whole principal amount received as gifts from alumni over the year.
Thus, the investment income will be used as designated by the donor. Usually, the trustees emphasize conservative investment strategies.
For instance, if a generous donor has donated a sum of $2,00,000 to the school. The school will invest the amount according to conservative investment strategy or any other the board has agreed upon.
Let’s say the investment returns are 10 percent. Furthermore, the school will use $20,000 for purposes the donor designated the donation for and keep the rest for legitimate emergency needs.
The principal amount of endowment remains untouched until an emergency occurs. Till then, only the investment return is used. For better protection and growth of these investments, schools should follow proper plans and procedures.
There is no specific law that says how schools should manage these funds, but school boards put some protocols for efficiently managing it.
Many endowment fund providers put restrictions on using these funds and keep track of where these funds are being utilized. Therefore, schools remain cautious of their spending and keep records of them too.
How Much Endowment Fund Is Enough?
Endowment funds help maintain financial equilibrium, which is why private schools need it. But the question that arises is how much endowment is enough for the schools and universities?
There can be no bar to the amount of endowment an institution is getting as it is an additional gift to the campus from the alumni. For instance, Harvard University’s endowment is over $14 billion approximately. Private schools with good endowments continue to record strong growth and increased personal wealth.
If the private schools are getting the optimal level of support for the operating budget as an endowment, the school should identify the most support areas. Let’s discuss further how the endowment can be managed effectively.
Here are some best practices to ensure effective management of the endowment funds in private schools:
1. Implement Governance Structure
The private institution should be responsible for the growth and protection of endowment funds. Besides, how these institutions execute them is equally imperative.
It is a fiduciary responsibility that needs to be delegated to a qualified financial committee. With their practical knowledge in the field, it will be easier for them to establish and implement a comprehensive investment strategy. The management of the school provides the needed support, and investment advisors make decisions considering them.
Some private institutions outsource their investment services, and others have investment officers on staff. The schools that outsource these services maintain proper documents of the process.
In order to ensure appropriate law adherence, legal counsel is appointed to review all the policies and procedures followed.
2. Adequate Monitoring
Every institution having endowment funds should responsibly manage their investment. They should implement particular policies and procedures and check timely if they are being followed. The Uniform Prudent Management of Institutional Funds Act (UPMIFA) has advised criteria guiding the endowment fund’s adequate spending and preservation.
These policies intend to streamline the consistency and sustainability of cash-flows. Making a large number of investments or spending huge amounts of money in a year can impact the future operating budget negatively.
Besides, withdrawing these funds continuously can have a consequence on the future purchasing power of funds. Private schools should have an investment committee to assess and review the spending and preserving policy.
3. Follow Due Diligence Process
Private schools with an ample supply of endowment funds include various alternative investments like hedge funds, funds of funds, private equity, commodities, and venture capitals. All these investments are a part of their assets allocation strategy to manage their portfolio well.
However, a few of these investment funds do not provide transparency regarding their financial activities and underlying assets. Others have foreign domiciles that bring potential risks that need to be charged.
Following a perfectly implemented due diligence process will streamline the whole management and monitoring system. It will outline the steps that need to be taken to manage, monitor, and implement the funds with [proper taxation and foreign reporting considerations.
4. Allocating Resources Appropriately
Effective management of endowment funds doesn’t necessarily mean to implement a strategic investment plan.
For enhancing the endowment’s growth and proper management, it is imperative to foster a good relationship with the families of current students and alumni and other prospective donors.
A proper advancement team should be there to follow the protocols as it will help in effectively managing these funds. To manage the endowed funds tactically, you can use a spreadsheet filled appropriately to better track records.
Maintaining these records with proper due diligence to avoid errors as incorrect balances and accounting issues can harm donor relationships.
The Bottom Line
Endowment funds provide private schools with enhanced flexibility in delivering value and quality of education. The protection and appropriate management of these funds is the duty of the school authorities.
For successful management and potential growth in the future, schools should implement these best practices.
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