While fundraising is often thought of as the lifeblood of the nonprofit world, the pressure to raise funds in order to balance an organization’s budget, grow services, or broaden the number of people served may mean that long-term goals get ignored.
This is particularly true given the current economy, as nonprofits try to balance a slowdown in giving with increased demands for services. In such an environment, it is tempting to use endowment income to meet current operating needs. Doing so, however, inhibits growth and delays endowment goals.
Take, for example, the case of a private high school that wants to create an endowment providing four $2,500 scholarships annually to needy children in each grade. To make that happen, Year One would require $10,000 per annum, Year Two $20,000 per annum (eight total scholarships), and so on, until there are $40,000 per year of scholarships being awarded, four for each grade.
Assuming that the endowment earns 5 percent a year, the endowment would require $800,000 to be able to support these 16 scholarships.
That seems fairly clear cut, but every year the school has budget shortfalls. The school’s trustees decide to use 1.5 percent of endowment earnings ($12,000) to fund its shortfall. That decision, though, leaves the school with some difficult choices – make aggressive and risky investment decisions in its endowment portfolio, eliminate the scholarships, or use endowment principal. The last choice impacts future earnings, as there is less principal invested. Besides, these decisions may be contrary to the donor’s intent.
To address both short- and long-term fundraising goals, non-profits should consider –
- Setting specific endowment goals, with particular attention to the amount of principal required before funding programs, use of income and principal, investment policy, protections from operating budget demands, and protections to a donor’s intent.
- Separating endowment fundraising from annual and capital fundraising efforts, which will ensure that endowment gifts do not compromise other gifts from the same donors.
- Understanding estate planning and tax basics.
- Recognizing charitable motives.
With respect to charitable motives, it is important to recognize that people make donations for a variety of reasons. Some care about the organization’s mission. Some make contributions to organizations which target a particular illness suffered by a friend or loved one. Some wish to thank a non-profit that has enriched their lives. Rare is the donor who is motivated solely by tax breaks or recognition.
In truth, most endowment decisions are impacted by all of these issues. What makes this difficult for the organization is that each endowment donor is unique. As a result, endowment gift planning has to be done in small groups or with individuals, and it has to be personalized. This time commitment is a huge challenge for most non-profit organizations – but it can be made easier if these guidelines for building an endowment are carefully followed.
James A. List is founding partner of The Law Offices of James A. List, LLC, a Mid-Atlantic law firm which serves business owners, non-profit organizations, and individuals with estate planning, asset protection, and trust needs. The firm also focuses a substantial part of its practice on working with families which have members with developmental disabilities. List is also President of the Board of Directors of The Arc Baltimore. James can be contacted by email at