August 24, 2015; Pensions & Investments

Nonprofits and nonprofit regulators, among many others, should put this trend in the category of things to keep a careful eye on.

Municipalities across the U.S., especially school districts and parks departments, have been forming private foundations to support their missions in order to reduce their dependence on shrinking government budgets, but have sometimes been hampered by legal restrictions on where they can invest their assets.

Indiana has enacted a new law that gives municipal governments in the state the authority to fund foundations with proceeds of property sales, and to keep their assets in a broader range of investments, according to a report in Pensions & Investments.

The law allows municipal foundations with at least $50 million in assets, the required minimum, to invest up to 55 percent in equities, in addition to other securities. They would no longer be limited by the Indiana state constitution’s requirement that governmental agencies invest in only short-term fixed income instruments with limited duration.

The law requires foundations to have an investment consultant, which is common sense. It also allows annual investment returns of up to five percent to be used for any municipal purpose, while the balance can be kept in the foundation. This standard is commonly the way that private grantmaking foundations spend their endowments.

“The whole intent is to optimize the investment of capital, preserve the corpus, and provide a way for governments that are strapped for money to sell some assets and get a better return on those assets,” the state legislator who authored the law told Pensions & Investments.

Potentially, hundreds of millions of dollars could be invested by Indiana’s counties, cities, towns and townships if they were to create foundations under the new law. The new law was developed when a county sold its hospital in 2007 but was limited in how much of a return it could get on the funds because of existing state limitations. Now, municipalities in the state can create a foundation and broaden their investment options.—Larry Kaplan