This is quite the common practice, Jeff. Many institutions establish quasi-endowments that do precisely as you describe.
By definition, a quasi-endowment is established by your governing board, typically funded in one of two ways:
- Excess operating funds or revenue
- Undesignated bequests
I always advise having two quasis for the two different funding sources.
For the first type, the board must establish the fund and approve the additions as funds become available.
For the second, a board-approved policy usually places undesignated bequests above a certain amount into the quasi.
Investments for the quasis are often the same as permanent endowments - but do not have restrictions on invading the principal.
The board can specify where the annual distributions go when establishing the endowments. That could be to the general operating account, but it doesn't have to be that way. And both quasis could have different purposes. At Duke, our undesignated bequest endowment spun funds into a strategic initiatives fund where the President had discretion over the use - but only if that use was toward a strategic initiative outlined in our strategic plan. Of course, the board can change the fund's purpose at any time.
There are dozens of web resources explaining the definition and purpose of quasi-endowment. You can also search for the policies of other institutions. My first search brought up policies from Princeton, Indiana, UCI, and SUNY. But this article might help your board member:
BTW, you never "count" the annual revenue from these funds in fundraising totals as those represent investment gains. But from an accounting perspective, you can record the revenue as an investment gain, miscellaneous income, or whatever your CFO says is the right term!
John