Endowments and Foundations
Endowments and foundations include colleges, private schools, museums, and hospitals. The investment income generated from the funds invested by endowments and foundations is used for the operation of the entity. In the case of a college, the investment income is used to meet current operating expenses and capital expenditures (i.e., the construction of new buildings or sports facilities).
As with pension funds, qualified endowments and foundations are exempt from taxation. The board of trustees, just like the plan sponsor for a pension fund, specifies the investment objectives and the acceptable investment alternatives. Typically, the managers of endowments and foundations invest in long-term assets and have the primary goal of safeguarding the principal of the entity. The second goal, and an important one, is to generate a stream of earnings that allow the endowment or foundation to perform its functions of supporting certain operations. There is a constraint imposed on an endowment or foundation in that it must maintain its tax-exempt status.