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Endowments Are Not Safety Valves

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I have often argued that endowments are not the cure-alls many people, especially board members, believe them to be.

Endowment enthusiasts believe when an organization creates an endowment it reduces the amount of money that has to be raised annually. This is very attractive to board members (and staff members) because fundraising feels scary and uncontrollable to many. 'Guaranteed' income from an endowment makes everyone feel safer. But the truth is most organizations that create an endowment simply, and rather quickly, increase the size of their budgets by the amount of income the endowment is meant to generate annually. (This is a direct result of Kaiser's first rule: not-for-profit organizations always grow to the point where they are uncomfortable.)

In fact, this makes the organization less safe because the budget is now predicated on endowment earnings which, we learned during the past several years, are not always guaranteed. When the economy is in recession, and stocks and bonds lose a portion of their value, endowment earnings can disappear. But the organization which planned its budget before the downturn is still expecting endowment revenue. The bigger the endowment, the larger the earnings deficit.

But recently I have heard a different argument coming from pro-endowment board members: we need an endowment so that when things get bad we can raid it and cover our deficit.

This is clearly NOT what donors to endowments have in mind. Endowments are meant to be permanent. Donors contribute to an endowment, often in amounts that far exceed their normal annual gifts, because they want to ensure the long-term health of the institution. They want the organization to have a life long after they are able to make contributions.

It is true there are organizations that have borrowed from their endowments when serious shortfalls are experienced. (In most cases this requires the agreement of the donor or even the Attorney General of the relevant state, though some organizations raid their endowments without proper authority.) But this approach must be saved for the direst of situations and should not be the reason to create the endowment in the first place.

But the notion that an endowment is an insurance policy is simply not appropriate.

Boards can create designated funds that serve as safety valves (often out of surpluses when things are going well) but this is not the same as endowment that is meant to be a permanent source of funding.

Why does this matter? Does anyone really care about the endowment gift they made years or even decades before?

I think a widespread invasion of endowment funds would have a very negative impact on anyone considering making a major endowment gift.

If too many boards think of endowments as a bank account that can be drawn from, most donors will no longer be willing to make extraordinary gifts to endowment campaigns.

Endowments are not right for every organization and the notion that all an organization needs to be healthy is a larger endowment is faulty.

But once an organization decides to build one, they must respect its purpose and the rules that govern its use.