Endowment Spending Policy: When to Bend the Rules

Federal funding reductions, persistent inflation, declining enrollment trends, and a more constrained return environment have converged to create a financial stress test unlike any most boards have faced since the Great Recession. A notable minority of organizations overseeing endowment spending policy are already drawing beyond their stated limits — and heading into 2026, that number is expected to grow.¹

For investment committees and boards responsible for nonprofit endowment management and significant philanthropic capital, the question isn’t whether to acknowledge this pressure. It’s how to respond thoughtfully — with an eye toward both your institution’s immediate mission and the legacy you’re building for generations to come. Understanding what your endowment policy actually permits, and what sound nonprofit investment management looks like in this environment, is the starting point for every responsible board conversation.

The new pressure on endowment spending

Endowments were designed to support institutions across market cycles and across generations. The endowment spending policy — typically expressed as a percentage draw on a rolling average of the portfolio’s value — is one of the most important governance documents a board maintains. It balances the competing obligations of supporting today’s mission and preserving the principal that will fund tomorrow’s. For institutions with substantial university endowments or private foundation assets, that balance now defines long-term institutional viability.

That balance is under significant strain right now. According to a recent study, higher education institutions funded an average of 15.2% of their operating budgets from endowments — a historic high, reflecting an 11% increase over the prior year.² Most institutions rely on federal grants for 10% to 15% of their operating budgets, and for large research institutions, that figure can reach 40% to 50%.³ As federal support has become less certain, the pressure on endowment draw rates has intensified accordingly — and effective nonprofit investment management now requires a direct response.

At the same time, forward-looking return expectations have become more constrained. Nearly half of institutional investors responding to a recent survey expect U.S. equity returns in 2026 to fall below long-term historical averages, reflecting heightened geopolitical risk and valuation concerns.⁴ More reliance on the endowment, combined with more modest return expectations, raises the stakes considerably.

The passage of the One Big Beautiful Bill Act (OBBBA) added another layer of complexity for larger private institutions, expanding the excise tax on endowments and reducing available budgets at a particularly challenging moment.⁵ For boards and investment committees overseeing foundation and philanthropic capital, these are not abstract concerns — they are live decisions.

What UPMIFA actually permits

Much of the confusion around endowment spending policy in this environment traces back to a misreading of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). This UPMIFA spending policy framework — the model law governing endowment investment and spending adopted in various forms across most states⁶ — is frequently misunderstood as an absolute cap. It isn’t. And that distinction has significant implications for nonprofit endowment management at this moment.

UPMIFA establishes a rebuttable presumption — not an absolute ceiling — around spending. The law’s drafters explicitly noted that “circumstances in a particular year” could void that presumption, as they did during the pandemic and the Great Recession.⁷

In practice, that means boards retain meaningful flexibility to spend above typical thresholds when extraordinary circumstances warrant it. What UPMIFA requires is not a rigid cap but a deliberate, documented decision-making process grounded in prudence. It directs fiduciaries to weigh the duration and preservation of the endowment, the expected total return of the portfolio, the institution’s other resources, and the needs of the institution and its beneficiaries.

For investment committees governing family foundations, private foundations, or institutional endowments with significant philanthropic portfolios, this framework is both permission and responsibility. You can respond to extraordinary circumstances — provided that response is governed, documented, and coordinated across your investment, tax, and philanthropic strategies.

Three integrated strategies for navigating this environment

1. Revisiting your endowment investment strategy

   Endowment spending policy and asset allocation are inseparable. If your committee is considering higher draws, it’s essential to evaluate whether your current endowment investment strategy and nonprofit investment management framework can reasonably support them on a sustainable basis. High-quality nonprofit endowment management begins with this coordinated review — not with a spending decision made in isolation from portfolio realities.

   Mercer Advisors recommends that organizations incorporate spending policy guardrails — such as 4% to 5% draw limits — and coordinate those guardrails with the portfolio’s expected return profile.⁸

   For institutions with significant philanthropic capital, this may be an appropriate moment to assess whether the portfolio’s allocation to institutional-quality alternatives — private equity, private credit, and real assets — is calibrated to today’s return and liquidity environment. These allocations can seek to improve long-term returns for endowments that don’t face near-term liquidity constraints, but they require thoughtful sizing alongside your distribution timeline and operating cash needs.⁹ Nonprofit endowment management at this level demands a coordinated review of both the endowment payout rate and the underlying portfolio construction simultaneously.

2. Coordinating tax planning with endowment distributions

   For families and institutions navigating the new excise tax landscape created by OBBB, endowment distributions don’t exist in isolation — they intersect with broader tax strategy. The expanded excise tax applies to private higher education institutions with large per-student endowments, but its implications cascade: it can disproportionately affect unrestricted budget categories, including financial aid, faculty, and infrastructure.

   For boards of private foundations and family foundations, a parallel discipline applies. Distribution planning needs to be coordinated with the foundation’s required minimum distributions, any charitable remainder structures in place, and the family’s overall estate and income tax picture. Tax planning at this level is not an annual exercise — it’s an ongoing, integrated discipline that connects governance decisions with multi-generational financial strategy.

3. Aligning endowment policy with philanthropic and estate planning

   One of the most overlooked dimensions of endowment spending decisions is how they connect to legacy and estate planning at the family level. For families with significant philanthropic capital — whether held in a private foundation, a donor-advised fund, or an endowment — the distribution policy reflects more than operational finance. It reflects values, priorities, and the family’s vision for how their resources will advance their mission across generations.

   When extraordinary pressures arise — as they clearly have in 2025 and 2026 — the families and institutions who navigate them most effectively are those whose philanthropic and estate strategies are coordinated across legal, investment, and tax teams. That means ensuring dynasty trust structures are aligned with the foundation’s long-term distribution goals, that family governance frameworks address how spending deviations are authorized and documented, and that any adjustments to endowment draw rates are evaluated in light of both the institution’s needs and the family’s broader legacy objectives.

Governance: The underappreciated variable

Research published in late 2025 noted that investment committees control the spending decision at only 12% of organizations surveyed — the full board is responsible at more than half, and the finance committee at nearly one-third.¹⁰ That structural reality has important implications: strong communication and clear documentation are essential to link endowment spending and investment policy decisions across these stakeholders.

When a board considers authorizing a higher-endowment draw, the process itself matters as much as the outcome. Documenting the circumstances that warrant a policy deviation, the data and analysis supporting the decision, the expected duration of elevated spending, and the conditions that would trigger a return to standard policy — all of this creates the governance record that serves the institution, its donors, and its legal obligations.

The discipline to spend thoughtfully

The pressure to spend beyond policy in this environment is real, and for many boards it is appropriate. But the institutions that seek to preserve their long-term sustainability will be those that treat any deviation as a deliberate, bounded decision — not a passive response to circumstances.

Working with an experienced fiduciary partner who understands both the investment and governance dimensions of endowment management can help your board act with the urgency the moment demands while maintaining the discipline your institution’s legacy requires.

At Mercer Advisors, our endowment and foundation team works alongside boards and investment committees to review spending policies, stress-test endowment investment strategies, and coordinate the tax and philanthropic planning that turns a well-governed endowment into a lasting institutional resource.

Endowment spending policy and asset allocation are inseparable. If your committee is considering higher draws, it’s essential to evaluate whether your current endowment investment strategy and nonprofit investment management framework can reasonably support them on a sustainable basis. High-quality nonprofit endowment management begins with this coordinated review — not with a spending decision made in isolation from portfolio realities.

FAQS

What is an endowment spending policy?

An endowment spending policy is a governance document that establishes how much of an endowment’s value an organization can distribute each year to support its operations and mission. It’s typically expressed as a percentage draw — often 4% to 5% — calculated on a rolling average of the portfolio’s market value, and it seeks to balance current spending needs against the preservation of principal for future generations. For families and institutions engaged in nonprofit endowment management, it functions as both a financial guardrail and a statement of long-term values: it reflects a commitment to sustaining your institution’s mission not just today, but for generations who haven’t yet arrived.

When is it appropriate to spend beyond your stated endowment spending policy?

UPMIFA — the model law governing most endowment spending policies across the U.S. — doesn’t establish an absolute spending ceiling. It creates a rebuttable presumption that boards can exceed when extraordinary circumstances warrant a higher endowment draw rate: significant loss of other funding sources, operating stress, or major institutional needs that can’t be met through other means. That said, any deviation should satisfy three clear conditions: it must be formally authorized by the governing body, documented with supporting analysis of expected return, available resources, and institutional need, and framed as a temporary and bounded measure with defined review triggers. If those conditions are met — and your nonprofit investment management strategy can support the higher draw on a sustainable basis — acting with considered urgency is not just permissible. It may well be the most prudent path forward.

How does a higher endowment draw rate affect long-term sustainability?

Higher draw rates reduce the compounding power of an endowment over time. If distributions consistently exceed the portfolio’s net return — after inflation — the endowment will gradually lose real purchasing power, a condition known as spending down the corpus. Investment committees must evaluate proposed changes to the endowment payout rate in light of forward-looking return assumptions, inflation, and the portfolio’s asset allocation to assess long-term sustainability.

Where can boards find guidance on UPMIFA compliance for endowment spending decisions?

State attorneys general and the National Conference of Commissioners on Uniform State Laws publish guidance on UPMIFA adoption and interpretation in each state, as provisions vary by jurisdiction. Organizations should consult legal counsel familiar with the specific version adopted in their state. For investment-side guidance, an experienced financial fiduciary — such as an Outsourced Chief Investment Officer (OCIO) — can provide analysis that works alongside legal advice to complete your governance framework. The endowments and foundations team at Mercer Advisors offers exactly this kind of coordinated support: reviewing endowment spending policies, stress-testing endowment investment strategies, and helping boards document their decision-making process in a way that satisfies both fiduciary and legal obligations.

How does coordinating endowment spending policy decisions with tax and estate planning compare to managing them separately?

Managing endowment spending policy decisions in isolation from tax and estate planning typically results in missed opportunities and unintended costs. For family foundations and private foundations, distributions don’t stand apart from a family’s broader financial picture — they intersect with required minimum distribution rules, the expanded excise tax landscape created by the One Big Beautiful Bill Act, and multi-generational estate planning structures. A coordinated nonprofit investment management approach — one that integrates investment strategy, tax planning, and philanthropic goals under a single advisory framework — seeks to optimize outcomes across all of these dimensions at once. By contrast, siloed decision-making can leave boards inadvertently triggering tax consequences, missing distribution efficiencies, or making endowment draw decisions that conflict with the family’s long-term legacy objectives. The difference, in practical terms, can be significant: not just in dollars conserved, but in the clarity and confidence of every governance decision your board makes.