December 1, 2010 | Read Time: 3 minutes
Later this week I’m meeting with a board member of one of the Meyer Foundation’s grantees to discuss why I believe that the organization is not ready to start raising money for an endowment–and that even if it were more ready, an endowment is a bad idea.
This is not the first time I’ve had a conversation like this with a board member. Far from it.
Apparently the idea of building an endowment (a permanently restricted pot of money that is invested to generate income to support operations) is almost irresistibly seductive to nonprofit board members. And while I understand the many good reasons for this, it’s usually a bad idea.
For board members and executive directors engaged in the painful and nail-biting annual struggle to raise enough money to operate this year’s programs, the idea of having a large chunk of money in the bank that would generate income each year to help close the annual budget gap is appealing. And many board members and executives are aware of independent schools, universities, hospitals, and cultural institutions that have built substantial endowments that provide significant annual returns.
But small to midsize social-service and arts organizations face a steep uphill battle in raising money for endowment. To create an endowment that would have a significant impact on the annual budget, even a relatively small organization would need to raise millions (or tens of millions) of dollars. Take, for example, a nonprofit with an annual budget of $1-million that hoped to create an endowment that would generate at least $100,000 a year in annual income. That organization would need an endowment of at least $2-million to generate that much annual income, based on a 5-percent payout. Maybe more, given current economic conditions.
Raising $2-million may not seem all that daunting until you consider the circumstances that led to the desire for an endowment in the first place. This hypothetical organization, if it’s like most nonprofits, struggles to raise several hundred thousand dollars each year from private sources. An organization that has a hard time meeting modest annual fund raising goals just isn’t in a good position to launch an audacious campaign.
Even if it were, a large pool of restricted capital is probably not what most nonprofits need to thrive in the short or medium term. Nonprofits need operating reserves that can be used to weather tough times and unexpected financial setbacks. They need working capital that can be used to build organizational infrastructure and take advantage of unanticipated opportunities, such as expansion or merger. An endowment doesn’t help with any of these things.
As board members everywhere sit in meetings wrestling with the impact of the Great Recession on the finances of their organizations, it can be tempting to fantasize about having an endowment that would provide long-term financial security and help relieve the relentless annual fund-raising pressure.
Having an endowment is a worthwhile long-term goal once an organization has a sustainable capital structure and a large pool of engaged donors. But for easing today’s pain, endowment is not the answer.
