Monthly Archives: January 2016

Not-for-Profit: What it takes to manage an endowment

NFP Endowments

not-for-profit-290x300Every nonprofit dreams of receiving a large endowment that will keep it financially worry-free in the future and allow it to fulfill its mission with ease. But, in the real world, endowments also carry serious responsibilities, created by the Uniform Prudent Management of Institutional Funds Act (UPMIFA). When managing endowments, nonprofit leaders must keep the following realities in mind.

An investment policy drives fund management
Every endowment should have a comprehensive investment policy that drives the management of the fund. According to UPMIFA, investment decisions must be made in relation to the nonprofit’s overall resources and purposes. And the endowment investment policy should be different from the policy for other investments of the organization.

“Prudent” investment decisions must consider the entire portfolio and be made as part of an investment strategy with risk and return objectives reasonably suited to the fund and the organization. UPMIFA also permits “only investment costs that are appropriate and reasonable.” (UPMIFA applies only to “true” endowments funded by donors, not “quasi” endowments created by boards.)

The endowment’s objectives should guide its investments and management. For this reason, it’s important not to simply adopt a generic objective but to articulate an objective that reflects the organization’s own circumstances. For many not-for-profits, the primary goal is to preserve and grow funds for the organization’s long-term stability while providing a predictable contribution to support current activities. As a living document, the investment policy can change over time as objectives or other factors change.

Asset allocation is key
The investment policy will include an optimal asset allocation. The nonprofit’s investment committee must analyze the risk and return of potential investments (including stocks, bonds and alternative investments such as hedge funds and private equity) to determine the best mix and to obtain the total desired return. To maintain flexibility for responding to changes in the investment environment, it’s best to establish ranges for each asset class instead of set percentages. The investment committee should review performance quarterly and adjust the allocations accordingly.

Your spending policy: A crucial component
The investment policy should include a spending policy for the endowment, setting a percentage that can be spent annually. The spending policy will impact the performance of the fund, as well as its ability to fulfill the donor’s intent.

UPMIFA sets standards for endowment fund spending. It provides that an organization can spend as much of a fund as it determines to be prudent for the “uses, benefits, purposes and duration” for which the fund is established.

UPMIFA’s seven criteria to guide annual spending decisions are: 1) duration and preservation of the endowment, 2) the purposes of the organization and the fund, 3) general economic conditions, 4) effects of inflation/deflation, 5) expected total return from income and appreciation, 6) the organization’s other resources, and 7) the organization’s investment policy.
Unlike its predecessor, the Uniform Management of Institutional Funds Act, UPMIFA allows nonprofits to adopt a “total return” strategy that bases the spending rate on the endowment’s total value (including appreciation) rather than on only income. To ensure reasonably consistent cash flows, many organizations using a total return spending policy apply “smoothing” mechanisms to minimize the effect of market volatility. An organization might, for example, use a three- or five-year rolling average calculation.

Benchmarks gauge performance
The investment policy should include benchmarks for evaluating the performance of investments and managers, too. Performance should be assessed over both full market cycles (seven to ten years) and the shorter time periods that compose them.
An investment committee can meet quarterly to review performance, consider recommendations for changes to the investment strategy and rebalance asset allocation as necessary.

GAAP requires disclosures
Whether or not it’s covered by UPMIFA, every endowment must make certain financial statement disclosures under Generally Accepted Accounting Principles (GAAP). Among these are descriptions of the organization’s endowment spending — and investment — policies, and of the nature and types of permanent or temporary restrictions on the endowment net assets. You also must report:

  • The governing board’s interpretation of the law(s) underlying the organization’s net asset classification of donor-restricted funds,
  • the composition of the endowment by net asset class at the end of the period, in total and by type of endowment fund, with donor-restricted funds shown separately from board-designated endowment funds, and
  • the aggregate amount of the deficiencies for all donor-restricted endowment funds where the fair value of the assets at the reporting date is less than the level required by donor stipulations or law.

Finally, be sure to include a reconciliation of beginning and ending endowments, in total and by net asset class.

Not just a dream
One of the most important roles of your board of directors is managing your endowment funds. Guided by good stewardship, the endowment will contribute to your nonprofit’s financial health and stability — no longer a dream, but a reality.  Contact Mike Klein , Partner in our Not-for-Profit Group at 216.831.7171 or for additional information and assistance.

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When Will Stocks Stabilize?

How deep will this correction ultimately be?

Provided by Dane A. Wilson, Wealth Management Advisor

DaneWilson-01 smaller2January may prove to be the worst month for stocks in eight years. The S&P 500 just corrected for the second time in five months, and some investors think the bull market may be ending.(1,2)

Bull markets do end, and the current one is nearly seven years old, the third longest in history. If a bear market is truly on the horizon, it may not last very long – the 12 bear markets recorded since the end of World War II have averaged 367 days in duration.(2)

How far would stocks have to fall for a bear market to begin? Should the S&P close at 1,708 or below, you would have an “official” bear market on Wall Street – a 20% fall of that index from its most recent peak. Right now, the S&P is above 1,800.(2,3)

While the S&P, Dow Jones Industrial Average, and Nasdaq Composite have all corrected this month, the damage to the small caps has been worse. The Russell 2000 is now in a bear market, off more than 20% from its June 2015 high. On January 20, the MSCI All-Country World index went bear, joining the Nikkei 225, TSX Composite, Hang Seng, and Shanghai Composite.(2,4)

Where is the bottom? We may not be there just yet. For the market to stabilize or rebound, institutional investors must accept (or at least distract themselves from) three realities that have been hard for them to stomach…

Oil prices may remain under $50 all year. Earlier this month, the Wall Street Journal asked 12 investment banks to project the average crude oil price across 2016. Their consensus? West Texas Intermediate crude will average $48 in 2016; Brent crude will average $50. Oil price forecasts are frequently off the mark, however – and if the oil glut persists, prices may take months to regain those levels. Saudi Arabia and Russia are not cutting back output, as they want to retain market share. With embargoes being lifted, Iran is set to export more oil. U.S. daily oil output has fallen by only 500,000 barrels since April.(5)

China’s manufacturing sector may never again grow as it once did. Its leaders are overseeing a gradual shift from a robust, manufacturing-centered economy to a still-booming economy built on services and personal consumption expenditures. The nation’s growth rate has vacillated between 4%-15% since 1980, but for most of that time it has topped 8%. In 2015, the Chinese economy grew only 6.9% by official estimates (which some observers question). The International Monetary Fund forecasts growth of just 6.3% for China in 2016 and 6.0% in 2017. Stock and commodity markets react quickly to any sputtering of China’s economic engine.(6)

The Q4 earnings season looks to be soft. A strong dollar, the slumping commodities sector, and the pullback in U.S. stocks have all hurt expectations. A note from Morgan Stanley struck a reasonably positive chord at mid-month, however, stating that “a lowered bar for earnings should be cleared” and that decent Q4 results could act as “a catalyst to calm fears.”(7)

What developments could help turn things around this quarter? OPEC could cut oil output, Chinese indicators could beat forecasts, and corporate earnings could surprise to the upside. If these seem like longshots to you, they also do to economists. Still, other factors could emerge.

Central banks could take further action. Since China’s 6.9% 2015 GDP came in below projections, its leaders could authorize a stimulus. The European Central Bank could increase the scope of its bond buying, and the Federal Reserve could hold off on tightening further in the first half of the year. If this month’s Fed policy statement notes that Fed officials are taking extra scrutiny in light of recent events, it could be reassuring. Any statement that could be taken as “second thoughts” about raising interest rates would not be reassuring.(6)

U.S. GDP could prove better than expected. The Atlanta Fed thinks the economy grew 0.6% in Q4 and Barclays believes Q4 GDP will come in at 0.3%; if the number approaches 1%, it could mean something for investors. Moving forward, if the economy expands at least 2.5% in Q1 and Q2 (which it very well might), it would say something about our resilience and markets could take the cue. Other domestic indicators could also affirm our comparative economic health.(8)

While the drama on Wall Street is high right now, investors would do well not to fall prey to emotion. As Jack Bogle told CNBC on January 20, “In the short run, listen to the economy; don’t listen to the stock market. These moves in the market are like a tale told by an idiot: full of sound and fury, signaling nothing.”(9)

Dane A. Wilson may be reached at 216-831-7171 or


This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

1 – market_analyst_believes_stocks_will_rebound_after_correction [1/14/16]
2 – [1/16/16]
3 – [1/20/16]
4 – [1/20/16]
5 – [1/12/16]
6 – [1/19/16]
7 – [1/14/16]
8 – [1/19/16]
9 – [1/20/16]

IRS Extends Affordable Care Act Reporting Deadlines

Welcome Relief for Employers

By Jeffrey R. Spencer, CPA, Principal, Ciuni & Panichi, Inc.

Jeff SpencerThe Internal Revenue Service (“IRS”) has issued Notice 2016-4 which automatically extends the due dates of the new Affordable Care Act (“ACA”) reporting forms for the 2015 calendar year.  The extension applies to IRS Forms 1094/1095-B (Issuer of Minimum Essential Coverage) and to IRS Forms 1094/1095-C (Applicable Large Employer).

In their Notice, the IRS acknowledged that some Applicable Large Employers (generally employers with 50 or more full-time employees) and some coverage providers need additional time to implement systems to properly capture and report the necessary information to individuals and the IRS.

Therefore, the extended deadline for furnishing the 2015 Form 1095-B and 1095-C to individuals is March 31, 2016 (previously February 1, 2016).

The extended deadline for filing Forms 1094/1095-B and Forms 1094/1095-C with the IRS is June 30, 2016 if filed electronically (previously March 31, 2016).  However, if filing less than 250 forms and filing on paper, then the extended deadline is May 31, 2016 (previously February 29, 2016).
Since these forms have potential tax implications for individuals, the IRS is encouraging employers and coverage providers to furnish the statements and file these information returns as soon as they are completed.  If you are using a third-party vendor to assist with these ACA filings, then you should discuss the extended filing deadlines with the vendor and determine whether the forms will be filed using the original or the extended due dates.

It is very important for employers to determine whether or not these filings apply to them, and if they do apply, that they make a good faith effort to comply with them.  The IRS can assess substantial penalties for noncompliance with these new reporting requirements.

Please contact Jeff Spencer at 216-831-7171 or for more information on this topic.

Jeff Spencer is a Tax Principal at Ciuni & Panichi, Inc., and he is the head of the employee benefits tax services group.

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