An overview of the spending rates and methodologies that various types of nonprofits in the U.S. currently use, as well as the key considerations for investment committees in determining the spending strategy for the organization.
The Uniform Prudent Management Institutional Funds Act (UPMIFA) clearly outlines the fiduciary responsibility of the stewards of these asset pools. Conducting relevant analysis, paired with risk-reducing diversification strategies and maintaining good decision records, are all part of complying with this act.
Spending levels are expected to hold steady.
What are your spending expectations for 2021?
- 38% – Increase spending
- 14% – Decrease spending
- 48% – No change
Spending expectations broken down by type:
- Arts, Culture, and Humanities – 25% had no change, 50% had decreased spending and 25% had increased spending
- Community Foundation – 50% had no change, 6% had decreased spending and 44% had increased spending
- College or University (Private) – 50% had no change, 5% had decreased spending and 45% had increased spending
- College or University (Public) – 83% had no change, 17% had decreased spending and 0% had increased spending
- Private Foundation – 44% had no change, 0% had decreased spending and 56% had increased spending
- Faith-based Organization – 44% had no change, 22% had decreased spending and 34% had increased spending
- Health or Human Services – 38% had no change, 18% had decreased spending and 44% had increased spending
- Educational Institution (non-College or University) – 33% had no change, 50% had decreased spending and 17% had increased spending
- Other – 67% had no change, 11% had decreased spending and 22% had increased spending
FAST FACT: 68% said the COVID-19 pandemic has had no impact on their organization’s spending policy
Of those that DID experience an impact:
- 34% said their organization is considering an allocation (or increased allocation) to illiquid investments as a source of return.
- 19% said their organization experienced liquidity challenges.
9% said their organization did not meet their spending target.
- 47% said their organization achieved a spend rate above their target
Nonprofits report a broad range of current spending rates.
The range of averages varies by type of organization. Arts, culture and humanities organizations show the highest average spending rate of 5.47%. Other organizations have average spending rates between 4.33% and 5.06%.
Most nonprofit organizations use one of three strategies to determine their annual spending rate.
FAST FACT: Only one in ten (10%) of those polled said their organization is considering changing the methodology used for their spending policy.
A moving average methodology with three-year smoothing formula is the most popular among survey respondents, but does it mean that it’s the right spending approach for your nonprofit? If your organization reviews its spending policy annually, but has not made a change in more than five years, how do you know when the time is right to adjust your spending? Often, you can answer these questions through an analysis of past and future spending scenarios.
How many years is your moving average formula based on?
- 70% – 3 years
- 21% – 5
- 5% – 6-7
- 2% – 8+
Has your organization's investment return hurdle for 2021 increased, decreased or stayed the same?
- Increased – 24%
- Decreased – 0%
- Stayed the same – 76%
Is there a separate spending policy for non-endowed assets (vs. aggregated into existing spend)?
- 29% – Yes
- 71% – No
More results from the Nonprofit Investing Survey:
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The SEI Nonprofit Management Research Panel completed a comprehensive survey of executives and investment committee members in North America to gauge their views on a numbers of critical components of their organization. The poll was completed by 102 participants, representing nonprofits with endowments ranging in size from $25 million to more than $1 billion. The poll was conducted in January 2021 and will be released in a series of chapters. No clients of SEI were polled.
This information is provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company (SEI). Investing involves risk including possible loss of principal. There can be no assurance that your investment objectives will be achieved nor that risk can be managed successfully. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Bonds and bond funds will decrease in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments.
This material represents an assessment of the market environment 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. This information is for educational purposes only and should not be interpreted as legal opinion or advice.