Editors’ note: This article, first published in print during Mar/Apr 2002, has been republished for Nonprofit Quarterly with minor updates.
Of course, an endowment is for you, and for every organization! The sense of freedom and stability offered by an endowment is irresistible to any nonprofit. But is it realistic to think you can raise endowment funds now? That is the question so many nonprofits have started asking over the past couple of years, when we basked in the luxury of increased giving, good economic times, a strong stock market, and people talking about the “wave of wealth” that will sweep over us like a tsunami as baby boomers’ parents leave large estates.
Today, as we face the realities of a nervous economy, we can almost hear the belts tightening and a whispering hush when the word endowment comes up. This is not a surprise. An endowment is traditionally viewed as a luxury. Imagine a young family starting out in life and starting a savings account. It’s pretty hard to put away money for a rainy day when every day looks threatening; no family invests heavily in their savings until they’ve provided for the basics of food, comfort, and home. An endowment is the equivalent of a savings account for a nonprofit. Once established, it can generate much-needed operating funds through its earnings, but to build the endowment initially requires more sacrifice than most groups can afford.
Endowment funding has always been hard to raise because it requires everyone, donors and recipients, to think more about the future than we do about the present. That is simply not human nature. In addition, the organizations that need an endowment most are often the ones that are looking strenuously for any promising source of operating funds. Many of these are small or don’t have long-established annual funds. Yet those are the same organizations that have the hardest time raising endowment funds. (One could probably develop a mathematical formula demonstrating how much easier it is to raise an endowment for every iota less urgent having it seems.) Also, it takes an awfully large endowment to make a significant dent in current budgets.
Donors are also reluctant to give to endowment funds during harder financial times. They may no longer be setting aside significant personal savings, so giving to a nonprofit’s savings account may seem counterintuitive. Many donors are extremely generous, but very few of them give to nonprofits before they’ve taken care of their own family’s needs.
From the organization’s point of view, in harder times annual funds may become more urgently needed while harder to raise. Truthfully, an endowment is not going to resolve an urgent situation. It is not going to relieve you of ongoing annual fundraising challenges or erase the need for a capital campaign. Unless very, very large, an endowment is not going to take the worry out of your budget. Still, having an endowment seems irresistible. Before we all jump on the bandwagon, however, we need to consider it very carefully. Can we afford to invest that much of our current time and energy in something that, if it works, may not significantly help us very soon?
The following questions are often asked by first-time endowment seekers. As you wonder if you should be doing something more toward establishing an endowment, consider the following thoughts.
WHY DOES AN ORGANIZATION NEED AN ENDOWMENT?
When you are ready to plan for the future, and you know that you probably have a future, you are ready for an endowment. But raising funds for an endowment and receiving income from it are two different things. You have to keep in mind that an endowment only generates a small percentage of its total in income for operating use: financial committees and advisors usually recommend 5% as in a secure enough position with fundraising for current expenses that you can afford to draw this minimal amount so the endowment can grow over time and be as useful years from now as it is today.
One of the biggest questions for any organization is whether or not to devote fundraising time to seeking endowment funds. There is always the chance that some wonderful surprise gift will come along and you could put that into an endowment and just call yourselves lucky. But a serious and deliberate effort to raise an endowment takes a great deal of time and effort, and also requires that you ask your donors to focus on the long term. You have to be in secure financial condition to have the luxury of doing that.
It is also essential that you are offering a great program if you want to raise an endowment. If you are not meeting your mission, if you are struggling to keep your members happy, if you are having trouble delivering a quality product, you should put your energies into improving the organization here and now. Endowment is a gift forever. You have to have a program that is worth keeping forever.
Whether or not you decide to initiate an endowment campaign, you certainly can prepare to receive “lucky” endowment gifts by establishing a few simple policies. These might include:
- Any bequest or unanticipated windfall will be invested in an endowment.
- The endowment will be professionally managed for moderate (low-risk) growth according to the decisions of the finance committee.
- No more than 5% of the endowment asset will be drawn each year for support of operations. The organization will probably want some reliable draw in order to budget, and over time the income earned should average more than the amount of your draw. This policy would allow a small draw from principal in the occasional years when income earnings dropped below 5%.
The board may also choose to set up two different types of endowment funds: “Pure” endowment whose capital investments can never be spent and is used only to generate income. “Quasi” endowment funds, more like a savings account, that may be used as organizational collateral, an internal loan, or for other long-term purposes at the discretion of the board. Most organizations that have such a “quasi” endowment fund fully intend to repay it if they use it, but the circumstances that cause it to be used often preclude repayment.
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WHEN IS THE RIGHT TIME TO START AN ENDOWMENT?
If you have the policies suggested above in place, and any others you think would be helpful in guiding the organization concerning endowment funding, you may start an endowment whenever someone makes a bequest or unanticipated gift. But in most circumstances, organizations start an endowment at one of these points in their lives:
- When a new building is purchased or built, and fundraising can include an endowment component
- During a capital campaign that includes a variety of projects • When a special drive is established to honor a person or accomplishment
- When the money is there, the organization is riding a crest of accomplishment, and donors want to secure the future of the organization Probably the only bad time to establish and fundraise for an endowment is when the organization is in financial stress and needs to fund its operating budget. Even if you could convince donors to make endowment gifts at that point, the return would probably be too small to get you back in stable financial condition fast enough.
HOW DO WE SET A GOAL FOR THE ENDOWMENT?
From the planning distance, it seems that the more endowment, the better. But it is possible to have too much tied up in endowment, just as it is possible to have too little to make a difference. There is probably no “right amount” of money that an organization should seek for an endowment, as it’s unlikely that any size endowment would be able to cover a group’s annual costs from its earnings. So, setting the goal is more a matter of creating a motivational target than of getting the right amount of money. In a capital campaign for a building, your endowment goal will probably be set at some reasonable percentage of the campaign, which will also generate a significant enough amount to offset operations or maintenance costs for that building.
For instance, if you are running a $2 million campaign for a new building and you anticipate that the increased operations costs to run that building will be $125,000 per year, you might want to raise enough in endowment funds to generate that $125,000 annually. But at a 5% draw rate, you’d have to have $2,500,000 in endowment to accomplish that. Would your donors really give a total of $4.5 million in order to help you get that building? You can test that in your feasibility study; perhaps they will, but it’s more likely they’ll see a $1 million endowment on top of $2 million for the building as reasonable. So, you can set your campaign goal at $3 million, with an endowment goal of $1 million within the campaign. Some day in the future, you can try to raise the remaining $1.5 million for the endowment. If you go over goal, of course, you can put more into the endowment.
Such figuring is always influenced by non-financial issues. For instance, the older and more established the organization, the more likely your donors would be to support an endowment approaching the actual need. For a young organization raising funds for a $2 million building, the $1 million endowment might be a challenge, whereas a century-old, beloved community organization might be able to raise the full $2.5 million desired for endowment. It is an irony of fundraising, of course, that the older and more established organization probably has more ways to raise operating costs than the young, struggling organization, but can also raise the endowment more easily. The same goes for highly controversial organizations, those in financial difficulties, and so on. The characteristics that make operations fundraising difficult for these groups are going to provide endowment challenges.
The real secret here is that your endowment will never be complete; you only need the goals to motivate solicitors and donors at various points in time. Your goal will have to factor in need, ability to raise funds, motivation, and other demands on your income.
WHAT ARE THE WAYS TO RAISE AN ENDOWMENT?
As mentioned above, a capital campaign drive is a great way to raise endowment funds. Not only do you have a tangible goal to work toward, but your donors can see that building, program, and endowment are carefully interwoven to create a productive, stable organization with a strong future.
But you can also be working on raising endowment funds over the long term, as an underlying foundation of all your future-building work. This is not the kind of fundraising that you do within the context of a single annual fund drive. It is the long-term, relationship-based fundraising that you achieve with your most devoted donors. Many organizations tie their endowment efforts
to planned giving, because large endowment gifts more often come through estate planning and bequest planning than through current income gifts (see the next article in this issue).
Unless you have such a strong annual drive that you can afford to be obsessed with seeking endowment money, your organization would probably be wise to develop several ongoing efforts that can be implemented by the organization, such as the following:
- Create the policies for raising and managing an endowment mentioned above.
- Include discussion (incidental at least) of the future, and mention endowment, in every major gift solicitation.
- Feature news about endowment gifts and the uses of endowment income in each publication year-round.
- Create a small pamphlet about the future of your organization and leave it with people when you visit, send it to major donors from time to time, offer it at performances or other events, and include notices of its availability in your newsletters.
- Include a check-off on your donor reply envelopes that says, “Yes, I’d like to know about gifts that preserve the future of the organization.”
- In a strong fundraising year, offer some annual donors the option of restricting their gift to a preexisting endowment. You might carefully suggest this to longtime donors who might be thinking about planned giving, to get them started. Only do this if you can afford to give up the operations money!
- Educate yourselves about planned giving vehicles and find a specialist who can be available in case the opportunity arises to solicit or negotiate a trust or bequest.
HOW MUCH OF MY TIME SHOULD BE SPENT ON RAISING ENDOWMENT MONEY?
Very few organizations, especially young, small, grassroots organizations, have the luxury of spending large percentages of staff time on raising endowment funds. Annual needs are too pressing. If your organization is in terrific shape for operations, by all means devote a large percentage of your time to raising an endowment. If you are doing a capital campaign, absolutely include an endowment component.
But if you are like most organizations, hoping for a good year and working like the devil to assure it, you should design a long-term plan for your time investment. Educate yourself and do some of the simple, less time-consuming things mentioned above. Find a board member or two who might be endowment donors and who might help you create this plan and start talking to donors about endowment.
Most important, build strong relationships with the donors who care the most about your organization. All good fundraising is built around people and relationships, and endowment projects as much or more so than anything else. An endowment gift is a permanent gift for the future; it requires a donor who is totally committed to the organization. If you build great donor relationships and if you run a wonderful organization that serves its mission well, you will eventually have a great endowment.
