What Is a Quasi Endowment and How Does It Work?

An endowment is a fund of money or assets donated to an institution, such as a non-profit, university, or charitable foundation. The principal is invested to generate income, supporting the organization’s mission. A quasi endowment is a specific type of endowment, distinguished by its establishment and governance. It provides financial stability and flexibility, helping organizations pursue long-term goals.

Defining Quasi Endowments

A quasi endowment is an internal designation by an organization’s governing board, rather than a donor-restricted fund. The board treats a portion of its unrestricted funds as a permanent endowment, investing the principal for long-term income. Unlike a true endowment, the board retains authority to access and spend the principal if deemed necessary.

Organizations establish quasi endowments for various strategic reasons, such as future capital projects, long-term initiatives, or to enhance financial stability. This designation allows an organization to commit to long-term investment strategies while maintaining internal control. The “quasi” aspect highlights that this designation is revocable and not legally binding like a donor-imposed restriction.

How Quasi Endowments Function

Once established, quasi endowment funds are typically invested alongside an organization’s other long-term assets, often within a consolidated investment pool. This pooling allows for diversified investment strategies aimed at generating returns, which can include interest, dividends, and capital gains. The primary objective is to grow the fund’s value over time while providing a consistent income stream.

Organizations usually implement a spending policy to determine how much of the quasi endowment’s value can be used annually. This policy often involves applying a fixed percentage, commonly ranging from 3.5% to 5.5%, to the fund’s market value, often averaged over a trailing three-to-five-year period. This smoothing mechanism helps to stabilize the amount available for spending, protecting against short-term market fluctuations.

Distinguishing Quasi Endowments from True Endowments

The fundamental difference between a quasi endowment and a true endowment lies in the source and nature of their restrictions. A true endowment, also known as a permanent endowment, is created when a donor stipulates that the principal must be maintained in perpetuity. This donor restriction is legally binding, meaning only the investment income can typically be spent, and often for a specific purpose defined by the donor. Financial reporting reflects this as permanently restricted net assets.

In contrast, a quasi endowment is designated by the organization’s own governing board from its unrestricted funds. While invested for long-term growth, the board retains the authority to revoke this designation and spend the principal if necessary. This internal designation provides flexibility, and these funds are classified as net assets without donor restrictions in financial statements.

Management and Allocation of Quasi Endowment Funds

The governing board of an organization plays a central role in overseeing quasi endowment funds, often through a dedicated investment committee. The board is responsible for establishing and regularly reviewing the policies governing these funds. This includes setting an investment strategy for long-term growth and capital preservation.

The board also determines the annual spending rate, balancing current financial needs with long-term sustainability goals. Decisions to access the principal of a quasi endowment are made by the board. These actions are typically reserved for specific circumstances, such as unexpected financial challenges, strategic opportunities, or critical capital needs, and require formal board approval.