Part 1: What Is Endowment And Are You A Good Fit

Over the course of two blogs, you will be guided on how to launch an endowment-giving program for your nonprofit. In this first blog, we will look at what endowment is, what endowment funds are, how endowment funds are given, and—most critically—whether endowment is a good fit for your organization.

In Part 2, we’ll look at all those policies and procedures, and consider who your endowment donors are and how you can find them. We’ll drill more deeply into how endowment funds are given and then we’ll look specifically about launching an endowment giving program.

Let’s get started by looking at endowment and what it actually is.

01 Introduction

When the topic of endowment comes up in nonprofit circles, it is usually about the endowments of large universities, museums, or hospitals. Occasionally, endowment conversations are about a wealthy individual or family who endowed a trust or foundation so that it could, over time provide support (and hopefully sustenance) to other nonprofit entities. When we think about the endowment, we think large. We think of vast amounts of money. And we often think about the many people it will take to manage the investments for the endowment funds.

But endowment doesn’t have to only be for large organizations. Organizations of any size would benefit from having a pool of money that could help to ensure its future, smooth over rough stretches, and show other potential donors that the organization is well situated for the long haul. Of course, not all should launch an endowment-giving program. There are many things to consider, and many policies and procedures that will have to be put in place before you commit to raising endowment funds.

It has often been said that fundraising is a marathon, not a sprint, and endowment giving is very much a long-distance enterprise. You wouldn’t—or at least, you shouldn’t—seek endowment giving unless your financial house is in order. If you end each year a little (or a lot!) in the red, then your first order of business is to increase your annual support and ensure that your operational budget is fully funded. But if you are in good fiscal health, then endowment giving may just be an initiative that will put your nonprofit a step above.

02 What Is an Endowment?

According to Investopedia (https://www.investopedia.com)—an online financial content resource, an endowment is “a donation of money or property to a non-profit organization, which uses the resulting investment income for a specific purpose.”

True as that is, it doesn’t quite do justice to the intricacies of the endowment.

The endowment is a pot (or many pots) of money that is invested for a period of time, usually in perpetuity. These pots are called the principal or corpus and they may not be touched. The income or some percentage of the income that is earned from the investment is available for current use.

Although most endowments are forever, there are some that are time-limited. Many private foundations, for instance, have made the decision that at some particular point in time, all the money in the endowment must be expended and the foundation will close its doors. And sometimes the donors themselves only want the endowment to last for a specific period of time.

TRUE ENDOWMENTS, QUASI-ENDOWMENTS, AND RESERVES

Whether time-limited or in perpetuity, these are known as “true” endowments and are created by donor restrictions. The purpose of the endowment can be to support the general or operating fund, or it can be to support a specific purpose. In either case, the gift itself is a restricted gift because of the limitations put on it by the donor.

Prior to 2017 when new rules made by the Financial Accounting Standards Board (FASB) came into play, nonprofits had three types of funds:

• Unrestricted funds—funds your organization can use for any purpose as long as it stays within your mission (so no, you can’t use unrestricted funds to take a trip to Fiji unless that is part of the organization’s mission)
• Temporarily Restricted funds—these are funds the donor says “use now for this specific purpose”
• Permanently Restricted Funds—fund amounts that are donated is to be invested and only the income earned from the investment may be used for current purposes. Endowments with permanently restricted funds

The new rules changed the three categories into two:

• Gifts “without donor restrictions”
• Gifts “with donor restrictions.”

Clearly, the endowment is the latter.

BOARD DESIGNATED FUNDS

From time to time—generally, when there is an unrestricted windfall donation, the board of directors of a nonprofit organization will designate these funds to act as if they were endowments. Called quasi-endowments, these funds have one very important difference: in a true endowment, the principal may not be invaded. In a quasi-endowment, they can.

Although the board has decided that these funds be restricted in use, FASB requires that nonprofits report these funds as unrestricted. That makes sense. Remember, only a donor can restrict a gift.

Quasi-endowments are also frequently created if a nonprofit raises—through fundraising or fees—more unrestricted funds than it needs for operations in a particular year. The excess or surplus may get swept into an investment fund. If the organization has sufficient reserves, which we will discuss in a minute, the board may choose to use these funds to create or add to a quasi-endowment.

RAINY DAY FUND

Finally, there are reserves. These and not endowments are often called a “rainy day” fund. They are monies you set aside for your regular operation should you face an unexpected shortfall. Typically, reserves come from a surplus of unrestricted funds. While they may be invested, it is critically important that the investment fund be liquid, and you can get your money out quickly and without a penalty. Many nonprofits operate without such a fund, however, it is recommended that an organization keep 3-6 months in reserve.

Reserves, of course, are not endowments, although the two are often confused. Worse, too many nonprofit organizations and/or their boards decide that if they have one, they do not need the other. That may be true, as long as one is the reserve fund. An endowment is not for every organization. But do make that decision based on a clear assessment of your organization’s resources and needs.

03 What Do Endowment Funds Support?

From an accounting standpoint, all endowments are considered “restricted.” Remember, these are funds that can only be used for specific purposes or only after a condition is met. That condition may be a specific amount of time after a certain amount of matching funds have been raised, or any other circumstance the donor decides on. Only donors may impose restrictions and conditions though again, boards can create designations for funds. However, while all endowments are technically restricted, the purpose for which the money may be used isn’t always so limiting.

TYPES OF ENDOWMENT FUNDS

While endowments can, and do come in many different shapes and sizes, there are essentially two types of endowment funds that donors can choose between:

The General Endowment Fund

This is a pooled fund, usually made up of gifts from many different donors. Typically, this fund is for operations, and gifts to this fund can be large or small.

Named Endowment Fund

These are funds that commonly carry the “main” donor’s name and are for something specific. This might be for a program, a position, or a scholarship. For example, The Janet Levine Endowed Chair of Fundraising. Has a certain cachet to it, doesn’t it?

The amount to name an endowment fund is generally very high. As you consider how much it would cost to endow something, remember to consider not just what it costs today, but what you think it will cost tomorrow. That means if a program costs $10,000 a year today to run, and you are assuming that the fund will earn 5% a year, it would take $200,000 to fully fund the program. However, it is more than likely that the cost of the program will grow. Therefore, it would be wise to price this at a minimum of $250,000 and then reinvest the excess interest so the fund continues to grow as the cost expands.

AN ENDOWMENT FOR…

Schools and universities often fundraise for endowed scholarships as do other organizations that charge various fees or tuitions for their programs. As with all endowments, these can be pooled scholarship funds. This means, many people giving to the fund which will then award as many scholarships as the amount the funds each year allows—or a named scholarship where the donor supports one or more specific scholarships. This is often very attractive to donors because depending on how quickly they fund the endowment, they can see the fruits of their generosity and also get to meet those who benefit from their support.

Endowments are also often set up to fund a position or a program. For your nonprofit, these are most useful if they are supporting something you already have or do, rather than creating something new. If it is something new, do make sure that a) it fits your mission and b) it is something your organization really wants to do. Yes, the donor is in charge of restricting a gift, but that restriction should always meet the nonprofit’s needs.

One type of endowment that I was very successful with when I was a ground fundraiser was asking my major annual donors, those who gave $5,000 or more each and every year to endow their annual gifts. If, for example, my donor regularly gave us $5,000 a year, I would ask them to consider an additional gift of say $100,000-150,000 (payable over 3-5 years). Assuming an interest rate of between 5% - 6%, this would endow their annual gift forever.

As we will discuss a little later, if you launch an endowment-giving program, it is critical that you consider if the endowment is right for your nonprofit. Beyond understanding what your endowment-giving program could support, you also need to consider how endowment funds are given.

04 How Are Endowment Funds Given?

A donor can give a gift of endowment in a number of ways. The gift can be:

• Current: Cash or appreciated stock that immediately is invested and begins earning interest
• Planned: Also known as Deferred. These gifts will not be recognized until the donor (and, depending on the type of planned gift, perhaps another beneficiary) passes on.

These types of gifts can also be combined which allows the donor to make a much larger gift. For example, your donor could make a $100,000 gift to the endowment, $25,000 of it might be in cash while the remaining $75,000 will come about as a bequest in the donor’s will.

As noted above, general endowment funds are typically made up of gifts, both current and deferred, and come from many different people. Occasionally, an endowment fund for something specific can also be comprised of many smaller gifts, but this is not the norm. Typically, one person or family gives a very large gift to endow the project and or program, and that gift is often made over a number of years. Whatever is endowed is often named for the generous donor (or the donor’s family).

CURRENT AND DEFERRED ENDOWMENT GIFTS

Current gifts are arguably the holy grail of endowment giving. These are immediately put into the endowment fund and begin earning interest. This interest can then be used in real-time. Both the donor and the organization have the benefit of seeing the gift in action.

But current gifts, important as they are, comprise only a small part of endowment giving.

Most endowments are made up of planned or deferred gifts. This is both good and bad for most organizations. Good in that donors can often make much larger gifts from their estates than they can or will from current assets. The bad, of course, is mainly because you don’t know when the gift will come in and that means you don’t necessarily know what the value of the gift will be at the time you receive it. If the donor has further restricted the gift to support a specific thing, you don’t know if the amount to endow that specific thing will have increased significantly or, even if the program will still be of importance to your organization.

The most difficult part of planned gifts is that often the smaller your organization is, the donor doesn’t let you know about their plans. While it is wonderful when you receive a planned gift windfall, the opportunity to honor that donor during his or her lifetime is forever lost.

YOUR PLANNED GIVING PROGRAM

Understanding that planned gifts will make up a big part of your endowment giving program means that you must develop a planned giving program that fits your organization. There are many planned giving vehicles that are fabulous for large organizations but may not be manageable for smaller ones. More importantly, how will be the smaller organizations handle these planned gifts?

When I worked at large universities donors created charitable remainder trusts as an example. The university itself acted as the trustees for those CRTs. Smaller organizations should avoid ever being the trustee.

Likewise, if a donor wants your organization to be the beneficiary of a charitable annuity, your organization should tell the donor how fabulous that is, and then guide them to a third party where they can purchase the annuity. Under no circumstances should small organizations sell gift annuities themselves. The requirements of holding the annuity are extremely onerous, especially in highly regulated states such as California and New York.

Large nonprofits may offer their planned giving donors many options in how their gifts can be made; smaller ones may limit their offerings to bequests. Smaller organizations, of course, can talk with certain donors about how various other options can be held and managed elsewhere while the donor carefully documents the nonprofit as a beneficiary.

ALSO/AND

One caveat here is that you should not think of endowment giving possibilities as an either/or. As you approach people and market the idea of endowment giving, make sure you are thinking holistically and make all your asks in an integrated way. Donors who have said yes to endowment giving, either with a current or a planned gift they are most likely to say yes again if you have stewarded their original gift and ask them in an appropriate way.

Taking care of your donors is something your organization should do for all gifts. The donor attrition rates for nonprofits are horrific. Each year, the Fundraising Effectiveness Project reports on this, and consistently they find that for every $100 new dollars raised by nonprofits, well over $90 of that is lost through attrition. Worse still is the fact that for every 100 new donors gained, close to 100 existing donors cease to give to that organization. Small organi[1]zations have much worse retention rates than do the larger organizations, but the problem exists everywhere in our sector. Creating a robust stewardship/ donor relations program will help to ensure that your fundraising program and your endowment giving are strong.

Saying thank you to donors and showing why their support is important is something every nonprofit should do. Those who have an endowment-giving program need to craft very special ways of doing this for those donors whose gifts won’t be realized until after the donor is gone.

Of course, before you go out and get donors, you need to be sure that an endowment-giving program is right for your organization.

05 Is Endowment-Giving Right for Your Nonprofit?

Some years back, I worked with a national organization that was helping independent schools build endowments. Some of the schools I worked with were very small, and many of them had a hard time meeting their annual operating budgets. I believed then and having followed up with several of the schools, believe even more strongly now that endowment was really not for those schools, at least not at that time. All of them did raise endowment funds and many of them did meet the national organization’s requirements to qualify for additional perks. But many of them also suffered because they were putting their efforts in the wrong (for them) places. All because the amounts they raised really didn’t help them out.

This wasn’t of course, a total disaster. Through their endowment efforts, they did raise awareness of planned giving, and they have a number of committed bequests and a way of engaging new families in planned giving. For many of these schools, however, asking for current endowment gifts is off the table for the moment.

I also work with numerous small nonprofits, which raise sufficient annual operating funds. For them, the endowment is something they should strongly consider.

Size, of course, is not the only consideration. I work with large organizations for which endowment is too far a reach, as well as with some who are raising serious endowment funds. How will you decide whether launching an endowment giving is right for you? Let’s look at the things you should consider.

THE ELEMENTS OF A SUCCESSFUL ENDOWMENT GIVING PROGRAM

There are a number of things that help to ensure a successful endowment

giving program. These are:

1. A history
2. A board that is committed to the endowment
3. A strong annual fund
4. Fundraising success
5. Strong financial oversight
6. A cadre of askers who are also committed to the endowment

Let’s look at this one by one:

A History

We’ve all heard the saying that the past is prologue. This is very true when you want to launch an endowment-giving program. If your organization is less than 10 years old, you may be too young for endowment giving. People want to know that you are solid before they are willing to commit to your future. That means that they can look back at your accomplishments, review your financial statements, see a pattern, and feel comfortable about what you have done. All this will encourage them to believe in and support your future.

A Board That Is Committed To Endowment

Before you actually launch an endowment giving program, it is a good idea to do a presentation to your board on what endowment is and why it would be good for your organization. I would also recommend having your board vote to launch an endowment program. If you already have a program in place, but your board isn’t terribly committed to it, now is the time to get their buy-in. Beyond saying they support the endowment, in my opinion, each and every board member must commit to an endowment gift, both cash, and legacy. And yes, this should be a commitment that new board members also make. And yes again, this should be in addition to the annual gift you should be expecting from your board members.

A Strong Annual Fund

In order to find other non-board member donors, you need to have a strong annual fund and a solid base of loyal donors. It would also help to have a robust comprehensive fundraising program, one that goes beyond annual giving and has a core of mid-level and major donors. You have already qualified these mid-level and major donors and know they have the capacity to make a larger gift. You’ve also undoubtedly been building a relationship with these larger donors. For these reasons, you’re already halfway to an endowment gift with them.

Fundraising Success

Just having a fundraising program is not enough. You must also have fundraising success. As has already been said, if you are not raising enough to keep your organization in the black always, and don’t have adequate reserves, you may not be ready to launch an endowment giving program. If however, you do have a successful history of raising funds and of keeping donors happy and recurring, then launching an endowment giving program is something to consider.

Strong Financial Oversight

An endowment is about investments. If your endowment funds don’t do well, your donors won’t be happy, and your prospects won’t turn into endowment donors. And, of course, you won’t be helping your organization. Consequently, your organization must have strong financial oversight. Your board members should all both understand your financial statements and keep an eagle eye on how your staff is using the money that has been raised. Unless you are a big organization, you will undoubtedly hire an investment firm (or several) to manage your funds. Nevertheless, you must have board and staff members who can provide adequate oversight to what these firms are doing. They also need to be financially savvy enough to understand the vagaries of the market and know when your investments are underperforming.

A Cadre Of Askers Who Are Also Committed To Endowment

Last but not least, you must have a group of people, both staff and volunteers who are not afraid of endowment giving and can make a clear and compelling case to your prospects about why this is a great investment for them and important for the future of the organization.

06 Summary

Launching an endowment-giving program is not for the faint of heart, but it may just be the right thing for your organization. As long as your fiscal house is in order, your organization may be primed to consider raising funds not just for today but also for tomorrow.

As we outlined in this blog, before you launch such a campaign, there are many things to consider in order to ensure that endowment giving is a good program for your organization. As you think about what endowment is, what it supports, and how these funds are given, you must think about your donor pool. Do you have the right donors for this type of program? And do you have the right resources?

If you aren’t raising enough funds to keep you strong today, tomorrow should not be your focus. However, if you can build your endowment giving on top of a successful comprehensive fundraising program, you will not only ensure the future, you will be able to guarantee that your fundraising for programs today will be strengthened. Those who give to your future want to ensure that the present is strong—and the future bright.

In the second book of this series—How to Launch an Endowment Giving Program for Your Nonprofit, Part 2: How to Set Up Your Program – you’ll learn about the policies and procedures to have in place and what else you need to do. After you’ve finished this blog, make sure you continue to Part 2!

As Mahatma Gandhi wisely said: “The future depends on what you do today.” And today is a great day to begin to launch your endowment-giving program.