The Great Disconnect

I was speaking with the executive director of a small nonprofit the other day. She mentioned that her board’s major development initiative was to increase the organization’s endowment from $400,000 to $700,000.

I asked her why the board was so focused on building the endowment. She answered, “Because they like that the larger endowment would provide an extra $12,000 or so a year for expenses.”

I responded, “Well, sure: that extra endowment income would help a bit, but it’s not exactly transformational. It probably wouldn’t even pay for the next increase in your health insurance premium!”

To which she responded, “What health insurance? We don’t offer health insurance!

Philanthropy: We have a problem.

There’s a scarcity mentality in the nonprofit world, and for good reason: there’s simply not enough money to fund the charitable sector’s work. Government investment in social services, education, and the arts has steadily dropped in recent decades. Meanwhile, charitable giving is narrowing to fewer donors, and last year overall donations dropped for the first time since the Great Recession – likely a reaction to the way in which the 2017 tax act slashed the incentives associated with charitable giving.

Small nonprofits – actually, all nonprofits – scramble each year to fund their operating expenses. To add a layer of stress, nonprofit leaders’ natural worries about income and expenses are amplified by the public’s obsession with balanced operating budgets. Run a deficit for one year, and funders will furrow their brows. Run a deficit for two years in a row, and those funders will cut you off. At that point, you’re genuinely in trouble.

As a result, nonprofits count every penny, twice. And a core strategy in this effort – unconscious, unspoken, but ubiquitous – is to squeeze as much as possible out of staff members. Charitable organizations tend to pay their staff members too little and ask them to do too much. Meanwhile, nonprofit employers rarely provide robust professional development opportunities or employee benefits. Most organizations are only as strong as their staff – and yet we consistently underinvest in the very people who help our organizations meet their missions.

Arguably the top priority for nonprofit organizations should be supporting their staff. Better salaries, benefits, and training in almost every case improve mission impact and reduce disruptive and expensive staff turnover. Boards should recognize this core truth and do all they can to attract increased annual support. If the organization has donors who are capable of giving significant gifts, the board and executive leadership should approach those donors for larger annual donations and work to ensure that these higher contributions continue year after year.

But, instead, all too often boards go down the endowment rabbit hole. “If we only had a $10 million endowment,” muses the well-meaning board treasurer of an organization with an $800,000 annual budget, “then the endowment income would provide half of our annual expenses!” Yes, that’s true. But the chances of a small organization snapping its fingers and coming up with a $10 million endowment are about as likely as my getting a tryout at shortstop with the Boston Red Sox. (Okay, the odds are better than that.) The point is, it’s not likely, or at least it’s not going to happen without making endowment-building a clear priority. And the problem with undertaking an endowment-first approach is that you’d likely undermine your annual campaign, which would bring us back to our original dilemma: not enough money to support current operations.

I know that suggesting that endowments are anything other than an unalloyed good is blasphemous in the charitable world. And clearly, if you were to give me the choice between leading an organization that has an endowment or one that doesn’t have an endowment, I’ll take the place with the endowment every time.

But here’s the point: It’s one thing to have an endowment. It’s another thing entirely to tell your donors to direct their major giving to endowment, rather than toward annual support. Saying to your funders that building the endowment is your organizational priority – at a time when you’re understaffed and underpaying the staff you have – is putting the cart before the starving horse. In the example of the small nonprofit I described at the start of this piece, the board members seem to think they have donors who can make gifts of $10,000, $20,000, $50,000, or more. If that’s the case, the organization should work to get those larger gifts to fund its annual operations, and to commit to that level of giving year after year. They might even package that higher giving level into an aspirational impact campaign, raising major money for short- and mid-term needs.

Meanwhile, there are ways to attract endowment gifts that don’t cannibalize annual giving. The simplest is to promote planned giving. Make sure your organization has a section on your website about how donors can remember the organization in their wills. (And, yes, call it that: “Remembering Agency ABC in your will.” Don’t call it “planned giving” or “bequests.” Studies show that a lot of people don’t know what those terms means.) Provide suggested bequest language, so donors and their attorneys can make provisions without having to contact you and reveal themselves. You should also consider creating a legacy society to recognize people who have publicly committed to making estate gifts, thereby encouraging others to join them – and if you already have a legacy society, work on strategies to build its membership. Bequests are sure to follow, and with those gifts, endowment funds.

But prioritizing endowment building through gifts from living donors? If your organization is already serving everyone who needs your programs, paying your staff at the top of their pay ranges, providing excellent benefits, and offering top-notch professional development and healthcare, then, yes, go right ahead. But if not, you have higher priorities. It’s far more important to raise money for today’s organizational imperatives. An endowment is a nice thing to have. But an endowment should not be your priority, and it certainly isn’t your salvation.

Copyright Alan Cantor 2019. All rights reserved.

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3 Comments. Leave new

  • Thanks, Al. Love the suggestions about “remembering in your will” and suggesting bequest language. And I agree that endowment is not the first priority. There are other benefits to endowments beyond income, though. One of those is providing a buffer to changes, like a weakening of annual fund donations in a particular year, for whatever reason, an economic downturn, temporary disruption in the organization; (with us we have three legs on the stool, with tuition, annual fund, and endowment, and if we ever had a weak year for tuition – probably in an economic downturn – endowment would give us support while we adjusted for it); severance; emergency purchases, like land or septic system collapse. (Hope that syntax holds together.) Also working to ensure higher contributions continue year after year, we have to keep on, but it might be easier for a donor, for numerous reasons, to give one lump sum at one time. And it may work better for them to give while they are alive than after they die. We may agree on all these, but I thought I would pass them on while I was thinking about it. Thanks for stirring the thinking! Vin

    Reply
    • Thanks, Vin —

      I don’t disagree with anything you say here, and thanks for raising these issues.

      Again, an endowment is a nice thing to have. A damned nice thing, in fact. The question is, as I know you agree: what is shunted aside that might be a higher priority for the organization.

      Two other thoughts:

      One, different organizations have different needs for endowment based on mission. If it’s a museum, with a mission to preserve art and artifacts in perpetuity, then a maintenance endowment to keep the building dry and air-conditioned and well-maintained is just the right thing. A museum has perpetual mission; an endowment is a perpetual investment. It’s a perfect match. I would encourage that kind of endowment, assuming the current needs are being met. But if your mission is to feed hungry children or house the homeless? No, it’s best to invest in current needs. (Though your point about how an endowment smooths out the tough years is important. Indeed, there’s a need for nuance here.)

      Second, it’s possible to take bequests and use them over a few years, rather than pop them into an endowment and only draw 4%/year. (That’s assuming the terms of the bequest are not that the funds be invested as an endowment.) A human services organization I really like gets a lot of bequests, and they put the money into a “spendowment” account — where they spend earnings and principal over about six or seven years from the time of the gift. This really boosts their impact.

      Be well!

      Al

      Reply
  • Hi Al,

    Wonderful column, and I liked the actionable suggestions. I would like to add to it that not only might donors not know what planned giving or bequests are: most nonprofits don’t either. There are a lot of nonprofits that don’t clear the $50K/year threshold, where the ED is the one-stop staff for everything–if they finally get a development volunteer, or development coordinator, or director…they’re still a long way from knowing about planned giving (and if they’re like most small nonprofits, they’ll be skeptical about waiting that long for a donation that they need–like your starving horse–right now).

    I think a column that expands on what you mention here, making no assumptions about endowments or basic levels of knowledge, would be a huge hit with the quiet majority of nonprofit professionals in the country. “What small nonprofits don’t know (that is keeping them small)”. Maybe it’s just a collection of vignettes you’ve gotten from consulting around New England, but if you have this much to say about redirecting operating capital to an endowment, I’m sure you’ve seen some less-than-best practices, and can help the smallest of nonprofits with some solid advice around fundraising fundamentals.

    Reply

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