Terrie on
Nonprofits ©
April 2006
Clarifying
Endowments
Q:
I have several questions related to endowments.
If an organization establishes an endowment fund,
can other donors contribute funds to build it up?
If so, can the donors restrict these donations to
the agency's endowment to certain causes? Is it
good business practice to use the interest from
an endowment for operating expenses on a regular
basis? Or, should an organization seek grants for
operating funds and reserve the non-designated portion
of the endowment fund for emergency expenses?
A:
Before addressing your questions specifically, I
think it would be helpful to clarify the term endowment.
A true endowment is designed to secure an organization’s
future for generations to come. Money is set aside
to grow. The principal is never touched. The goal
is that eventually there will be sufficient funds
to draw out the interest to supplement current giving
when that fails to meet organizational needs.
There
is some confusion about the term endowment because
organizations often talk about endowing programs
such as scholarships, awards or particular client
services. This type of “endowment” –
generally supported by restricted gifts –
may be initiated by a single individual or family
with a dream and the financial wherewithal to put
their money where their mouth is. But, it may also
be initiated by the organizations when they identify
a need that they know will resonate with a large
number of people. Many times the money for these
programs will be given “in perpetuity,”
where again the principal is to be kept intact,
but this does not have to be the case.
Given
this distinction, the answers to your questions
become more evident. Generally, multiple donors
are welcome to help “endow” specific
programs, though occasionally the terms governing
such a program will prohibit additional gifts from
outside sources. A broad donor base is actually
essential to building an organization’s endowment
though, since it is almost impossible to amass sufficient
funds to ensure a secure future without such a base.
To
give you an example, we all know education is expensive.
Its costs escalate annually. With few families able
to afford the actual costs associated with obtaining
a college degree, there must be subsidies if this
country is to continue turning out doctors, teachers,
engineers and scientists. Recognizing this reality
early in the game – and intent on not only
keeping its doors open but continuing to turn out
quality doctors, teachers, engineers and scientists
– Harvard University aggressively sought to
build an endowment program. The fund development
office threw a wide net and today its endowment
stands in excess of $26 billion – yes, that’s
billion with a “b.” The interest on
that sum can provide for a lot.
Of
course, how that money is used relates to your next
question. There should be written organizational
policies dictating where, when and how the funds
from an endowment can be used – this includes
whether any of the monies can be restricted to certain
programs or causes – how these monies are
to be invested and what funds are to go to make
up the endowment in the first place. So, when you
ask about using these funds to pay operational expenses,
one would have to look at the policies of the specific
organization in question. Because endowment programs
are relatively new outside of hospitals and universities
most organizations don’t have sufficient funds
in their endowments to use those dollars to pay
current expenses – at least on a regular basis
or without draining the corpus.
As
to using endowment monies as emergency funds, while
some organizations do permit tapping their endowments
when faced with the unexpected, a distinction is
generally made between endowment funds and reserve
funds. Regardless of the pocket in which it’s
kept, every organization should be setting aside
money specifically to handle the unforeseen needs,
such as hurricane cleanup and repair. As is often
the case, these issues fall to the board to determine.
Terrie
Temkin, Ph.D. is an internationally recognized governance
and planning expert. She is president of NonProfit
Management Solutions, Inc., a principal in CoreStrategies
for Nonprofits, Inc., and a longtime member of AFP.
Contact her at terriet@nonprofitmanagementsolutions.com,
954-985-9489, or 866-985-9489.
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