The Endowment Is Twice the Budget: Writing a Spending Rule the Founders Would Recognize

Danielle Stanley

Pastor Elaine Thurston here. I want to tell you about a meeting that happens in a lot of our churches, and then I want to walk through the document that should come out of it.

It is a Tuesday evening in the fellowship hall. The finance committee has the year-end statement spread across the table. The endowment’s market value is $412,000. The operating budget is $206,000. The endowment is, for the first time anyone can remember, twice the budget. Someone says what everyone is thinking: We have all this money sitting there. Why are we arguing about the roof?

That is the right question. It is also the question that has split more congregations than any theological dispute I know of. And the answer is not a number. The answer is a document.

The document at the center of the table

Before the board votes on a spending rate, it needs to read the gift instruments. Not the fund summary the treasurer keeps in a spreadsheet. The actual instruments: the will, the trust agreement, the deed of gift, the letter the donor wrote in 1978 that the church secretary typed up and filed in a manila folder.

This matters because the legal structure of an endowment is not “the church’s money.” Under the prudent-management framework that most states have adopted in some form, endowment assets are donor-restricted until the board formally appropriates them for expenditure. The New York Attorney General’s guide to that state’s law puts it plainly: “Unless stated otherwise in the gift instrument, the assets in an endowment fund are donor-restricted assets (i.e., may not be spent) until they are ‘appropriated for expenditure’ by the institution.” (N.Y. Office of the Attorney General, A Practical Guide to the New York Prudent Management of Institutional Funds Act, p. 3.)

I am using New York’s guide because it is the most detailed public explanation of the uniform law I could retrieve, and because it lays out the board’s obligations in plain English. North Carolina’s statute is the one that governs a Western North Carolina church, and I have not retrieved its text. Do not treat anything below as legal advice for your state. Treat it as a checklist for the conversation you need to have with a lawyer and with your board.

The point stands across state lines: the gift instrument is the first document. A board that has not read it is not in a position to invoke the founder’s name, for a higher draw or against one.

Two questions, not one

Most board arguments about the endowment conflate two separate questions.

Question one: What may the board appropriate? This is governed by state prudent-management law. The law gives the board authority, but it also imposes a process. The board must act in good faith, with the care of an ordinarily prudent person, and must consider a list of factors if they are relevant. New York’s list, which is a useful template even where it is not binding, includes the duration and preservation of the fund, the purposes of the institution and the fund, general economic conditions, inflation or deflation, expected total return, other resources of the institution, alternatives to expenditure, and the institution’s investment policy. (NY AG guide, pp. 3–4.)

Question two: What did the donor restrict? This is governed by the gift instrument. A donor may have given the principal to the church outright, or may have restricted it to a specific purpose, or may have prohibited spending below the original dollar amount. The statute does not override the instrument. It operates inside it.

When a board skips question two, it usually discovers the problem later, at the worst possible moment — when a family member asks to see the paperwork, or when the church wants to sell a piece of property and the title search turns up a restriction nobody remembered.

What the board must actually do

Here is where the conversation gets practical. The law does not just ask the board to reach a prudent conclusion. It asks the board to show its work.

New York’s guide states: “An institution must make a contemporaneous record of the consideration it gave to each of the factors in deciding to appropriate. If the institution decides to accumulate rather than appropriate from an endowment fund, it must also keep a record of such action.” (NY AG guide, p. 4.)

That word — contemporaneous — is the one to underline. A resolution passed three years after the fact, reconstructing what the board probably thought, is not a contemporaneous record. It is a story. Boards tell stories. Courts and successors read records.

For a 50-to-300-member congregation, the practical version looks like this. At the meeting where the board sets or renews the spending rule, the clerk writes down:

  • The market value of each fund and the total, as of a stated date.
  • The gift instrument for each fund, by name and date, and a one-line summary of any restriction.
  • The factors the board considered, in the board’s own words. Not “we reviewed the factors.” What did you actually discuss about the roof, the parsonage, the cemetery, the reserve fund?
  • The formula adopted, the averaging period, and the review date.
  • The vote, with the ayes and nays if anyone asks for them.

That is a page and a half. It is the cheapest insurance the church will ever buy.

The 7% number, used correctly

You will hear 7% quoted in congregational conversation as if it were a ceiling. It is not. In New York, for endowment gifts made after September 17, 2010, the law creates a rebuttable presumption of imprudence if an institution appropriates more than 7% of the fund’s fair market value, averaged over at least the preceding five years, in any year. (NY AG guide, p. 4.) The same guide notes that an appropriation of 7% or less is not presumptively prudent — the absence of a red flag is not a green light.

Two cautions. First, that presumption is New York’s, for gifts made after a specific date. It does not travel automatically to North Carolina or to a 1962 bequest. Second, even where it applies, it is a tripwire, not a target. A board proposing to go above it should be able to point to the specific factors and the specific gift instruments that justify the decision, and should record that reasoning at the time. A board that treats 7% as a ceiling has misunderstood the statute. A board that treats it as a floor has misunderstood the donor.

Rate versus formula

Here is a distinction that clears up more confusion than any other. The spending rate is a percentage. The spending formula is the rule that applies the rate to a number.

NACUBO, the association that studies endowment management, explains it this way: “Most endowment spending policies are based on a formula designed to enable spending to keep up with budget needs and inflationary pressure. While some formulas are more complex, a simple example might be: 4 percent of the average market value of the prior four quarters. In this case, 4 percent would be applied to an average endowment amount based on prior years, quarters, or something else. The spending rate is a part of the formula, established as a percentage which is then applied to the average value of the endowment.” (NACUBO, “Your Endowment Questions, Answered.”)

Why does the averaging period matter so much for a small congregation? Because a single bad year in a $400,000 portfolio can swing the draw by tens of thousands of dollars. If the board spends a flat percentage of the current balance, the roof budget moves with the stock market. If the board spends a percentage of a three-year or five-year average, the roof budget moves slowly. The formula is what keeps the annual draw steady enough to plan around.

NACUBO’s data is drawn from colleges and universities, not churches, and I am not importing their rates into your fellowship hall. What transfers is the structure: a rate, an averaging period, a review date, and a written record.

What the founders would recognize

I want to be careful here, because this is where pastors and boards can slide into sentimentality. We do not know what the founders would have wanted in 2026. They did not anticipate 2026. What we know is what they wrote down.

NACUBO’s explainer makes the point in the higher-education context: “True endowments belong to the institution in perpetuity for the purpose to which they were entrusted. This means that the endowment is held for mission-related activities defined in the donor’s agreement with the institution. The board of trustees is responsible for ensuring the endowment is managed to meet those demands.” (NACUBO.)

Read that again with a small-church eye. The endowment is held for the purpose to which it was entrusted. The board’s job is to ensure it is managed to meet those demands. The founders’ intent is not a mood to be guessed at. It is a document to be read. A spending rule the founders would recognize is one that can be traced, line by line, back to the instruments they signed.

That is also the rule that will survive the board that wrote it. A future treasurer should be able to open the file and see the formula, the averaging period, the review date, and the factors the board considered — not reverse-engineer the reasoning from a bank statement and a memory.

The real risk is drift, not a single year

For a congregation whose endowment is twice its budget, the danger is rarely one dramatic overspend. It is the slow reclassification of endowment dollars as operating dollars. The draw creeps up. The roof, then the parsonage, then the copier, then the pastor’s continuing-education line. Each year the board approves it because the budget needs it, and each year the paper trail gets thinner. Ten years later, nobody can say what the original restriction was, and the fund has become a checking account with a plaque on the wall.

A written rule with a named review date is the cheapest available defense against that drift. It does not prevent a board from spending more. It forces the board to say so out loud, on the record, with the gift instruments in front of it.

Bi-vocational pastors and volunteer treasurers are the most exposed here, because they often inherit a spending practice with no paper trail at all. The first useful act is not to change the number. It is to write down the number currently being used and the reasoning behind it, so the next conversation starts from a document rather than a memory.

An illustration, clearly labeled

I am not describing a real church. This is a constructed example to show the process.

Suppose a 180-member congregation has a $400,000 endowment and a $200,000 budget. The board discovers it has been drawing 9% for three years with no recorded deliberation. The remedy is not necessarily to cut to 4% overnight — that could close the food pantry and end the pastor’s health insurance in the same month. The remedy is to adopt a formula, record the factors, and set a glide path with a review date. Maybe the board adopts a 5% rate on a three-year average, with a written plan to step down one point per year and a review at the next annual meeting. Maybe it decides the current draw is defensible for one more year because of a specific capital need, and records why. Either way, the board has done what the law asks and what the founders’ documents permit. The number is a decision. The record is the accountability.

The resolution itself

What should the motion say? Keep it short enough to read aloud and specific enough to survive you.

  1. The formula. “The board adopts a spending rate of X% applied to the average market value of the endowment funds over the preceding N quarters, calculated as of [date].”
  2. The funds covered. Name each fund and attach the gift instrument summary. If a fund is excluded because of a restriction, say so.
  3. The factors considered. A short paragraph in the board’s own words, addressing the relevant items from your state’s list. Attach the finance committee’s one-page memo if there is one.
  4. The review date. A specific month and year. Not “annually.” A date.
  5. The record. Direct the clerk to file the resolution, the fund summary, the gift instrument summaries, and the finance committee memo together in the permanent record, and to note the location in the minutes.

Then file it where the next board can find it. Not in the treasurer’s home office. Not in a folder labeled “misc.” In the church’s permanent record, with a copy in the safe and a note in the minutes saying where it is.

What this does not solve

I want to be honest about the limits. A written spending rule does not settle the argument about whether to build the addition. It does not tell you whether the endowment should fund the pastor’s salary or only the mission line. It does not resolve the family that has held the treasurer’s chair for thirty years and regards the endowment as its own. Those are relational questions, and they are older than the statute.

What the rule does is give the board a place to stand. When the argument comes — and it will — the board can point to a document rather than a memory. It can say: here is what the founders wrote, here is what the law requires us to consider, here is what we decided and why, and here is when we will look at it again.

That is not a triumphal ending. It is a working document. In a small church, a working document is a form of grace.

Questions readers ask

Does this apply to our church in North Carolina? The general framework — donor-restricted funds, board appropriation, a duty to consider factors and keep a record — is the shape of the uniform prudent-management law that most states have adopted in some form. But the specific factors, the 7% presumption, and the notice requirements I quoted are New York’s. North Carolina’s statute is the one that governs you, and I have not retrieved its text. Ask a North Carolina attorney who works with churches before you vote.

Our endowment is small. Do we still need a written rule? Yes, and for the same reason. The smaller the fund, the easier it is for a single year’s draw to look like a rounding error and the harder it is to reconstruct later. A one-page resolution is enough.

What if we cannot find the gift instruments? Then the first task is a search, not a vote. Look in the church safe, the former treasurer’s files, the donor’s family papers, the county deed records if real property is involved, and the church’s own minutes from the year of the gift. If the instrument truly cannot be found, the board should record that fact and get legal advice before appropriating. Do not assume the restriction is gone because the paper is lost.

Can we spend below the original gift amount? In New York, the law now permits it if the board concludes it is prudent, subject to donor notice rules for older gifts. (NY AG guide, pp. 2–4.) Your state may differ. The gift instrument may also prohibit it. Read the instrument first.

Who decides — the board or the congregation? That depends on your bylaws and your state’s nonprofit corporation law. In many congregational settings the board or trustees hold the authority to appropriate, while the congregation holds authority over the budget. The spending rule should be adopted by whichever body the bylaws name, and the other body should be told in writing what was adopted. If the bylaws are silent, that silence is itself a document problem worth fixing.

What about the 7% figure — is that a safe ceiling? No. In New York it is a rebuttable presumption of imprudence above 7% for certain gifts, and the guide explicitly says 7% or less is not presumptively prudent. It is a tripwire, not a target, and it is not a North Carolina rule unless your statute says so.

Sources

Note on scope: The statutory details quoted above are from New York’s version of the uniform law. North Carolina’s statute was not retrieved for this article. The NACUBO material concerns college and university endowments and is cited for the structure of a spending formula, not for a recommended rate for congregations.

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