Charities in Search of Endowment Gifts Use Creative Strategies to Lure Donors

The bad economy persuaded many charities that they needed to bolster their endowments so they would always have a financial cushion for tough times.

But for many donors that argument is a tough sell, so a growing number of nonprofits are finding ways to make endowment gifts more attractive.

“Donors are not as interested in endowments as they used to be,” says Dianne Johnson, president of Endowment Builders, a fundraising consulting firm that works with small to medium-size nonprofits in the Midwest. “They think it is too long a payoff and too far out. They think the nonprofit might not be there.”

Donors often feel they can get a better return than a charity can, she says, so more and more people are setting aside money in donor-advised funds that allow them to get a charitable deduction upfront and have some say over how the money they set aside is invested.

“The donor is not just going to give it to you to invest like you want,” says Ms. Johnson. “They will hold onto it and manage it and negotiate more with you over how you use the funds. The recession deepened this tendency.”

New Conditions

Other fundraising experts who advise large institutions say that even donors who are willing to support endowments are getting more demanding. Edith Falk, head of the Campbell & Company consulting firm, says donors are increasingly attaching conditions on how their money will be invested and spent.

She says that some entrepreneurs and other wealthy people want to set up “quasi endowments” in which they control how their funds are invested and require charities to spend all of the money, including the principal, by a certain time.

“We are seeing more creative twists, simply because people struggle with the notion that 95 percent of their funds just sit there,” says Ms. Falk. “They want to see the money put to more productive use.”

Nonetheless, she says, donors who have long supported an institution may be willing to make a traditional endowment gift by leaving a bequest.

Among the beneficiaries of a donor who took that approach is the Huntington Library, Art Collections, and Botanical Gardens. After more than 20 years of giving regularly to the institution, the arts advocate Frances Lasker Brody left a bequest worth at least $100-million. That donation increased the Huntington’s endowment by 73 percent, the biggest jump of any endowment in The Chronicle’s study of 273 organizations.

Some nonprofits are also persuading people who leave endowment gifts in their wills to provide an annual amount equal to what the endowment would earn if it were set up in the donor’s lifetime, says Kathryn Miree, a Birmingham, Ala., lawyer who advises charities. Ms. Miree says she recently worked with a university donor who started providing $50,000 every year for a music scholarship, even though the institution won’t receive the woman’s much-larger endowment gift until her death.

Other institutions are moving away from the tradition of taking a very small amount from the endowment each year and investing the rest. For example, universities are offering to take money from their own coffers to match the interest earned on an endowed gift.

“Let’s say they give us $1-million and the payout is 5 percent, which is $50,000,” says Curt Simic, president emeritus at the Indiana University Foundation, in Bloomington. “We match the payouts. This is an enormous incentive.”

With some undergraduate scholarships, for example, Mr. Simic says, the university matches the payout from the scholarship fund for four years to cover the first scholarship recipient’s college career. He says that when donors see the university’s willingness to spend more on today’s needs, they are more interested in giving.

If an institution can’t afford to appeal to donors by adding to the money earned by endowments, “look for an angel who will match payouts,” Mr. Simic advises. “This really works.”

Universities are among the most successful endowment seekers, but even charities like United Ways, which have traditionally relied on bequests to build their endowments, have started more aggressive campaigns in recent years to ask living donors for endowed gifts.

Some United Ways have persuaded companies to establish a United Way endowment that is named for a chief executive or other leader of the company.

United Ways in the United States now collectively have endowed funds worth $1.2-billion, says Ed John, vice president of planned giving at United Way Worldwide. That’s more than a quarter of the $4-billion raised by the charity annually.

Other United Ways have also started their own big endowment drives. The Dallas United Way is now in the planning stages of a $20-million endowment campaign, while the United Way in Philadelphia is asking some of its most generous donors who give every year to set up multimillion-dollar endowments.

To show donors how such gifts can make a difference long into the future, United Ways explain that if they invest the money, they can use the earnings every year to replace the money a donor used to give annually—and that will last long after the donor dies.

Now United Ways and other charities struggling in the downturn will need to find more donors who are interested in investing for the long haul.

Suzanne Sataline contributed to this report.