by Robert I. Evans of member firm The EHL Consulting Group, Inc.
Every vibrant nonprofit today requires a strong endowment as part of its financial program and the best and most well-run agencies accepted this mandate many years ago. Lessons from the Great Recession remind us, too, that endowments are a critical venue for institutional funding. Yet fresh perspectives about endowments are important today and are reshaping the financial picture for many nonprofits.
Webster’s defines an endowment as “the part of an institution’s income derived from donations.” With this basic statement in hand, I am hearing that some nonprofit organizations still confuse “endowment” with “planned giving” or a “freespending account” . . . or even other incorrect or misleading terms. This prompts me to wonder aloud if nonprofit leaders truly understand the critical importance of having adequate endowments, what they are doing to build this important income stream for the long term, and what they see as their responsibilities to protect the corpus of the endowments.
Nonprofit volunteers and professional leaders need to keep evaluating the endowment programs that they create and depend upon. Recognize that donors have made endowment gifts with the expectation that funds will be managed well (conservatively), and funneled to oftentimes specific channels for restricted purposes and will be available for years to come. Every endowment giftrepresents an investment in the future of a nonprofit.
As a consultant to nonprofits of all types and sizes for many decades, I receive questions constantly about what represents adequate endowments and what these dollars can be used for. Best practices today dictate that a nonprofit’s endowments should exceed no less than five times its operating budget. One of the troubling factors today is that too many nonprofits are not considering this ratio, are looking only at their day-to-day needs, and are not necessarily being creative in the approaches they are taking in establishing and encouraging endowment gifts.
Because of financial pressures, some nonprofit leaders have even dipped into their organization’s endowment when times seem economically dire and have not replenished the corpus, thereby perpetuating “the slippery slope” of economic difficulties. This is not only bad practice but it also often violates instructions set forth by generous donors.
There are many reasons to keep healthy balances in the endowment investment portfolio. One of the primary reasons is because of a likely scenario that I discussed for “Taking the Long View” in the September edition of Advancing Philanthropy. The author, Paul Lagasse, asked me if there was a lesson to be learned about the Great Recession as it pertains to endowment funds. My view steadfastly remains that we need to be prepared for the next downturn in the economy. The best way to do that responsibly is safeguarding our endowments. Interpret this as protecting the corpus of the endowment while concurrently attracting more donor support for restricted and unrestricted purposes.
In the winter 2010 issue of The Stanford Innovation Review, authors Burton A. Weisbrod and Evelyn D. Asch make another compelling case that endowments are more than simply a rainy day account. In many cases, it is a benchmark for bragging and a measurability of viability. It is a way for consumers (aka donors) to understand the impact of an organization. Savvy donors use it as a guide to determine an organization’s level of sophistication as well as their wealth management expertise. From an organizational perspective, it is a way to showcase a respectable endowment as “qualified” and capable for cultivating additional support.
Besides the ethical dilemmas associated with dipping into the assets of an endowment, acknowledge, too, the overarching federal law that prohibits such practices from occurring. The Uniform Prudent Management of Institutional Funds Act of 2010 (UPMIFA) provides guidance on investment decisions and endowment expenditures for nonprofit organizations. Almost every US state except Florida, Mississippi and Pennsylvania also adopted these recommendations about good investment behaviors. The idea of this act is to responsibly dictate guidelines for nonprofits on what levels of withdrawls from endowments are permitted. In other words, endowment funds decreasing in value probably are not eligible for withdrawls. Any deviation from these guidelines would be deemed irresponsible and possibly unlawful.
Therefore, as increasing numbers of nonprofits do adopt best practices about establishing and fostering endowment programs, I recommend that organizations consider four essential points to secure both the trust of donors and treat their funds with respect:
A. Continually review investment policies. In doing this, I recommend that every nonprofit Board regularly assess investment allocations, evaluate the work of management and investment services, and clarify and redefine endowment objectives. Professionals who are specialists in nonprofit investment strategies should be called upon.
B. Endowment programs should be building for 20 or more years . . . not just for today! Contributions to endowments should not be looked at as band-aids on the finances of any nonprofit. Therefore, donors may make either (or both) testamentary gifts as well as current gifts to fund restricted or unrestricted purposes.
C. Provide an annual report to stakeholders. This important document can highlight accomplishments and relatable statistics to give donors a sense of how their gifts are being appropriated and managed. Perhaps their money is supporting a specific program or professional position: donors expect to see if their dollars are justified by the end result. In the case of unrestricted gifts, donors would like to know that their contributions are paving the way for a financially sustainable future for the organization they love.
D. Seek ongoing endowment initiatives. Make sure there is a vision for what endowment gifts can support. Donors like to see tangible results being accomplished. They may also like to have some control of where their money is going. Invite donors at all levels to truly become investors in the future of the nonprofit by being committed to endowment strength just as much as addressing every day financial needs.
Robert Evans is the founder and managing director of The EHL Consulting Group, of suburban Philadelphia. EHL Consulting has been a longtime member of the Giving Institute. Mr. Evans is widely cited in publications across the globe.