In the past six months, I have had several nonprofits approach me about launching an endowment campaign. Traditionally, I have seen endowments looped into capital campaigns – yet the true focus on the capital campaign is the “capital” projects not necessarily the endowment.
With the cry for sustainable funding from nonprofit Board members, it is no surprise that endowment campaigns are being considered – for good reason, in my opinion.
What is an endowment? Isn’t that where you lock away a ton of money that the organization can’t touch even if they are in dire straights to make payroll and keep the doors open?
Yes and no. An endowment is a fund created through donations and held in an investment fund so that the principal generates interest that can be used for nonprofit operations while leaving the principal amount intact. Think of endowments as marathons instead of sprints. Fundraising for the long-term will take place over time.
The most common type of endowment I see is a Board-designated endowment where the Board of Directors votes to make a resolution on how the distribution of funds from the endowment is set up. There are two principal ways to set an endowment:
- Spend just the interest from principal.
- Example: If you have an endowment of $5 million, it is assumed that it will generate 5% in interest on average or $250,000 each year for the organization.
- Spend the interest and principal of endowment.
- Example: If funds are desperately needed by the organization or there is an incredible time-limited opportunity for the organization to take advantage of, the Board can pass an additional resolution for a portion of the principal funds to be spent.
Why will donors give to the endowment fund? I mean don’t they all want to give to programs, no overhead costs and the interest on an endowment will most definitely support those administrative overhead costs.
By offering different opportunities to fund the endowment campaign, you will be able to attract donors.
- Bequest. Create a rule that 20-50% of all unrestricted bequests go directly to the endowment. This generates ongoing income for your endowment. Bequests tend to come as windfalls to the organization so the unexpected income will not be missed in the budget bottom line, but will make a big difference in building your endowment.
- Stock gifts. It is fairly common for nonprofits to receive gifts of stock – that cannot be sold. Like in the case of Cincinnati Children’s Hospital who received a gift of stock in 1931 from Dr. Procter of Procter and Gamble – a gift that keeps on giving through the decades. Turn those gifts into a big win for your endowment.
- Savings. Create a line item in your budget that moves a certain percentage directly to your endowment each year. Little by little you will grow your endowment.
- Purpose of endowments. Your endowment needs a purpose and “overhead” is not that purpose. Create a vision for how your endowment will impact the organization. It can fund multiple needs: new programs, increase reach of current programs, provide training for staff, bolster the organization’s internal systems, etc. Get creative and specific because the purpose of your endowment is why donors will give funding to it.
- Endowed Chairs or Fellowships. Similar to creating a purpose for your endowment, find specific positions in your organization is endow. If you are not in a research field, fund your program officer positions to ensure that services are delivered for the lifetime of the organization. I have seen private foundations give seed funding for new positions or existing positions for 1-2 years. Imagine being able to fund a position forever?
Why should we raise an endowment fund if no one is making money on investments right now?
In this economy, many nonprofits are struggling just to keep their programs funded and the doors open, making it hard to even consider fundraising for an endowment fund. According to an article by The Chronicle of Philanthropy: Private foundation endowments received an average return of 12.5 percent in 2010, compared with 20.9 percent the in 2009. For charity endowments, the average return was 11.6 percent in 2010, compared with 21.5 percent in 2009. Since most charities assume a 5% return on investment it is surprising (and a relief) to see that even in tough years, endowments are seeing a greater return than assumed.
What are the steps you can take to prepare for an endowment campaign?
- Determine an endowment campaign goal and build a budget. Consider what costs will be associated with getting to this goal like staff support, design and printing of campaign materials, trainings, and consultant costs.
- Determine the purpose of the endowment campaign. What will the interest from your endowment fund every year? “The gap in our budget” is not a sexy reason. How will these funds truly impact the organization? Better current programs or launch new ones?
- Include your board of directors in the discussion for the two items above and gain their support for an endowment.
- Conduct a feasibility study to determine the capacity of the organization to fundraise for an endowment. Would you jump into a pool without sticking your toe in first to test the waters? A feasibility study tests the water to see if your endowment campaign will float.
- Craft materials for an endowment campaign. Write out the purpose of the endowment campaign and create a budget. This will be used during the feasibility study and to circulate to your major donors who exist in your “inside circle” to gain their feedback – and donations to the campaign in the quiet phase.