“We need to build our endowment.” If that’s something you hear frequently from your board and senior management these days, you’re in good company. We increasingly hear from all types of nonprofits eager to build endowment.
Having listened to many people describe their endowment development efforts, however, it is apparent that a number of very different concepts are being described by the same term.
Volunteers, donors and fellow staff members will almost always have experience with other organizations. Different ideas regarding the nature of endowment may thus be present among those critical to the success of your program. Your finance office may hold yet another concept of endowment as it approaches the process of accounting for funds after they have been raised.
What are some of the many uses of the term “endowment”?
The traditional concept
To many people (including a large number of those employed outside the development and financial areas of nonprofits) endowment means funds permanently set aside by donors from which only the income can be used for the institution’s purposes.
Examples include restricted or designated research funds, scholarships and chairs. These funds are often intended as legacies or personal monuments much like many bricks-and-mortar gifts.
Those engaged in encouraging and maintaining this type of endowment must be prepared to meet a donor’s wishes for a long time. That is why, in the past, one rarely saw broad-based efforts to create “pure” endowment.
The quasi-endowment—a savings account?
Some organizations may refer to previously unrestricted funds that have been voluntarily restricted by board action as a “quasi-endowment” because such funds function much like an endowment until the governing body decides otherwise. The term derives from the fact that such funds mimic true endowments.
Quasi-endowment funds have in some cases been saved by the organization from excesses of revenues over expenses or have been received as large unrestricted bequests or current gifts. Many previously unknown bequests of larger amounts end up in this type of endowment, as most such gifts are often received without restriction.
Some organizations have found that what some would consider the prudent course of saving their way to a quasi-endowment can raise the eyebrows of industry-watchers, some of whom seem to believe that having reserves of more than one year’s operating budget is improper (in spite of the fact that this reserve, invested at today’s typical returns, will produce income of only about 3 to 5 percent of the current budget).
At the same time, fault is rarely found with organizations that enjoy restricted (traditional) endowment equal to several times annual budgets, even when that endowment is indirectly funding a large share of current operational expenses. Thus, more may be at stake than mere semantics.
A new concept—future endowment
Perhaps the most interesting type of endowment is the one that exists only in the form of future remainders or promises of gifts in the future, sometimes encountered as the endowment component of a campaign. If a campaign includes an endowment goal of $40 million, for example, this can mean a number of things.
The goal may anticipate gifts of this amount in hand in a permanent endowment before the end of the campaign. Or it can mean deferred gift commitments being counted toward the campaign goal as endowment gifts. In this event, it is possible to have $40 million in bequest commitments, trusts, insurance and other deferred gifts, but actually have little or no additional endowment or quasi-endowment at campaign’s end.
In recent years there has been an increasing trend to count “documented bequest commitments” at face value for campaign credit purposes regardless of age, contingencies or present value. Thus the term “endowment,” for some, has morphed into yet another term to describe what have historically been referred to as planned gifts. In some cases, we have even seen the planned giving officer assume the title of director of endowment.
This trend does not recognize that endowment or quasi-endowment is only one potential use of bequests and other planned gifts. Capital and operational needs have traditionally been met by these gifts as well. By referring to these unrealized funds as endowments before they are received when any possible restrictions or lack thereof are unknown, it may be much more difficult to maintain the freedom, often intended by donors, to use these funds for their highest and best use when received.
If you are charged with the responsibility for encouraging endowment, or if your leadership wants to know why you don’t have more endowment, or if an endowment component is proposed for an upcoming campaign, make sure all involved are on the same page. Once everyone knows each is discussing the same subject, it can be easier to set and meet reasonable and attainable objectives.
Next month: Are your programs endowable?