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By Robin Ganzert
“The decent thing to do is to get rid of some of this money.” -James Michener, author
Commenting on his giving of $117,000,000 during his lifetime
Historically, charities have actively sought donations for endowments while gaining increasing dependence on spending policy payouts for operating budgets. During the past few years, declines in the market negatively affected endowment investment performance. Hence, lower spending policy payouts dramatically affected operating funds and forced budget cuts, layoffs and program closures. During the most recent period, giving did not outpace inflation, and giving to human service organizations fell by more than 11% according to Giving USA. Fundraisers are now being asked about the need to build endowments versus the pressure to increase annual and major gifts for operating and capital funds. The issue centers on the concept of intergenerational equity, which is the delicate balance between spending for today or saving for tomorrow. Does raising money for endowment make sense in today’s environment?
An endowment is an investment fund of which the principal has been set aside for the long-term support of an organization. The principal is preserved, and withdrawals occur based on an agreed upon spending policy (spendable return) established by the Board. The investment time horizon is in perpetuity. Endowments are categorized based upon restrictions placed on the spendable return or principal. The categories include:
- True Endowment
- Term Endowment
- Funds Functioning as Endowment
True Endowment occurs when a donor restricts the principal of the gift, yet the spendable return may or may not be restricted for the organization. Term Endowment occurs when the donor stipulates that the principal may or may not be expended after a trigger point of a certain event or time period. Once again, the spendable return may or may not be restricted for the organization. Funds Functioning as Endowment is established by the governing board to function like an endowment, but may be expended at any time with board discretion. Planned giving vehicles, such as pooled income funds and charitable gift annuity funds, often flow into the category of funds functioning as endowment upon maturation of the gift. The charity sets out the purpose of the charitable remainders in the planned giving acceptance policies.
The primary argument today for building endowment is good stewardship and fiduciary management of the charitable organization. Charities are often set up to address long-term issues or societal problems; hence the causes require a funding stream for the long-term horizon. The good stewardship argument for endowment centers on the smoothing effect of the income curve through savings. Clearly, endowment payouts through a spending policy (spendable return) provide for a less disruptive cash flow, particularly when payouts are from an unrestricted endowment and may be used for any unrestricted purpose. Without endowment payouts, the organization is dependent on sources of funding that may be sporadic, undependable, and unreliable.
A secondary argument for building endowment centers on programs or causes that are difficult to fund. Endowed funds can support specific charitable endeavors that may not be among the popular causes that stimulate annual or operating gifts, or other sources of funding. Such programs or causes may stimulate the interest of a few benefactors who wish to see that specific issue funded for the long-term, and designating an endowment fund is the preference for the gift. Endowments, in this case, can ensure that in periods of financial stress with operating funds, specialty programs can continue based on endowment spendable return funding, despite cuts in other areas.
Another secondary argument for building endowment is the working capital concept. The working capital concept centers on setting up an endowment for maintenance and capital operations to support the long-term needs identified during a capital building project. Such funds protect future operating income streams by allowing donors, who prefer to fund buildings or physical plant additions, to maintain those structures for the long-term without draining the future operating streams. The working capital concept encourages the protection of future operating budgets during the expansion of physical plants, and can be an effective argument for building endowment. Other secondary arguments for endowment building include underwriting administration expenses, providing grants for new needs and programs, and offering matching funds.
In conclusion, the issue of intergenerational equity is best managed through deliberate strategic planning efforts in both the fundraising and financial operations. Whether to place a strategic focus on building endowment depends on the charity’s own unique funding structure, external environmental issues, program focus, and donor base.
Planned giving can be effectively used to build endowments at many charitable organizations. With planned gifts increasing in both size and quantity, the intergenerational equity balance between the argument of spending for today or saving for tomorrow can be mitigated. Planned giving program policies identify the flow of funding from terminated or matured planned gifts, and in the long term, these funds can dramatically build an endowment.
For further information specific to your program, please contact the Center for Planned Giving toll-free at (800) 462-7159.
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Robin R. Ganzert, Ph.D.
Vice President, Managing Director
The Wachovia National Center for Planned Giving