Pennsylvania nonprofits get a green light for more endowment spending

The shutdown of such cultural institutions as the Philadelphia Museum of Art and the Kimmel Center during the coronavirus pandemic has been financially devastating for them, forcing the two nonprofits to go months without revenue from visitors and concertgoers.

The two prominent Philadelphia institutions are among those that successfully advocated for a change in state law that temporarily increases the annual cap on money that nonprofits may take from their restricted endowments to 10% from 7%. The minimum spending amount — 2% — remains unchanged.

Advocates for the change say that if endowments are meant for a rainy day, it’s raining heavily now. Skeptics argue that the money is meant to be there forever and that more crises are sure to come, making it risky to deplete an endowment with no guarantee that it will ever recover.

The new law’s “flexibility to use up to 10% of endowment funds could be a critical lifeline for charities — but at what cost? Nonprofits that take 10% of their endowment funds for one, two, or three years will no doubt put long-term, perpetual funds at risk to satisfy their short-term needs,” said Laura Solomon, an Ardmore lawyer who specializes in nonprofits.

“And some donors who funded those same endowments may not be happy to hear that the money they gave to the charity, to hold in trust, is being eroded more quickly than intended. So it could beneficial, but short-sighted,” Solomon said.

The legislation signed by Gov. Tom Wolf on July 23 made two other significant and permanent changes to Pennsylvania’s nonprofit law. One allows a nonprofit and a living donor to reach an agreement on changing a gift’s use without going to Orphans’ Court for approval. Another gives donors standing to sue nonprofits over how a gift is being used. Previously, only the Attorney General’s Office could do that.

The increase in the spending cap is expected to have the most immediate impact, though it’s not clear how many nonprofits will take advantage of the change.

It’s common for nonprofits to spend 5% or less of their endowments each year, so it’s not clear how many will make the leap to 10% for fiscal years ending this year, next year, and in 2022. Moreover, the vast majority of nonprofits are very small and don’t have an endowment, according to the National Council of Nonprofits.

Even in the best of circumstances, many nonprofits struggle financially. COVID-19 turbocharged those problems.

The Kimmel Center board, which furloughed 80% of its staff, is trying to fill anticipated $5 million revenue gaps this year and next year through fund-raising, with nearly $3 million raised so far, the organization’s chief executive, Anne Ewers, said Monday in an emailed response to questions.

Ewers said the organization, which has a $62 million endowment, wants to avoid taking advantage of the new law. Still, she said, “If we have no other choice but to withdraw the money, and our board approves, the extra 3% is worth approximately $1.8 million per year.”

“While we now have this option to help with our survival during this crisis, our long-term goal is to protect our endowment for generations to come,” she said. The Kimmel Center, where more than 2,000 work during events, includes the Academy of Music and Merriam Theater.

The Philadelphia Museum of Art’s endowment approached $500 million last year, with close to $400 million in restricted funds that are subject to the new law, according to its audited financial statement. That makes the law potentially more significant.

“We are grateful for its passage, as it will grant us and others some additional flexibility, but for the museum, it will take us some time to evaluate how it may best be put to responsible use,” said a spokesperson for the museum, which announced in June that it would shed more than 100 jobs, or 20% of its staff, through furloughs, voluntary departures, and possibly layoffs.

The museum has been spending 4.5% to 5.5% of its endowment yearly. Based on $400 million in restricted endowment funds, the Art Museum could have spent $28 million under the 7% cap, while the new cap would allow it to spend $40 million, a $12 million increase.

The higher spending cap is in effect for three years, though some nonprofit advocates wanted it to be longer, said State Sen. Scott Hutchinson, a Republican from Western Pennsylvania, who sponsored the legislation in the Senate. “We didn’t want to do a wholesale change here because endowments for the long term are very important and we don’t want them to be drained overnight,” Hutchinson said

The prime sponsor was State Rep. Martina White, a Republican from Northeast Philadelphia. She did not respond to requests for comment.

Donald W. Kramer, a lawyer and nonprofit expert at Montgomery McCracken Walker & Rhoads LLP, praised the changes to the relationship between nonprofits and donors as good and said that the ability to spend more made sense — for a limited time.

“The question I ask is, how much of our seed corn should we eat? Ten percent for three years seems to be a reasonable proposal at this time, which is in many ways much more critical than other times have been,” he said.

Laura Otten, executive director of the Nonprofit Center at La Salle University, worries that some organizations might take advantage of the change just because they can and because it’s easier than raising more money.

“The ones with smart boards, the ones that have created a responsible endowment policy,” she said, “I don’t think they are going to do this.”