Accumulation of Capital, Not Borrowing, Is Charities’ Problem

To the Editor:

My opinion piece in The Chronicle (“Charities Should Borrow Money, Not Hoard It,” My View, July 24) has prompted a slew of letters. Many of them have insightful contributions to the perennial question, To borrow or not to borrow? Unfortunately, I believe that the debate has lost sight of the forest, while the participants bump into the trees.

I was not attempting to address the pros and cons of borrowing. Borrowing is a time-tested tool for providing access to capital to make purchases or to pay bills. Non-profits, businesses, and government agencies all need to borrow from time to time, and it makes sense to have credit in place and know how to borrow effectively.

My intent was to challenge the accelerating pattern of capital accumulation within the non-profit sector. Across the nation, larger institutions are running massive campaigns to accumulate funds for endowments, cash reserves, and capital projects, includ- ing buildings and renovations. These practices are harmful to the institutions that engage in them, harmful to other groups within communities, and, ultimately, harmful to the individuals and causes meant to be served by all these institutions.

In the May 29, 1997, issue of The Chronicle, in the section on fund raising, the feature article was headlined “Donations to Colleges Rise 12%.” The article notes that of the $14.25-billion raised in 1996, $7.85-billion was for capital purposes. Capital accumulation by private schools has risen by 46.5 per cent in the past five years.

In its September 14 edition, The Philadelphia Inquirer reported that cultural groups in Philadelphia are currently seeking $900-million for endowments, building campaigns, and renovations. This pattern of capital accumulation represents a very disturbing trend for two reasons.

First, it suggests that the technology of fund raising, which has grown remarkably sophisticated in recent years, is increasingly being deployed to raise funds that have the lowest possible level of usefulness to institutions seeking to meet their missions.

Is it surprising that the rate of tuition has soared in the past decade, despite the success of college and university fund-raising efforts? Not if the funds that are being raised are utilized inefficiently. Almost every dollar that is raised for an endowment is going to contribute less than 5 per cent of its value to direct annual support of the organization’s mission. Every dollar that is placed in a cash reserve by a non-profit institution, even a liquid money-market account, is going to lose value in relation to inflation the longer it is held. Most dollars that are spent on buying or building facilities, rather than leasing them, will be transformed from an asset to a liability.

Instead of addressing immediate operational needs designed to further the mission of the institution, the endowments, cash reserves, and buildings actually remove funds from these activities, often on the dubious premise that they will secure future financial stability.

Second, as studies have demonstrated over the past three decades, the pool of giving has remained remarkably constant.

It typically increases at close to or slightly more than the rate of inflation. When mas- sive capital-accumulation campaigns withdraw a disproportionate amount of money from the resource pool and that money is inefficiently used, the entire non-profit sector suffers, to say nothing of the recipients of services.

We need to examine and challenge the accelerating pattern of capital accumulation within the non-profit sector, both for its cost to the non-profit sector and to the people we seek to serve.

Richard S. Linzer
Consultant
Indianola, Wash.