Endowment Envy

August 23, 2011; Source: Huffington Post | Michael Kaiser, president of the Kennedy Center for the Performing Arts, writes in the Huffington Post that he is disturbed by the current thinking about endowments. They are not, he says, the cure-all multi-tool that many have come to believe.

“Oh fine!” say those of us who have no investments to speak of. When we got nothing, we got nothing to lose I guess, but Kaiser does make some good points.

First, Kaiser warns that people think an endowment will reduce their fundraising load by providing an annual source of “guaranteed income” that does not have to be raised. But, says he, many nonprofits will quickly and compulsively grow their expenses to match the endowment income, thus eliminating any fundraising relief. He calls this Kaiser’s First Rule: Nonprofits like to grow to the point where they are uncomfortable.

Additionally, he says, with the markets in their current condition, the income proposition is sketchy at best. That makes an organization that has grown based on expected endowment returns ironically less safe.

Finally, Kaiser says he hears more and more about people seeing an endowment as a ready source of raidable cash in a pinch. This, he says, is likely to negatively affect donors’ willingness to give endowment funds. Better to build dedicated reserve funds to respond to financial emergencies.—Ruth McCambridge