OK. I admit it. Sometimes I go a bit overboard to prove a point.
A friend of mine made me realize this the other day. She chided me: “You’re always beating on endowments. Sometimes, you know, they’re a good thing!” Somewhat to her surprise, I agreed.
But, as they say on Facebook, “It’s complicated.”
First, to recap my argument against the proliferation of endowed funds:
1) I believe, in general, that investing in people now – rather than in the securities markets so you can help people in the future – is more efficient and of higher impact. Future social problems can be averted though use of funds today. To put it simply (and, arguably, simplistically): If we spend the money to solve problems today, we perhaps won’t need the funds tomorrow, because those problems will be no longer exist.
2) Nonprofits – and specifically their investment committees – can get more wrapped up in the growth of the endowments than in putting them to good use. In tough times, organizations typically need more income to meet their mission – but the suggestion that they take an extra quarter- or half-percent from endowment is treated as raw heresy by most board members. Which raises the question: is the endowment there to serve the institution, or is the institution there to serve the endowment? All too often, it’s the latter.
3) Endowments can make nonprofits complacent – and weirdly vulnerable. It’s telling that in the great market correction of 2008-9, it was the most richly-endowed nonprofits that suffered the most disruption. When the Harvard endowment tanked, the university called a sudden halt to their construction plans for a new campus in the neighborhood of Allston, leaving enormous holes in the ground where stores and houses once stood. Dartmouth College slashed its budget by $100 million in one year – because of poor endowment returns. Don’t these examples undermine the presumption that endowments protect nonprofits in difficult economic times?
4) There is an opportunity cost to raising endowments. When we’re raising money for endowments, what are we not raising money for?
All of this said, my friend is right. In my effort to play the devil’s advocate, I have been guilty of overstating things. There is indeed a place for endowments.
Some institutions lend themselves very well to endowments – for example, museums. The best museums, of course, are not static institutions. They buzz with lectures and classes and tours and films seven days a week. But at their core, they exist to preserve valuable art and artifacts. Building an endowment at a museum helps guarantee the organization’s infrastructure so that it can meet its mission in perpetuity. The endowment keeps a roof over the paintings.
Similarly, I think that conservation easements – where land is preserved from development, but needs to be monitored in perpetuity by a land trust – are perfectly served by endowments. As with museums, in this case the vehicle (an endowed fund) fits the mission (perpetual dedication to a specific purpose). I’m not only okay with an endowment in this circumstance – I embrace it.
Are endowments right for other institutions? Sometimes. The key is to think before you endow – and many people and organizations skip this step.
Here’s the first question that should be asked: Will the nonprofit in question be around in perpetuity? In the private sector, corporations come and go. Kodak was a giant when I was a kid; now it’s on the brink of disappearing. Why, then, should we expect a nonprofit – say, a youth services program in Poughkeepsie – to last forever? And is there any point in creating an endowment for an organization that’s only temporary?
Endowment fans will say that strengthening an organization like that Poughkeepsie youth agency in is exactly why they create endowments. I recognize these good intentions, but in practice it rarely works out that way. I often come across nonprofits that are endowment-rich but operating-cash-poor. They might have a significant endowment, but their other sources of revenues are underdeveloped, and they are paying their staff such low wages that there is high turnover and inconsistent program quality.
I would argue – and I frequently do – that a concerted effort to attract current dollars would be a better investment than building the endowment. The money for current use can immediately improve the quality of the services, affect more lives for the better, and – this is important to remember! – attract new donors. And new donors are the real assurance of the long-term survival of the organization.
What I suggest is that each nonprofit do an honest evaluation of what kinds of funds would most positively impact its work. Be honest and analytical. You may need increased operating funds. You may legitimately need to build your endowment. You may want to experiment with a hybrid such as aspirational impact funds. You may want to do all three.
Nonprofits then need to have honest conversations with their donors. Treat your donors like adults. Tell them what kinds of gifts would have the most impact, not what you think they want to hear. Do them the courtesy of engaging in a real conversation about the impact of their gift.
So I apologize for blithely dismissing endowments. In an effort to make a point, I may have come across more stridently than I really feel. Endowments can be very helpful. But the donor and the nonprofit should set up an endowment only after a careful and honest conversation and a joint agreement that this is a good thing for the institution and the best use of the donor’s money.
Do keep in mind throughout that an endowment is invested in perpetuity. And all parties involved need to remember that perpetuity is a very, very long time indeed.
Copyright Alan Cantor 2012. All rights reserved.