Creating an endowment seems like a sound business practice to most nonprofit boards. But is it really the next logical step for your organization?
“For many, amassing an endowment represents a ‘nirvana’ state, where fundraising (and related pain) ceases and programs are amply funded,” wrote Clara Miller, CEO of the Nonprofit Finance Fund, in a recent article. “The sun shines on beaming board members who have tidy, constructive discussion about investment options (as opposed to unseemly wrestling sessions about who’s written their annual check); and every meeting includes thoughtful planning based on a reliable, multiyear gush of investment earnings from the endowment.”
The reality, however, is often quite different. Most nonprofits have bylaws that restrict annual spending to the earnings or a percentage of the earnings of an endowment. At 5 percent of a $1 million fund, for example, that amounts to only $50,000 a year, a sum that might cover new equipment or a staff salary. But it wouldn’t meet annual operating expenses for any organization.
Endowments, considered “illiquid” assets, are little help in challenging economic times. That’s why reserves are necessary. So if a month before year-end you’re still concerned about meeting operating expenses, or if you haven’t built up sufficient cash reserves, establishing an endowment may not be the appropriate next step in your development efforts.
“This is not to say that some organizations do not have a compelling mission-related need for an endowment,” Miller added. “The problem is our sector’s automatic-pilot approach to making these decisions.”