Endowments, Pro and Con

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.

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5 Comments. Leave new

  • Here’s my case for perpituity….The Boys & Girls Club of Manchester was incorporated in 1907. Our mission today is fundamentally the same as it was 112 years ago. Sadly, short of a miracle cultural change occuring in our society, there will always be a need for a place like the Club for children and teens most in need of encouragement, guidance and support. Ensuring that all children have the opportunity to reach their full potential in life is a generational responsibility we are bound to pass on. Our modest “endowment” provides annual operating revenue and a rolling safety net during difficult economic times or catastrophic events. This endowment combined with a strategic plan initiated 10 years ago for cultivating and stewarding annual support has helped us serve more children and increase the quality and impact of our work. A planned gift to our endowment is a compelling way for a donor to help kids “in perpituity”. Instituting an “Aspirational Impact Fund” campaign would be an exciting way of further engaging current donors and introducing new individuals to an innovative way of addressing current problems and meeting future youth development needs.

    Reply
    • Thanks, Brian, for your thoughtful comments.

      I think you and the Boys and Girls Club are a good argument for making an endowment a piece of the development plan. You have obviously thought about the perpetuity question — and your answer was yes. You have made the endowment a source of stability for the operating program. And you’ve been assertive in building the annual campaign, and your are open to the idea of the “Aspirational Impact Funds.” So I’m all for what you’ve done. You’re not overly dependent on the endowment, but it plays an important part in your ongoing work; and it’s not the only trinket in your jewelery box.

      Again, the key is to think about these things. You’ve done that, and you continue to do that. Good luck!

      Reply
  • Very thoughtful discourse, Alan; helpful to me in thinking about which entities in our community will find endowments of use and which may not. As someone who works with a community foundation that provides both endowment focus as well as pass-through funding I offer three footnotes …. 1. Your remark that not all entities need to exist in perpetuity and thus may not need an endowment actually makes a good case for developing “field of interest” funds in a community. Arguably, while a specific institution may vanish if the need for its services is eliminated, likely there will still always be a need for broad purpose support for grantmaking in the related field of interest. For example, if we are fortunate enough to find a cure for some major disease, perhaps institutions focused soley on that disease may then close but there are likely to be other public health issues present. Humanity has never seen an era free of any type of disease. Thus, funds to address the public health needs of a community likely will always have a purpose. 2. One has to respect that there are some donors who are personally passionate about permanence of their gift, and it is simply good business to offer multiple ways that folks can find an intersection between their interests and passions and that of your organization. No one door to giving serves all donors. Lastly, 3. Having an endowment that supports your organization’s ongoing administrative costs can mean that more annually raised resources can be delivered for program purposes, something many donors appreciate. Our local United Way’s operating endowment supports its costs of administration, thus allowing it to be able to say that the dollars raised during its annual campaign are fully returned to the community which is savvy on its part.

    Reply
    • Thanks, Judy — Always good to hear from you.

      I guess I would respond with a bit of a “yes, but…” to your thoughts.

      Yes, a field-of-interest fund in a community foundation is a viable way to approach leaving money for the community. The real question — and the one at the heart of my argument — is whether it’s better to leave a fund for the future, or to work on the issues right now. I am biased toward thinking that, in more cases than not, getting funds out today (or over the course of a few years) is better than investing them in perpetuity.

      The other issue is whether we indeed have to “respect that there are some donors who are personally passionate about permanence of their gift,” as you put it. I admit that the default position of most large donors is to create a permanent fund. The question is: why? Part of it is tradition. Creating permanent funds is what people tend to do. Part of it is that this is what nonprofit organizations, from universities to community foundations, emphasize and market and reinforce. I want to encourage nonprofits to have a candid conversation with their donors about what truly would be most useful to the community — to test and challenge the initial inclinations of the donors.

      Let’s compare donors making a gift to people buying a car. In buying a car, there are lots of factors that enter into the decision: cost, fuel efficiency, safety, reputation, repair costs, style, status, even color. Car companies market in a variety of ways to the segments that care more about one attribute or another. The person interested in buying a big Cadillac Escalade would probably never consider a little Prius — but that doesn’t mean that the fuel efficiency of the Caddy is irrelevant to her. And at the car dealer, the salesperson will talk about the various models — the strengths, if not weaknesses, of each.

      We tend not to have that conversation with donors in the nonprofit world. If a donor comes to our showroom, as it were, and says he’s interested in the Cadillac Escalade of donations (the permanent fund), we tend not to discuss the pluses and minuses of other models. We don’t talk about efficiency. We don’t talk about impact. We tell them that they’re being incredibly generous, which is true, but we tend not to offer suggestions for how their generosity could help the mission even more. In a sense, we give the donor too much authority.

      I say — let’s engage in a conversation and test whether they really want that big gas guzzler of a vehicle!

      As for your point about the United Way, Judy — that’s a good example of using an endowment for a focused, appropriate purpose. I think that sounds pretty smart.

      Thanks!

      Reply
  • Meredith Funston
    November 9, 2012 10:26 pm

    Very interesting, Al! I like the concept of aspirational impact funds.

    As a 101 year old summer camp, a small educational nonprofit, we probably fall somewhere in the gray area of this conversation… not solving critical social issues of the day, but certainly concerned about retaining good staff now, adding new staff to meet new needs including development, not letting tuition escalate too much, having scholarship funds.so tuition isn’t a barrier for our families, etc. So we’re approaching the next 5 years with a plan to build annual giving and endowment simultaneously and gently. The endowment increase will come in the form of a very specific new scholarship fund for a girl graduating from a partner program for girls at risk. So I hope it WILL serve a more immediate purpose…and do so in perpetuity. But thanks for framing the thought process. I will share that with my director and fundraising committee.

    Aspirational impact funds….I love the idea and could see it being useful for a particular long range project perhaps. Be sure to let us hear about any success stories in that area. I’ll also share the idea with 2 np boards I serve on as well. Hmmmm. You’ve got me thinkin’!

    Thanks!

    Reply

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