A clear financial plan, including a sound investment policy, protects a church, its ministries and its people from a potentially devastating financial misstep. However, did you know this same plan can actually drive better giving, too?
John Regan, Partner and Chief Investment Officer at New York-based Permanens Capital, which counts among its clients several large churches and the largest Christian university in America, explains.
Q: A church’s revenue stream is largely outside its control. How can good governance and responsible investing make the revenue stream more predictable?
Regan: Churches’ revenue streams are primarily derived from parishioner contributions. As there are many unknown variables (the economy, attendance drop-offs and so on), churches may not know when they’re going to be cash rich or cash poor. It’s difficult to gauge, especially for the future. A church leader might know that giving around Christmastime will often increase and that it may decrease during the summer; however, in between, he / she may have a more difficult time predicting church cashflows.
How does a church protect itself against that unpredictability?
One thing the church can do to smooth a “bumpy ride” is to have a cash spend policy in place, whereby the church never moves forward with a new project unless a certain dollar amount / percentage of that dollar amount is available in cash on hand. Additionally, if the church is fortunate enough to have saved money along the way, excess cash could be wisely invested to earn interest. The church could use some of that interest income, without touching the principal, to help smooth out those uncertain revenue flows. As an example, many independent schools do this; it’s called a ‘draw rate,’ or ‘draw policy.’ Based on tuition, the school knows how much it’s going to earn in the fall and spring, and what the overhead and operational expenses will be. Then, to the extent the school is going to spend more than it brings in in revenue, it draws off its endowment (without touching the principal) in order to fund the excess operating expenses.
Q: In what ways does investing those funds represent good stewardship?
Regan: I think it’s important to acknowledge a prevailing mind-set, here: that money donated to the church is ‘required to be spent.’ Regarding funds given to support a specific mission, this might very well be the case. However, the Church has an opportunity to employ good stewardship over general donations by retaining a portion of those donations to protects itself against future downturns and unforeseen financial circumstances.
Good governance can drive the church’s spend policy, and how the church spends gifts and donations.
Q: Understood. To that end, why is an Investment Policy Statement (or written spend policy) so critical? And, what elements or mandates might it include?
Regan: An Investment Policy Statement, or written spend policy, provides guidelines for authorizing investments and, among other things, maps out the internal investments committee: how many members it should have, their term limits, who leads it, how many are parishioners versus staff, whether or not it includes the pastor, and more. It dictates whether investment authorities and responsibility are managed in-house or outsourced and, in the latter case, who at the church can sign off (the church treasurer, pastor, or someone else). It gets very detailed and often occupies multiple pages.
It’s important to note that no two Investment Policy Statements are the same. They should be written based on the specific needs of each individual Church.
“If you’re able to express to donors (especially financial leaders) that your church has these governing documents / guidelines / principles in place, it conveys to them a familiar, more business-minded approach to finances. This makes donors feel confident that their generosity will be appropriately handled. These documents are something a church leader can point to and say, “Look, this is what we do, and this is how we handle your gifts. It’s a very systematic approach. Don’t worry; no one will run away with those funds.” That drives good giving. ”
That said, an Investment Policy Statement is well worth the effort, as it alleviates inconsistencies in the way a church handles its funds. It’s so important that parishioners know the church’s money is being protected, vested, and where applicable
invested. Let me explain.
A long-time pastor might be notoriously financially conservative. When a new pastor takes over, a lot more spending might start taking place for high-priority ministries. If the new pastor believes the children’s ministry is the most important initiative to focus on, he might decide to spend a lot of money on a new playground.
Meanwhile, another member of the leadership team might believe adult Bible study is more critical. These differences can cause a lot of conflict and uncertainty.
Having a written spend policy in place governs how the church will be operated and ensures the church’s funds will last longer by providing consistent, unemotional guidance surrounding spending procedures. If, for example, a church or staff member is pressuring the pastor to invest in a new bus, that pastor can consult the written spend policy, which might (depending on the church) dictate that the church can’t spend more than $15,000 per quarter on capital expenditures.
Q: Beyond better management of the funds a church already has, can a written spend policy also drive ‘good giving’ to generate new funds?
Regan: Absolutely! If you’re able to express to donors (especially financial leaders) that your church has these governing documents / guidelines / principles in place, it conveys to them a familiar, more business-minded approach to finances. This makes donors feel confident that their generosity will be appropriately handled. These documents are something a church leader can point to and say, “Look, this is what we do, and this is how we handle your gifts. It’s a very systematic approach. Don’t worry; no one will run away with those funds.” That drives good giving.
Having said that, governance can be updated. If a new pastor disagrees with the governing documents as they’re written (depending on how a church sets them up), he can adjust them himself or work with the appointed committee to update and amend them.
In fact, we recommend that governing documents be revisited every year and updated every three years.
Q: How might a church’s investment options differ depending on its need to access those funds?
Regan: Liquidity is a word that’s often used in the investment world. To elaborate: If your church needs money in a week (whether it’s $10,000 or $10), then you can’t afford for your investments to dip to $8,000 or $8, mid-week, because you might not have time to get it back up to the original amount before you need it.
The point is: liquidity needs are a major driver in the type of investments a church can sustain.
Keep in mind that this isn’t an either / or proposition. For example, if your church has $50,000 in a savings account, and you know you’ll need $5,000 in two weeks for a mission trip, you could split that money into two different investment pools. Maybe $10,000 could be invested in a very safe, liquid, low-risk way, while the other $40,000 (which you know you won’t need for a while) lends itself to a longer-term, higher-risk approach.
Q: Who should a church choose to manage its investments, and why?
Regan: It’s very important that whoever is in charge of the church’s investments is unaffiliated and unconflicted. Both are equally critical.
If, for example, you enlist your largest donor’s brother as your broker, but then you disagree with something he’s doing, you might decide not to cut ties with him for fear of upsetting that financial leader in the congregation. Also, this could give the donor, who likely already has tremendous influence, even more influence … and make him ‘responsible’ (in the congregation’s eyes) if an investment doesn’t perform as hoped.
The better approach is to choose an investment manager with experience in the faith-based and non-profit worlds. If you hire a local broker (one without this experience) and tell them the church has $10,000 in an account, they’re likely to invest that $10,000 and try to make as much money as possible so that they look good. That might sound like a good plan, but a broker with experience in the non-profit and faith-based realms will know to be more prudent with a church client’s funds.
They will know to ask more questions. “OK, you have $10,000, but what’s your church’s year-over-year revenue? What is your operational overhead? Do you have any debt? Are there any upcoming capital expenditure items?”
Asking (and answering) such questions identifies what that $10,000 really means to the church.
Q: Members expect a certain degree of financial transparency from their churches. When a church outsources its investments management, how can the firm handling that process help the church ensure the appropriate degree of transparency for givers?
Regan: A church should think really carefully about transparency in this context. I would form a committee of four to five individuals who receive the requested transparency from the investment manager, and who are involved in the stewardship of cash investments. Whether or not that committee chooses to share all the investment details with every parishioner is up to them; however, I would caution that if shared with the entire congregation, many people will have many different ideas about those investments.
Another area where transparency comes into play is socially responsible investing. Churches, for example, may not want investments in fossil fuels, pornography, casinos, firearms and so on. If a mandate is in place with the proper level of transparency, the ethical committee can ensure the church’s investment criteria are being met by their investment manager.
— Reporting by RaeAnn Slaybaugh