I was recently asked at a public forum why I don’t like endowments. I answered: “It’s not so much that I don’t like endowments. It’s that nonprofits and their donors like endowments too much.”

Endowments have become the default destination for major gifts and bequests. If someone dies and leaves an organization a lot of money, the odds are good that the bequest will come with instructions to create an endowment in the name of the deceased. If a nonprofit launches a major campaign, there is inevitably a significant endowment component. As I’ve said before, endowments feel good. Endowments connote a certain sense of immortality. And endowments seem like a prudent investment. But do endowments, paying out 4% or so of their assets a year, have all that much impact? Or are there better ways to direct the donors’ generosity?

Here are some examples of endowment funds I’ve seen that were either already in place or being contemplated. And then, in italics, I suggest alternatives that could have led to significantly more impact for the organizational missions.

• A tiny nonprofit organization (part-time executive director, two very part-time staff members, total budget of $130,000) struggles every year to balance its budget and plan for its future. There are chronic issues with staff retention. Only a third of the board members are donors, and the annual campaign is almost non-existent. But a well-meaning donor has set up a $10,000 endowment fund to support its operations. The endowment fund provides about $400 a year.

This structure is creating an insignificant cash flow to a dying organization. Wouldn’t it have been more helpful to the organization – and more meaningful to the donor – if the donor had instead made a challenge gift to jump-start the annual campaign? For example, the donor could have challenged board members to donate $7,500, which the donor would have matched with $2,500. The donor could have promised to do this for three additional years, for a total of $10,000. For the same money, this would have helped the organization focus on what’s really important in their situation: building a strong annual campaign, which would help preserve ongoing activities and help halt the organizational bleeding.

• An organization serving children with behavioral and emotional issues honors its outgoing CEO by creating a permanent endowment fund in his name. The organization will use the proceeds to fund enrichment activities like dance lessons and field trips. At the kick-off event announcing the fund, the organization emphasizes how otherwise it barely has funds for these activities.

The cause is compelling, but why fund it through an endowment? The goal for this effort is $25,000, which would produce all of $1,000 a year for these activities. A thousand dollars a year won’t buy many dance lessons or field trips. Wouldn’t people be just as inspired to make annual gifts for this purpose, with all the funds being used in the year of the gift? And couldn’t donors still make the gifts in the name of the honored former CEO, even if there wouldn’t be a permanent fund in his name?

• A rapidly growing human services agency is desperate to move out of cramped, inefficient, and expensive rental quarters and buy a new building that just came onto the market for a good price. The organization will need to take on a mortgage to buy the building. Meanwhile, its largest donor has expressed an interest in creating a $250,000 endowment – the exact amount of the mortgage they would need.

I would tell the Executive Director: Run the numbers and talk to the donor! Explain why buying the building will improve your productivity and impact. Then explain how buying the building outright will create relief for the operating budget. Talk about how avoiding taking out a mortgage will save you money each month, even taking into account the income from the endowment the donor wants to create. Talk about how you will be able to use those excess funds for the mission, rather than for making mortgage payments. And be sure to mention your willingness – even eagerness – to name the new building after the donor.

Admittedly, there are some times when endowments are just what the organization needs. (I go into this in more detail in an earlier post.) But more often than not, gifts other than endowments can be much more transformational for the organization and the people it serves.

If you are a nonprofit, I urge you to think about what kind of money will be most useful – and to be direct about asking for it. If you are a donor, think about why you want to make a major gift, and talk with the nonprofit about structuring a gift that will have real impact. It’s been my experience that in most cases donors are not necessarily committed to creating an endowment. They simply want to help – and they may have presumed that an endowment is the way to do that.

Think. Analyze. Discuss. Figure out what’s really best. And resist the widespread practice of making an endowment the default choice for every situation.

Copyright Alan Cantor 2014. All rights reserved.

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