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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Up-to-date reference on building endowment, reserves, and enduring relationships in the modern world
The Endowment Handbook is a comprehensive overview of endowments and reserves, covering key changes brought about by the Tax Cuts and Jobs Act, the pandemic, and calls for social change which have caused dramatic shifts in donor behavior, market performance, and society's perceptions (good and bad) of endowed funds and the rising popularity of strategic reserves. This new publication reflects these changes and provides examples for attracting new kinds of assets like Cryptocurrency and building relationships that will sustain a cause for the future.
Written by Laura MacDonald, Principal and Founder of Benefactor Group and frequent speaker at local, regional, and national conferences, Endowment Handbook covers every aspect of endowments and reserves from preplanning, to identifying, cultivating, and establishing prospective donors, all the way to marketing and measuring success. In this book, you'll learn about:
- Technical information describing endowments, balanced with some of the emerging critiques of endowments and growing preferences for strategic reserves
- Effective messaging strategies for endowment funds, such as the “follow-the-leader” effect and citing “donor agency”
- Use of data screening and AI tools, social media outreach, and behavioral research to increase donor engagement
As interest in financial sustainability continues to grow, The Endowment Handbook is an essential resource for nonprofit organizations, healthcare systems, universities, and others seeking to leverage the enormous transfer of wealth from generations demonstrating high levels of philanthropy and civic engagement.
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Veröffentlichungsjahr: 2024
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Dedication
Foreword
Preface
The Purpose of This Book
Overview of the Content
Disclaimer
A Few Notes About Language
Onward
Notes
PART 1: Financial Resilience
1 What Is Endowment?
Endowment in Today's Context
Defining Endowment
The Benefits of Endowment
Endowment Criticisms and Pitfalls
A (Very) Brief History of Endowments
Summary and Next Steps
Notes
2 Are You Ready to Build Endowment?
Prerequisites for Endowment Building
Assessing Readiness
The Assessment Report
Recruiting Endowment Champions
Endowment Myths
Summary and Next Steps
Note
3 A Summary of Endowment‐Building Methods
The Pros and Cons of Endowment‐Building Methods
Variations of Endowment‐Building Tactics
Roles: Who Helps to Build Endowment?
Bringing It All Together with an Endowment Action Plan
Summary and Next Steps
Notes
4 Making the Casefor Support and Marketing Endowment
Start with a Compelling Vision
What Is a “Case for Support”?
Marketing the Endowment
Summary and Next Steps
Notes
5 Policies and Practices for Managing Endowment
Endowment Governance
Endowment Growth via New Gifts
Endowment Growth via Responsible Investment
Selecting and Monitoring Investments
Spending Policy
Gift and Fund Documentation
Gift Administration
Summary and Next Steps
Notes
6 Alternatives to Endowment
What Are Reserves?
Other Ways to Bolster Financial Resilience
Summary and Next Steps
Notes
PART 2: Enduring Relationships
7 Who Gives, Who Gives to Endowment, and Why
Who Makes Charitable Gifts in America?
The Traits of Individual Charitable Donors
Who Gives to Endowments?
Who Doesn't Give to Endowment?
Why Do People Give?
Summary and Next Steps
Notes
8 How Endowment Donors Give and How They Are Engaged
How Donors Give to Endowment
Types of Gifts
The Donor's Team
How Fundraisers Can Encourage (or Discourage) Gifts to Endowment
Summary and Next Steps
Notes
9 Achieving and Measuring Success
Measuring Impact
Fundraising Performance Indicators
Financial Performance Indicators
Return on Investment in Endowment Building
Going Forward
Note
About the Author
Acknowledgments
Appendix: References and Resources
General References
Resources
Bibliography
The Donor Bill of Rights
Index
End User License Agreement
List of Tables
Chapter 1
TABLE 1-1 Endowments Explained
Chapter 4
TABLE 4-1 Missing Case Ingredients
TABLE 4-2 The Purpose of Typical Endowment Marketing Tactics
Chapter 5
TABLE 5-1 Typical Investment Allocation
TABLE 5-2 Calculating a Total Return Draw
Chapter 7
TABLE 7-1 Charitable Giving Practices By Generation
TABLE 7-2 Responses to a Poll About Why People Give
Chapter 8
TABLE 8-1 Types of Gifts and Their Treatment
TABLE 8-2 Applying Thaler's Hierarchy to Charitable Giving
TABLE 8-3 The Donor Journey as Universal Hero Myth
Chapter 9
TABLE 9-1 Performance Metrics for the Fundraising and Endowment Building Te...
TABLE 9-2 Projecting Endowment Value
TABLE 9-3 Calculating Returns on Endowment‐Building Investments
List of Illustrations
Chapter 6
FIGURE 6-1 Matrix for estimating the need for emergency operating reserves....
Chapter 7
FIGURE 7-1 Proportion of contributed versus earned revenue by sector
FIGURE 7-2 Sources of charitable contributions
Chapter 9
FIGURE 9-1 Outputs, Outcomes, and Impact.
Guide
Cover
Table of Contents
Title Page
Copyright
Dedication
Foreword
Preface
Begin Reading
About the Author
Acknowledgments
Appendix: References and Resources
Bibliography
The Donor Bill of Rights
Index
End User License Agreement
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Praise for The Endowment Handbook
“My working relationship with Laura spans two decades of witnessing the wisdom and counsel she has shared with thousands of nonprofit organizations across the United States and the world. This book is a challenge to seize this moment of the greatest wealth transfer in history. It is a compelling and pragmatic guidebook for the nonprofit professional, board member, and donor alike.”
—Steven S. Moore, Chief of Staff,The Columbus Foundation
“I have turned to Laura MacDonald on many occasions to make the complex simple in this essential world of charitable giving. In The Endowment Handbook, readers will see what all of us in the sector have come to expect: thoughtful consideration, practical application, and commitment to lasting impact for nonprofits. She has made endowments – thought to be reserved for elite institutions – accessible to all nonprofits looking to achieve long‐term sustainability and impact in our communities.”
—Josh Birkholz, CEO of BWF.Author of Fundraising Analytics and Benefactors
“The Endowment Handbook is not just a book; it's a manifesto for building a community of passionate advocates who, together, can transform visions of positive change into permanent, tangible realities. It will take you on a journey through the essential elements of donor engagement and help you discover how to nurture relationships that withstand the test of time. It's a rewarding journey. Take it!”
—Russell N. James III, J.D., Ph.D., CFP®,Professor & CH Foundation Chair inPersonal Financial Planning
“The Endowment Handbook is chock full of practical and useful information to help charities of all sizes and complexities to better serve their constituencies, grow their institutions, and secure their economic future. This comprehensive guide is state‐of‐the‐art, insightful, and easy to read with many real‐life examples and success stories. The Endowment Handbook is an excellent training guide and reference manual. It should be required reading for all nonprofit leaders – both board and staff members.”
—Diana S. Newman, Author and retiredconsultant to nonprofit organizations
“Laura MacDonald is one of the most insightful thinkers on philanthropy in the nonprofit world today. Our members have benefitted tremendously from her deep knowledge of fundraising trends and the philanthropic environment. But perhaps even more important is the way that she advocates for financial resilience and enduring relationships as fundamentals for organizations to deliver on their commitment to their communities. This book will be a vital guide for all of us in the years ahead.”
—Simon Woods, President and CEO,League of American Orchestras
“As CEO of National 4‐H Council, I have witnessed firsthand the transformative power of strategic financial management in advancing our mission. Laura MacDonald's The Endowment Handbook is a timely and indispensable resource for nonprofit leaders navigating the complexities of financial resilience, particularly through endowment management. A standout feature of the book is MacDonald's nuanced exploration of strategic reserves, crucial for complementing traditional endowments, especially in times of crisis. The Endowment Handbook is a must‐read for anyone committed to enhancing the financial resilience and impact of nonprofit organizations.”
—Jill Bramble, CEO, National 4‐H Council
“Laura MacDonald provides this generation of philanthropy professionals a comprehensive look at how endowments can create lasting impact while also motivating donors and potential donors to give at the highest levels possible. Her insights will help organizations establish thoughtful donor‐centric methods for communicating the benefit and opportunity inherent in endowed funds. Critically, Laura addresses the newest endowment tools available for crafting donor impact. As a tool for good, this book creates momentum for organization executives, boards, and philanthropy leadership teams to address the opportunities endowments provide.”
—Ben Golding, CEO, Advancement Resources
THE Endowment HANDBOOK
The Complete Guide to Building a Resilient Cause
LAURA MACDONALD
Copyright ©2024 by Benefactors Counsel, LLC. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
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Dedicated to all those who inspire generosity through their devotion to the common good.
Foreword
In The Endowment Handbook, Laura MacDonald has revived muted conversations about endowments. Building on previous efforts, she moves the subject of endowments into this time and space, making it relevant for today. She argues that setting up an endowment is not just a random event. It must be intentional and backed by big considerations.
The book does three things at once: it provides a refreshed, quick, and brief history of endowments; it helps to define endowments; and it “workshops” those who are envisioning endowments. Laura's style of intentionally blending information and teaching makes the book a rich resource, and many will find the hidden treasure that they are seeking.
This is an excellent overview of the concept of endowment. It provides a succinct explanation of the different types of endowments and carefully draws the distinction between them from an organizational and donor perspective. Laura helpfully debunks several commonly held myths that hinder actions or create false excitement about endowments. She takes in the wider landscape and presents a condensed history of endowments and the potential pitfalls of establishing and maintaining one. She categorically states that this particular investment structure is not for everyone and, at the same time, argues for the important role that an endowment plays in the distribution of resources in communities, and invites us to do more to ensure the equitable distribution of funds through our nonprofit investment strategies.
Many institutions' archives preserve minutes where boards discussed setting up endowment, yet the idea was never implemented. I was privy to such historical manifestation at the very time that Laura asked me to review and provide feedback to the manuscript of her book. From my own position as board chair of an organization in conversations about endowment, I was curious and hungry for knowledge. From Laura's perspective, she relied on my extensive international experience to make judgements about the relevance of the book outside the United States and whether the language level of the book would be accessible to people for whom English is just one of their many languages.
My answer is “yes” to both questions. This is a difficult book to write and yet well written, with illustrating stories and statistics. It shows sound scholarship yet not mired in jargon. Clare Flynn, Director of Advancement at the United World Colleges, a federation of 18 schools in 18 countries, had this to say about the book:
“This book is an excellent practical resource, for those in governance, leadership, and operational roles, who find themselves considering an endowment for future sustainability. Laura offers the notion that ‘big gifts stem from big ideas' for the many of us in the nonprofit sector involved in raising funds for the organizations and causes close to our hearts. Laura's book offers sound, practical advice and guidance for fundraisers and nonprofit marketers making the case for and demonstrating the impact of endowment support. She invites nonprofit leaders, staff, and supporters to come together to diligently craft their own compelling case for endowment as an opportunity to distill a shared vision for the future.”
Laura and I have had more than 20 years of professional relationship that has addressed the needs of international organizations with a global reach. Indeed, a book like this has many audiences and can provide guidance anywhere in the world. There are those for whom this book describes their reality and others who want to learn from what has worked elsewhere. People will use this book in seminars and as a reference during research. For many like me, the book will be a resource to empower volunteer leadership on boards.
The book draws its knowledge and examples mainly from the United States, a country renowned for advanced philanthropy and where endowment – especially in institutions of learning like universities – is a praxis rather than a discussion. Many US endowments benefit the whole world. Rarely do people associate the grants they receive from foundations such as Ford, Rockefeller, Packard, Carnegie, and others as emanating from endowments. Indeed, millions of dollars from foundations to communities all over the world are evidence of the potential return on endowed investments.
One of the debunked myths is the popular but false belief that endowments are the end of fundraising. Schools such as Harvard or Stanford have endowments from which they serve needs while they continue to raise more funds. Because they have endowments, they are in a better position than those without when it comes to managing various financial risks.
Laura MacDonald's book is a great companion for volunteer leaders who serve on countless nonprofit organizations, schools, universities, city councils, libraries, museums, and so on. Volunteers at the helm of board leadership are entrusted with important decisions, but not always equipped with information and knowledge. In fact, leadership exposes management and boards to unimaginable complexities. Contrasts between scarcity and plenty, poverty and wealth, continue to create shameful gaps between those who have and the ones without. In the context in which I operate today, I am particularly convinced that endowment to support scholarships for students from vulnerable situations is a big idea inviting big endowment investments. Education is the leading proven equalizer to combat the inequalities in our societies.
With a wealth of examples and stories from real situations where endowments have worked and not worked, this book offers convincing proof that endowments are of immense value to organizations and institutions. It is a powerful book, with great stories and a message that is current and important. The ideas in this book can help boards and management address their fears and answer the genuine questions that must be dealt with before, during, and when an endowment is the option of choice. With such a dearth of new books on endowments, I believe that this book has the potential to ignite interest in new research and books on endowments. In sum, this book is both a call to action and a manual on how to do it.
—Musimbi Kanyoro
Nairobi, Kenya
April 1, 2024
Preface
In my work with nonprofit organizations across the country – and occasionally around the world – I encounter a wide range of attitudes. Some board members build up treasure as they worry about an organization's future despite an enviable balance sheet. Across town, a scrappy executive director may be prepared to throw every dollar they have to solve a wicked problem today without regard to next month's payroll. Some prominent institutions consist of a small group of community stakeholders while other powerful movements build a global corps of supporters and partners. Between these extremes are almost two million 501(c)(3) organizations in the United States alone – and thousands more non‐governmental organizations (NGOs) around the world – all striving to do good work today and ensure their impact for the long haul. The most resilient are built upon a solid foundation of loyal donors and dependable funding – from endowments or their functional equivalents – that enable them to pursue their mission with confidence.
This is a particularly opportune moment to focus on endowments and the people who create them. In May 2023, a headline in The New York Times declared that “The Greatest Wealth Transfer in History is Here” (Smith, 2023). The article estimates that older Americans will pass down $84 trillion by 2045. While the majority will go to heirs, as much as $12 trillion may be bestowed upon nonprofit organizations according to the financial research firm Cerulli Associates. Imagine an additional $12 trillion fueling the causes that save lives, conserve the environment, and elevate the human experience. If that amount were endowed, it would create perpetual revenue equal to the total amount given to nonprofit organizations in the year 2020. But the funds will not magically appear. The organizations that receive a share of this bounty will be the ones that do the hard work to create systems and nurture relationships. Those that simply wait and hope are unlikely to benefit.
The Purpose of This Book
This book is intended to help nonprofit organizations create and nurture the systems and build the relationships that will fuel their cause and elevate their mission. It is focused on two key resources: money and people. While there are other important keys to resilience, such as brand, reputation, revenue diversity, disciplined budgeting and planning, relevance and impact, as well as an engaged board, even these factors are rooted in people, money, or both.
Who should care about the health and resilience of the nonprofit sector? Everyone. Whether someone gives to, works in, or is served by the nonprofit sector, the impact of charities is abundant. Nonprofit organizations employ approximately 12% of America's workforce and represent 5% of the total economy. The annual report Philanthropy and the Global Economy1 produced by the research team at Citi estimates the global value of philanthropy at $2.3 trillion per year, or just under 3% of global GDP.
Many everyday citizens are unaware of all the ways their lives are impacted by nonprofit organizations. They are not aware that philanthropy supports the places where they learn, worship, and heal; the well‐being of the environment that surrounds them; the experiences that bring them delight and wonder. A thriving nonprofit sector is essential to both our economy and our common good and can be achieved through the prudent management of these two critical ingredients: money and people.
More specifically, The Endowment Handbook is directed toward the current and future nonprofit leaders and development professionals who are responsible for nurturing relationships with donors, securing gifts, and managing endowed and reserve funds, especially those in mid‐size and smaller nonprofits. Endowments are disproportionally held by larger, older, predominantly white institutions that have ample knowledge of how to build and manage endowments (although they, too, will find helpful guidance here). With this book, nonprofit organizations of any size and in every sector can develop the ability to begin an endowment and increase it over time by cultivating mutually rewarding relationships with their donors.
Overview of the Content
This is meant to be a practical guide, offering nonprofit professionals, board members, and donors with specific steps that can be taken to strengthen the organizations that serve the common good, organized in two parts.
Part 1
This is a discussion of financial resilience, most notably endowment: how it is defined, built up, and deployed in service to a cause as well as some of the criticisms and pitfalls to avoid. The first five chapters owe much of their content and inspiration to Diana S. Newman's book Endowment Building, which was published in 2005 by John Wiley & Sons as a part of the Nonprofit Essentials series. Here, the book is updated to reflect changes in the economy, donor behavior, and the regulatory environment. Diana is a friend and mentor who spent the final decade of her career as executive vice president of Benefactor Group, the firm I established in 2000. It was an honor to work with Diana, and an even greater tribute when she assigned her rights in the original publication to the firm.
Part 1 also discusses other means of financial resilience, such as strategic reserves, which may complement an endowment in strengthening an organization's resilience. Reserves have grown in importance and popularity as organizations – and especially their donors – confronted the constraints of endowed funds during the financial pressures of the COVID‐19 pandemic. Much more than a “rainy day fund,” modern approaches to financial reserves balance fiscal stability against the flexibility to invest in social ventures and other innovations. Reserves can provide the required startup capital when an idea shows promise to advance the mission and strengthen the bottom line, and may even fund the growth of the endowment, in a virtuous cycle. In recent years, entrepreneurial donors have shown a preference for the flexibility of reserves over the staid dependability of endowments. Chapter 6 also explores other, less common, ways to achieve reliable financial resources.
Endowment and Reserves Are Not the Same
While both endowments and reserves involve assets held for the long‐term financial health of an organization, they are two very different concepts. One is meant to be held in perpetuity, releasing only a small portion of the invested funds to support programs and operations. The other is a revolving fund to manage temporary disruptions in operating cash or to provide one‐time funding for episodic opportunities.
Comparing Endowment and Reserves
Endowment
Reserves
Purpose
A permanent fund
Temporary funds
Primary types
True, quasi‐, and term
Emergency (operating) and strategic
Policy and regulation
UPMIFA (true endowment only), GAAP
GAAP
Accounting treatment (time)
Permanently restricted or temporarily restricted
Unrestricted
Accounting treatment (purpose)
May be restricted or unrestricted
Goal
Perpetuity
Temporary financial needs or opportunities
Investment horizon
Perpetual
Short term
Part 2
This part shifts from financial matters to focus on the individuals whose hard work and generosity fuel causes, whether they are the donors who make gifts; the nonprofit professionals who secure and manage funds; or the broad corps of stakeholders who advocate, volunteer, and elevate the mission in myriad ways. Building resilience requires a coordinated and cooperative effort, rooted in enduring relationships. It cannot be delegated to any single individual. The keys to building enduring relationships are explored in these chapters.
Most nonprofit organizations, regardless of their fiscal heft, continue to call on donors to fuel their cause. The focus is on individual donors because they – rather than corporations or institutional foundations – provide as much as 85% of all charitable dollars given, according to Giving USA2 (through direct giving, bequests, or closely held foundations), and are therefore the focus of these chapters. This part explores questions such as how and why people make charitable contributions – especially contributions to endowment – and how to earn and maintain their loyalty. Like any business model, the most stable system is one that relies on a significant proportion of its current “customers” (that is, donors) to provide recurring support. Because customer (donor) acquisition is both expensive and unpredictable, it is essential to retain these long‐term relationships.
Finally, the concluding chapter (Chapter 9) provides various means to achieve and measure the success of relationship‐ and endowment‐building strategies and ensure the desired benefits for the cause and those it serves.
The Resources appendix provides descriptions of various resources used in building and managing endowment and reserved funds, as well as links to templates and examples on various websites.
Disclaimer
Nothing in this book should be misconstrued as legal, accounting, or investment advice. While examples of methods for each are included in the text, they are just that: examples. Please consult with certified professionals, and – in the case of planned giving vehicles – encourage or require your donors to do the same. For one thing, I am simply a fundraising practitioner and unqualified to dispense formal guidance in these areas. In addition, this book reflects the legal and societal context of its time, which may well have evolved by the time a reader is applying its content.
Throughout this book, examples are drawn from the author's experience. For the most part, the organization is not named. In some cases, the examples are actually a composite of several organizations, donors, and/or situations. In all cases, they are rooted in one or more actual events.
A Few Notes About Language
The words “cause,” “organization,” “institution,” “charity,” and “nonprofit” tend to be used interchangeably throughout the text, although their meanings are not identical. While “nonprofit” has emerged as the dominant descriptor in North America, some have sought to replace this with the moniker “for impact,” and most of the rest of the world uses “non‐governmental organization” (NGO). A “cause” addresses a broad social issue such as racial justice or pediatric health or conservation of the environment. Many separate nonprofit organizations may work toward the same cause, each with its own programmatic approach, budget, and base of supporters. Trends point to donors' increasing loyalty toward a “cause” versus loyalty to any single nonprofit institution that serves the cause. For example, a donor may be committed to reducing food insecurity, but could express that loyalty through a gift to the foodbank one year and a gift to a nonprofit urban farm the next. The ability of any single organization to build financial resilience and enduring relationships depends, in part, on the resonance of its cause, its ability to differentiate from others serving the same cause, and its consistent cultivation of deep relationships that retain the donor's loyal support to their organization's pursuit of that cause.
Throughout the book, the words “donor” and “supporter” are frequently transposed, with a preference for the former. While “donor” implies someone who has given money, “supporter” is often understood as a more inclusive term that embraces those who have also given of their time, talent, ties, and testimony – traits that are also desirable and often lead to the giving of treasure.
“Major gifts” and “major donors” are frequently mentioned, reflecting the increasing reliance on big gifts to secure sufficient resources. Each organization has its own definition of “major donor,” which is best determined using the Pareto principle: calculate 80% of contributed revenue and then, starting with the largest donor and in descending order, count the number of donors whose collective gifts provide that amount. Often it is just 5–10% of the total donor roll – the cut‐off represents the organization's “major gift” threshold. However, use caution in applying the label because any donor could consider themselves “major,” depending on the size of their gift in proportion to their capacity and/or their dedication of time and talent in addition to treasure. And for purposes of building endowment, it is often a donor's loyalty, rather than the magnitude of their gifts, that signals the likelihood of a legacy gift.
Is it “development” or “advancement”? It depends on whether the marketing team reports to the same leader or has a separate (sometimes siloed) structure. Throughout the book, I tend toward “development,” because most of the references are to those with specific fundraising responsibilities whether their department is called “development,” embedded within “advancement,” placed in “external relations,” or somewhere else. When there is a distinction, it is clearly identified. As explored in Chapter 7, it may be prudent to consider different titles altogether.
Part 2 describes the various traits of donors, including their generation. Here, the definitions developed by the Pew Research Center are used, with the terms “Millennial” and “Gen Y” treated as interchangeable.
Discussions of who gives to endowment, how they give, and why they give lean heavily on research into the traits, motivations, and behaviors of planned giving donors. Not all gifts to endowment are planned gifts, and not all planned gifts are directed to endowment. Nevertheless, there are few studies that look at endowment donors in isolation, while there is abundant research on planned giving donors, so the latter serves as a proxy.
Onward
Readers are drawn to this book because they are (or are preparing to be) involved in the enterprise of building endowment or reserves and nurturing relationships. The journey will require more than new skills and knowledge. Building resilience requires a shift in culture: from focusing on today to focusing on tomorrow; from funding operations to fueling dreams; from scarcity to abundance. Those who can navigate this journey will find great reward as the causes they are devoted to flourish.
—LMac
Notes
1.
Andrew Pitt, Amy Thompson, and Karen Kardos, “Philanthropy and the Global Economy,”
Citi Group
(Citi GPS: Global Perspectives and Solutions, November 2021),
https://www.citigroup.com/global/insights/citigps/philanthropy
.
2.
Considering the sum of all gifts attributed to individual donors, bequests, and the half of foundation support that can be allocated to closely held family foundations and donor advised funds.
PART 1Financial Resilience
resilience, n.
The quality or fact of being able to recover quickly or easily from, or resist being affected by, a misfortune, shock, illness, etc.; robustness…1
Introduction
In the familiar fable attributed to ancient Greek storyteller Aesop, the tortoise wins the race even though the hare has much more speed. The moral that “slow and steady wins the race” embodies many of the ingredients that can sustain a cause for the long haul: tenacity, humility, and determination. Like the tortoise, nonprofit leaders are adept at turning disadvantages into advantages, at understanding the need for consistent effort, and at facing adversity and insurmountable odds. All of those qualities can – and should – be applied when developing financial resilience.
Should nonprofit organizations focus on money when they're not about profit? Of course they should! “Nonprofit” is simply a tax designation, not a business model. As with any enterprise, financial resources are necessary to fuel operations. Employees and vendors must be compensated, debts repaid, and dreams funded. Even “overhead” must be supported. As Dan Pallotta, the provocative author of Uncharitable, declared in a March 2013 TED Talk, “the next time you're looking at a charity, don't ask about the rate of their overhead. Ask about the scale of their dreams.”
For any cause to achieve and sustain the scale of their dreams, it must be more than a bootstrap operation, scrambling to shift money from one pocket to another like an exhausting and never‐ending gerbil wheel. It is through endowment, reserves, and enduring relationships with loyal supporters that an organization can pursue its cause from a place of strength and stability.
In the YWCA (a global movement working in more than 100 countries to mobilize the power of millions of women, young women, and girls), there is a common saying that leaders “plant trees whose shade they will never enjoy.” Leaders who accept the duty to create a resilient cause often do not enjoy the benefit of their labors. While they scramble to meet both the needs of today and the needs of the future, it is their hope that generations of successors will find their path less challenging and will be able to devote more energy to solving wicked problems or achieving brilliance, and less to the pursuit of funding.
Some may question whether it is appropriate to set money aside for the future through endowments or reserves, proclaiming it “hoarding” when there are pressing needs today. Others point to the necessity of generational equity, or not prioritizing the needs of today over the needs of tomorrow or vice versa. Perhaps the apt metaphor is a marathon: the training and discipline to get ready for that future race pays dividends today in better health and stamina (or a larger, more loyal donor corps) while it also provides a pathway to meet future goals. Just like someone running a marathon, a successful competitor sets a steady pace (like the tortoise) and understands that endurance is more important than speed. Too often, organizations are seduced by the idea that their efforts today will yield results tomorrow and set off at an unsustainable pace (like the rabbit), only to lose interest with the realization of the scale in time and effort without promise of immediate reward.
Yet, as with any journey, there are rewards along the way. Relationships are kindled and grow over time, to the betterment of both giver and receiver. Small victories are won. There may be intermediate destinations: a corps of X loyal donors, or endowment and reserves of Y dollars. Even as these goals are met, a leader will rarely say, “our cause has enough donors” or “enough money.” Instead, they will inspire those around them to strive toward elevated targets as they seek to increase the impact and sustainability of the cause. Occasionally they will pause to look back at the progress that has been made and celebrate with all who contributed to the effort.
Before setting out on this journey toward resilience and sustained impact, it is essential to establish a clear destination, assemble the necessary team, equip them with the right resources, and plot a course, as the pages that follow describe. Safe travels!
Note
1
Merriam‐Webster's Collegiate Dictionary
, 11th ed. (2003), s.v. “resilience.”
1What Is Endowment?
This chapter enables you to:
Understand the role of endowment funds in nonprofit organizations and society.
Explain the benefits and possible pitfalls of endowments for a cause, its donors, and its staff.
Describe why some critics eschew endowments.
Define three types of endowment and how they may be regulated.
Review the history of endowments in various cultures.
Endowments, generally, are financial assets that are held permanently by a nonprofit organization and invested to create income and capital appreciation. A reasonable portion of the endowment's value is spent annually to support programs and operations, while the excess income and/or appreciation are accumulated in the fund, so it grows over time as a hedge against inflation. Endowments can be established to support the ongoing operating expenses of a nonprofit organization or for designated purposes such as scholarships, projects, programs, institutes, endowed positions, or any aspect of its charitable work.
This chapter presents the benefits and pitfalls of endowments for an organization, its supporters, and its fundraising team. It describes the three kinds of endowments, various accounting and reporting considerations, strategies for building endowments, and the historical context for endowments.
Endowment in Today's Context
Traditionally, endowment has been the gold standard for ensuring that a cause has financial resilience, especially in the United States. Colleges and universities have set this standard with endowments of eye‐popping amounts that rival the total market value of large publicly traded companies like General Motors or General Mills. But this treasure has not been distributed equitably. The smallest endowment among the Ivy League schools is $8 billion, which provides Dartmouth College with nearly $350 million annually to fund programs and scholarships, but the typical Historically Black College or University (HBCU) endowment is well under $100 million. That's why they say that when PWIs (predominantly white institutions) catch a cold, HBCUs have pneumonia.1 According to www.hbcumoney.com, the top 10 endowments among PWIs total more than $300 billion (about $920 per person in the United States), while the top 10 HBCU endowments are less than 1% of that amount, at $2.5 billion. No wonder Harvard University's leaders were called “tone deaf” when they launched a $100 million endowment campaign to fund its own study of its ties to slavery.
Academic research finds that only one American nonprofit in nine has endowed funds.2 Most small and midsized nonprofit organizations – community colleges and local hospitals, social service agencies, arts and culture organizations, houses of worship, environmental advocates – have little or no endowment. These organizations have survived decreases in federal, state, and local governmental support for many core programs. They have experienced the changing interests of grantmaking foundations, receding support from local corporations taken over by out‐of‐town interests, the concentration of wealth and therefore greater reliance on donations from a diminishing percentage of households, economic headwinds, and the changing philanthropic values of new generations. In other settings, they may even face headwinds from charity regulators who may take a dim view of “tying up monies unnecessarily,” as the Charity Commission in the United Kingdom had once stated. These are the organizations that can benefit most from this book.
Only one American nonprofit in nine has endowed funds.
Although an endowment is not the panacea that many boards of directors hope for, it can provide a degree of certainty in projecting funding levels when the economy is uncertain and ensure a wellspring of resources for new programs and innovations in prosperous years.
Defining Endowment
The term “endowment” may be used informally to represent a variety of funds with several different specific definitions. Endowment and its various types must be understood to develop an effective charitable giving or financial management approach. Table 1‐1 helps clarify what endowments are (and aren't).
Endowment is a broad term that is often used to describe the total of one or more endowed funds. An endowed fund is a charitable gift established in perpetuity in which the principal is invested for total return (both income and appreciation) and a small portion of the fund's total value (usually 4% to 6%) is paid out, generally on an annual basis (see more about total return in Chapter 5). The beginning principal is the value of the asset that was contributed by the donor; the income is the earnings produced by the principal; and appreciation (or depreciation) is the gain (or loss) in the value of the principal since it was contributed. An organization may have several endowed funds, established by one or more donors and for one or more purposes, in its endowment.
TABLE 1-1 Endowments Explained
Endowments…
… Are
… Are Not
Permanent assets, invested for growth and appreciation
A “rainy day fund”
A place to hold funds permanently
A temporary place to deposit a windfall
Invested for total return, distributing from both income and appreciation
Limited to distributions of interest earned
A source of reliable, stable support based on long‐term investment growth
Volatile due to annual fluctuations in the market
Invested to produce an annual draw in support of the mission
Long‐term savings, rarely deployed to support programs
Long‐term assets that ensure future financial resilience
Short‐term solutions to fix today's structural deficit
Merriam‐Webster's Collegiate Dictionary (11thedition)3 states that to endow is “to furnish with an income … providing for the continuing support or maintenance” of an organization. An endowment, then, is simply a pool of funds that is invested to provide ongoing financial resources to fuel the pursuit of a cause. Both state laws and generally accepted accounting principles (GAAP) apply to endowments in the United States. Governmental bodies in other jurisdictions may also regulate endowments and the fundraising efforts to achieve them.
Governing the Management of Endowment Funds
The Uniform Prudent Management of Institutional Funds Act (UPMIFA)4 governs endowment spending by charitable corporations and some trusts in the United States. Almost every state and territory has enacted some form of the law since it was updated in 2006. An earlier version of the law, first enacted in 1972, lacked the word “prudent,” which was added in 2006 to acknowledge the stresses placed on endowments during the Great Recession, when market forces meant that some endowments dipped below the value of the original gift and therefore could not provide any resources to help navigate very challenging economic circumstances.
UMIFA itself represented progress, which was revolutionary for the time since prevailing wisdom prior to 1972 limited investment opportunities – and therefore growth – of endowments. At that time, Janne G. Gallagher, senior counsel for the Council on Foundations, said:
Before UMIFA, charity managers often believed that they could not rely on outside experts for investment advice and that investments had to be limited to the safest possible vehicles – cash, government bonds, and, perhaps, a few blue‐chip stocks. UMIFA not only freed charity managers to delegate investment decisions to outside managers, but also allowed them to invest assets for long‐term growth, not just current yields … Because UMIFA lets charity managers invest for growth, not just income, UMIFA also allows them to take that growth into account in making spending decisions for the endowed funds.
5
UMIFA defined an endowment fund as “an institutional fund, or any part thereof, not wholly expendable on a current basis under the terms of the donor's gift agreement.”4
The updated UP MIFA creates an even sounder and more uniform approach to charitable investments based on the “prudent‐person rule.” It permits a wider range of investment options and emphasizes the perpetuation of the original purchasing power of the fund (not just the original dollars). It also limits spending to 7% of the funds' total value unless the board can show that larger expenditures meet standards of prudence, and a formal vote to make a larger draw must be recorded in the board meeting minutes. See Chapter 5 for more information about setting a prudent endowment spending policy. The Financial Accounting Standards Board (FASB) also interprets UPMIFA to require that boards adopt specific disclosures to ensure the transparency of endowment management and expenditures.
From the Field: UPMIFA
UPMIFA has been enacted in 49 states (Pennsylvania being the only exception as of 2024). It provides guidance on the investment of endowment funds informed by modern portfolio theory. A charity is required to make decisions about each asset in the context of the entire portfolio of investments, as part of an overall investment strategy.
An organization determines prudent spending levels for its endowment (see Chapter 5) based on seven factors:
The duration and preservation of the endowment fund
The purposes of the institution and the endowment fund
General economic conditions
The possible effect of inflation or deflation
The expected total return from income and the appreciation of investments
Other resources of the institution, and
The investment policy of the institution
The first of the seven factors looks at the duration of the endowment fund, which in most cases is perpetual. This requires the institution to consider generational equity: the institution must attempt to ensure that the purchasing power of the endowment fund, after inflation (factor 4), will be maintained for future generations served by the institution. But the spending must also fit within the expected total investment return (factor 5).
—Joe Bull, Philanthropy Advisory Counsel, LLC
Types of Endowments
FASB has identified three types of endowments.
True endowment
(also called permanent endowment). This is the type that is subject to UPMIFA in most states. True endowments are created when a donor has stated that their gift is to be held permanently as an endowment, either for general purposes or for specific uses as identified in a written gift agreement. Therefore, true endowments are always “restricted as to time” (that is,
permanently
), and sometimes “restricted as to use” (that is, intended for a specific purpose such as funding a medical clinic, art acquisition, or scholarships). True endowments are documented in a legally enforceable written agreement between the donor and the recipient organization, signed by representatives of both parties. FASB requires that the original value of the gift(s) that created a permanent endowment must be maintained, not used up, expended, or otherwise exhausted, which means that no draw can be taken if a fund’s investments perform poorly, and it dips below the value of the original contribution. On the balance sheet, true endowment is classified as
permanently restricted net assets
.
