This piece is a conversation between long-time nonprofit colleagues, Allison Rabbitt, Boss Lady at RoosterRabbitt, Fundraising Consultant, and Jane Repensek, Bell Black & Company, Financial Consultant and Contributor to RADAR Nonprofit Solutions.
Jane: Nonprofits frequently look with envy at other nonprofits that have substantial endowments. Having an established and sizeable endowment is undoubtably a result from visionary past leadership. The question is, if a nonprofit has a nonexistent or small endowment, should efforts be undertaken to establish or grow one? I am skeptical about dedicating substantial energy to growing endowments and yet I think you’re more supportive.
Allison: I appreciate your skepticism! And yet endowments are a wonderful legacy for any nonprofit and many benefactors want to have a way to fund mission delivery for the long term. So, I wonder if there is such a size as “too small”. I can see why you might think that an endowment that is not equal to (or a multiple of) the nonprofit’s annual operating budget wouldn’t be “worth it”. But when it comes to building a sustainable organization, an endowment can be a key component in the recipe.
Jane: My primary concern is that many people misunderstand endowments. They are not a savings account. The legality behind an endowment is that the endowment donation (often referred to as “corpus”) must stay forever unspent and the nonprofit gets an annual distribution funded solely from corpus earnings, typically around 5% per year. No matter how much stress an organization is incurring, including the threat of insolvency, the corpus remains untouchable. Only the original donor or an extraordinary legal action can change the endowment designation. As you’ve heard me say, a nonprofit can fail with “money in the bank”.
Added Note: The rules governing endowments vary by state, so it’s crucial for nonprofits to understand their local regulations. Many states follow the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) but additional legal requirements may apply.
Allison: An endowment, even if “small”, can have a substantial impact on an organization. Let’s take a nonprofit with $10 million in expenses and a $5 million endowment. Each year, the endowment would distribute approximately 5% or $250,000 to the nonprofit – that’s $250,00 less that Development needs to raise! That’s time and energy staff can use toward the mission and sharing stories of impact.
Jane: No doubt that $250,000 is meaningful to an organization of this profile. But Development had to raise $5 million to realize only $250,000 in annual cash flow. Fundraising is hard work under the best of circumstances and seeing Development teams work so hard to only realize 5% annually feels like a bad return on your efforts. Plus, I worry about the probability that growing an endowment cannibalizes what donors contribute to ongoing operations.
Allison: Work is work! Development professionals are trained to talk with nonprofit investors about opportunities and not everyone is interested in the same thing. It’s important for Development staff to be able to talk about how operational funds and endowment funds work together to support mission delivery. It’s a great opportunity to talk with donors about legacy gifts. I also don’t subscribe to the idea that a gift to one campaign cannibalizes giving to another – that’s a scarcity mindset and my career would have been very short and frustrating if I had that mindset. My experience also has proven that joyful investment begets increased investment.
The easiest case to be made for an endowment is when a donor wants to make an outsized or “transformative” gift to a nonprofit. Big gifts can sometimes contribute to feast-and-famine circumstances. Instead, making that large gift to an endowment provides for a smoothing effect. I’m also a fan of long-term reserves. If the immediate need is great and making a gift to the endowment won’t address that need – what’s stopping an organization from establishing a long-term reserve fund? We’ve both been doing this work long enough to know that sustainability looks like a wildflower meadow rather than a monoculture.
Jane: Those are excellent distinctions between the characterization of contributions. I think we agree that having a sizable endowment is a tremendous asset for nonprofits. Do you believe that there are endowments that are just too small for nonprofits and cause more administrative hassles? If so, what do you consider “too small”?
Allison: This is a difficult question as size is subjective to each organization, staff member, and donor. In considering size, an organization needs to define both its current needs and its long-term vision. I would also task the donor to identify goals in making the donation where another giving structure may be more appropriate. For example, it is possible that making a grant restricted to a purpose is more consistent with both the non-profit’s needs and the donor’s goals. There are many donation solutions in addition to endowments and restricted gifts that can be structured for a desired outcome.
Jane: Going back to endowments for a moment, taking on the responsibility and administration of an endowment that provides rather small support can become a burden, especially if the endowment doesn’t grow. A potential $100,000 endowment-establishing first gift, with an annual payout of approximately $5,000, poses an important question. The nonprofit’s board has a fiduciary responsibility to debate endowment pros and cons, inclusive of an ongoing commitment to support the endowment with administration, governance, expertise and growth. As an endowment exists in perpetuity, this decision must be carefully considered as it is binding on all future board and staff members.
Allison: There certainly is an endowment minimum because there is an administrative load to managing an endowment. An endowment-establishing contribution of less than $100,000 should lead to a conversation within the nonprofit as to its commitment to take on this perpetual activity. I always recommend that nonprofits have a Gift Acceptance policy that includes the topic of endowments, even if an endowment doesn’t current exist. This gives Development teams proactive guidance in working with donors rather than reactive responses should an endowment possibility arise.
Contact us!
Allison at allison@roosterrabbitt.com and www.roosterrabbitt.com
Jane at jane@bellblackandcompany.com or janerepensek@radarnp.com
RADAR Nonprofit Solutions for Outsourced Accounting and Consulting at www.radarnp.com