Like it or not, if charitable, academic, and religious organizations are to be successful in achieving their missions, they need to become skilled fundraisers.
Fundraising is the lifeblood of the nonprofit world. With competition for dollars always fierce—and more intense now than ever before, given the nation's continuing economic doldrums—nonprofits know that they must do everything in their power to give themselves an edge.
Whether it's employing aggressive public relations and social media efforts to raise awareness and interest or hiring savvy fundraising professionals to strategize methodologies for attracting large corporate and foundation gifts, most nonprofit executives know that these tactics can mean the difference between success and failure. Depending solely on the goodwill of others is, for most, no longer an option.
The emphasis on fundraising, however, may mean that many nonprofits are forgetting about the need to also successfully build an endowment. It's easy to understand why. Fundraising, after all, is all about the here and now. Fundraising is tied to balancing the organization's budget, growing the services they offer and the number of people they serve, and accomplishing certain goals set by the board of directors and trustees.
From a more practical standpoint, fundraising also means enabling the organization to keep good employees by offering them pay increases, bonuses, and other perks. Senior executives of these organizations often have their own bonuses tied to annual fundraising objectives. Boards of directors and trustees certainly are sincere in wanting to accomplish specific goals and objectives, but they also feel a personal obligation to donors and constituents to do so.
Add to this the fact that there are various nonprofit certifications and standards, all of which tend to focus on annual fundraising, capital campaigns, board participation, and donor designations. An organization's bylaws may even establish funding expectations.
All of these fundraising goals inevitably conflict with building endowments. Endowments represent a long-term commitment for an organization. Endowments take time to build with donations and earnings. And bottom line, executives, board members, supporters, donors, and other constituents all tend to be impatient. They typically are more interested in seeing tangible results here and now than in slowly building for the future.
This is particularly true in the current economy, as many nonprofits are trying to balance a slowdown in corporate and individual giving with increased demands for services. In such an environment, it's often tempting to use endowment income or principal to meet current operating needs. Doing so, however, clearly inhibits growth and delays the endowment from providing its ultimate goals.
Take, for example, the case of a private high school that wants to create an endowment providing 4 $2,500 scholarships each year to needy children in each grade. To make that happen, Year One would require $10,000 per annum, Year Two $20,000 per annum (8 total scholarships), and so on, until there are $40,000 per year of scholarships being awarded, 4 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 teacher's 401(k) plan is chronically underfunded. To address this issue, the school's trustees vote to use 1.5 percent of the earnings from the endowment, or $12,000, to fund the 401(k). That decision, however, leaves the school facing a number of difficult choices—it can 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 intent of the donors who funded the endowment.
This example clearly illustrates the dilemma many nonprofit organizations face in trying to build an endowment while keeping up with current economic demands. Quite simply, the long-term nature of endowments is contrary to our collective natures. Directors, trustees, constituents, and donors want to see results. Too often, that means opting to fund a summer camp next year rather than deferring that camp for 10 years so that it can be funded every year thereafter.
Capital campaigns also conflict with endowment building. Capital campaigns have very specific goals—construct a new building, renovate existing facilities, acquire more land. They have very defined beginnings and, if successful, endings. Unfortunately, that specificity sometimes means that when capital campaigns fall a little short of their financial goals, other sources—most prominently, endowments—are "raided" to make up the deficit.
To get past the inherent conflict that inevitably exists between fundraising and building an endowment, nonprofits should consider adopting the following guidelines:
With respect to charitable motives, it's important to recognize that people make donations for a variety of reasons. Some sincerely care about the organization's mission. Sometimes, an individual has suffered from a disease or illness, and his or her family and friends make contributions to organizations that provide support, research, and care to others who have the disease. Some donors wish to thank a nonprofit that has enriched their lives. Still others are motivated by recognition. There are donors (or their families) who take great pride in seeing their family name on a building.
Rare is the donor who cares solely about taxes or recognition. Most endowment decisions are affected 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 nonprofit organizations—but it can be made easier if these guidelines for building an endowment are carefully followed.
James A. List© 2012, James A. List
James A. List is founding partner of The Law Offices of James A. List, LLC, a Mid-Atlantic law firm that serves business owners and individuals with estate planning, asset protection, and trust needs. He is also president of the Board of Directors of The Arc Baltimore.
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