Trustees face a balancing act on investments, spending

  • Hospitals and health care foundations have been operating in a favorable charitable environment.
  • Prospects could change in the face of greater financial volatility and transformation in health care.
  • Hospital and foundation boards need to take a balanced approach to long-term planning and immediate financial needs to remain viable.
  • This requires trustees to pay close attention to their institution's investments, spending and donations —  and projections of where they'll be in the future.

In the past few years, hospitals in all parts of the United States have received some of the largest single donations in their history, allowing them to expand services and build newer and more technologically advanced facillities. But this trend forces foundation trustees, particularly those in community hospitals, to make complex decisions about funding current projects while planning for the future.

Most independent hospital trustees understand the need for long-term fiduciary stewardship. Yet, all too often, immediate demands overshadow the long-term planning process. It can be a high-wire act for board members to balance these two needs in an ever-changing landscape of expected and projected investment returns, planned giving projections, and current spending rates. If the national economy heads south, the halcyon days of charitable giving could end in a quarter or two.

As Nobel Memorial Prize–winning economist James Tobin said, “The trustees of endowed institutions are the guardians of the future against the claims of the present.” With some planning, board members can ensure annual spending rates that help their organizations in perpetuity.

Long-term planning

Community hospital foundation boards must manage the short-term needs of their hospital (a current expansion project, for example) with their long-term goals (such as developing population health programs or building low-cost, patient-centered medical homes in their service area). It is a delicate balance for many community hospital trustees and the subject of much debate in foundation board meetings.

All too often, however, long-term planning exercises related to portfolio spending focus only on the simple math of expected returns, spending and inflation. When fiduciaries are setting a spending policy that will best meet the short- and long-term objectives of the organization, they need to employ a more balanced approach — to consider the financial drivers of the organization along with the investment-related drivers of portfolio results.  

A frank discussion about some key issues can help trustees balance their hospital's present and future financial needs:

Investment and spending policy: Are there bylaws or policies that dictate fiscal planning, planned giving, future commitments and investment strategies? Do those policies reflect the current and future market rate of returns or how inflation will affect those returns? Some hospital foundations have copious policies that will help guide them through this analysis; others simply make monthly decisions to avoid disasters.

Governance: Take a look at the interaction, communication and trust between a hospital’s investment committee and hospital leaders. Often, hospital CEOs and chief financial officers have different definitions of the term “best interests” or the core mission of the organization than do the foundation's trustees. Hospital leaders who keep the wheels spinning every day typically seek growth and expansion. To do this they require funds, from all sources, including foundation dollars. Foundation trustees and investment committees may seek to serve the future needs of the institution, but they can also fund some of the hospital’s business today.

Spending rates: An upgraded emergency room. A new patient wing. Money to acquire local medical groups. The fiscal challenges of today’s hospital are top of mind among all stakeholders. Given the uncertain nature of future returns, will foundation trustees vote to increase spending today?

Spending rates, which nationally are approximately 4.4 percent of a hospital’s portfolio, should be based on agreement between trustees and hospital administrators about current and future goals. There are many moving parts, such as portfolio decisions (risk and rate of return) and spending rates that interact with daily operational pressure. Trustees usually address market volatility at every board meeting but rarely discuss the hospital’s operational volatility. Trustees and administrators need to communicate the reality of their mandate in an open, progressive manner that ensures good decision-making based on reality — not on hope.

Donors: The outcome of a long bull run has benefited investors such as hospital endowments and foundations, and has emboldened individuals and institutions to give more. When it’s all sunshine, everything grows. Then, conditions change, either on the investment side (such as increased market volatility) or on the operational side (such as the status of the Affordable Care Act). Operational challenges from reduced reimbursement or a change in payer contracts may put more pressure on foundation trustees to make up the difference.

Rule book

Community hospital foundation boards can learn from the Uniform Prudent Management of Institutional Funds Act. The act provides guideline language for any endowment or foundation that is specifically designated to be a perpetual pool, which cannot be wholly expended on a short-term basis. 

UPMIFA states that an institution must determine a spending rate that is prudent for the uses, benefits, purposes and duration for which the endowment fund is established. In practice, the institution needs to consider a number of factors, including:

  • The purposes of the institution and the fund.
  • Other institutional resources.
  • The duration and preservation of the fund.
  • General economic conditions.
  • The possible effects of inflation or deflation.
  • The expected total return from income or appreciation.

When they feel threatened by financial volatility, administrators and trustees look to each other for solutions — or a scapegoat. It would be better to plan for market fluctuations in advance, as both know that foundation dollars and operational dollars have ups and downs.

Hospitals that embrace a balanced approach to their foundation structure will be better able to continue their health care mission for generations. With a new administration in Washington and more health care change on the horizon, hospitals that don’t embrace this framework may face reality a bit sooner than expected.

Debashis Chowdhury ( is the president of Canterbury Consulting, a national investment advisory firm in Newport Beach, Calif.