January 27, 2015

The growing importance of endowments


Kathryn Miree

Kathryn Miree

PJ's Ret Boney talked to fundraising consultant Kathryn Miree about why, particularly given the events of the past few years, an endowment is important for nonprofits of all sizes and types. Miree is principal consultant for Kathryn W. Miree & Associates, a consultancy based in Birmingham, Ala.

Question: Why is it important for nonprofits to build and maintain and endowment?

Answer: There are several reasons to start an endowment. The first is to have a source of funds to bridge the gap during cyclical variances in income. That way, an organization won't have to cut programs and staff during difficult times.

And if you've identified new programs and services you'd like to launch, but don't have the resources you need to start them, an endowment can provide you with the resources you need until you're up and running.

For some organizations, it might be a resource pool for times of emergency - like a flood or a tornado - whether those emergencies have affected the people the nonprofit serves or the nonprofit itself.

And for other organizations, an endowment might serve as a resource pool for innovation and planning, allowing a nonprofit to evolve to meet the changing needs of the people it serves

And, of course, an endowment can help ensure long-term continuity and sustainability.

Q: Have endowments become more important in the wake of the recession?

A: It's not that they're more important, it's that the recession has brought the role of the endowment into sharper focus.

And having an endowment does not mean the organization is set to weather every downturn.  Because of the difficult environment, some groups have simply run through their endowments.

They've been using the endowment to cover operating expenses, often taking far more than the normal distribution of 4.5 percent to 5 percent.

That happened in part because those organizations didn't have good controls in place and didn't quite understand that the role of an endowment is not to substitute for operating income.

You can't just simply pull half your operating budget out of your endowment and still have an endowment over the long-term.

Q: How do you decide if a nonprofit is ready for an endowment, and if it is, how large the endowment should be?

A: I usually look at the organization's cash flow, the regularity of that cash flow and the 10-year history of its income to see if the organization is growing.

And I look to see if there's already a fully-stocked operating reserve in place.

One of the exercises I lead a nonprofit through to set a goal is to divide the endowment into the four or five basic areas the organization serves.

Then we brainstorm within each area about what is needed to sustain the organization and take it to the next level.

I've never believed in using budget or expense-based formulas to set an endowment goal. That type of approach can shut down fundraising because the desire for the endowment is based on numbers, not on community needs.

An endowment must be based on the value it can bring to the nonprofit, with a secondary goal of providing a safety net.

Above all, an endowment should not, and won't, replace an organization's operating budget so that it never have has to fundraise again.

Setting goals based on what you aspire to be is much more compelling for donors because they can envision the impact of their endowment gift.

Otherwise, an endowment just looks like a big pile of unused money.

Q: Is it important for smaller nonprofits to have an endowment?

A: Rather than look at the size of an organization, I distinguish between new and old organizations and perpetual versus short-term purpose.

If you're brand new, it's unlikely anyone will provide you with endowment funds because the jury is still out on whether you'll survive.

What I'm looking for in an organization of any size is its history.

Has it started and grown by adding programs and by responding to new needs? Has it been able to navigate the playing field successfully?

Those things show me the organization is responsible and responding to the needs in the community and is able to morph as the environment changes.

Does the organization have the ability to last long term? If so, then that history is the best case the nonprofit can present to donors.

But if you've burned the wick on the candle and the money is gone while the need is still there, I wouldn't see you as a good investment.

Does the organization have a sustainable source of funding that is growing? By that I don't mean grant income. Rather, is it able to go to the public to raise money and is it retaining and adding new donors?

If the answer is yes, I know the organization will be able to expand its fundraising to major and deferred gifts.

Q: What are the basic steps a nonprofit should follow in planning for and creating an endowment?

A: There are five basic steps:

  • Make the case for an endowment. Not only about why your organization needs it, but about why donors should invest in the future of your organization and its mission.
  • Develop the necessary infrastructure, which includes endowment policies, solid fiscal-management practices, gift-acceptance policies and good donor-management practices.
  • Assemble a team that can go out and talk to donors about the endowment. The team should include staff, board members and volunteers.
  • Market the endowment campaign. Position it as critical, publish the case for the endowment on your website and in your annual report, report on it every year, and set the expectation that supporters invest.
  • Create a plan and goals. Then work the plan.

There are so many organizations that never have thought about endowments before.

But now, with demand increasing at the same time sources of funding are disappearing, it's time for another look.

There are organizations out there without any operating reserves or endowments and they're waiting on miracles. An endowment is not a luxury, it's a necessity.

Comment on this article


Please comment on the availability of an endowment to meet expenses.
If the Endowment is a separate nonprofit corporation with by-laws limiting withdrawals to interest only, can the operating nonprofit withdraw funds in excess of the interest in any single year?
Does your opinion change if the operating nonprofit directed funds into the stand alone corporation/endowment?
If the Treasurer of the operating nonprofit is a member of the board of the endowment and the other members are appointed by the operating nonprofit president does that influence your opinion?

These are responses to the questions raised in the previous comment. I've repeated the question before answering for clarity.

1. Is the endowment available to meet expenses?: An endowment is generally comprised of many funds. Some are "true" endowment, which is a fund where the donor has directed that funds be held and invested and the earnings used either for a specific purpose designated by the donor or unrestricted where the donor does not direct a specific use. In addition, the endowment may hold quasi-endowment, which are funds received from bequests, or sales, or excess funds at year end which are allocated to unrestricted used by the board. The unrestricted funds, or funds directed specifically for operations, may be allocated to an organization's operating expenses. In some case restricted funds are broad enough to cover some expenses. So the answer is, look to the document creating the endowment funds to determine if that use is appropriate.

2. Can you spend more than interest?: True endowments (see above) are governed by each state's Uniform Management of Institutional Funds Act - UMIFA - (these were enacted from about 1974 to about 5 years ago) or Uniform Prudent Management of Institutional Funds Act - UPMIFA - (these were enacted from about 2005 to present and replace most state's UMIFA laws). UMIFA laws restrict true endowment spending to amounts that do not go below the original contribution value. UPMIFA removes the contribution value limit and spending may go below that value if appropriate (standards are in the statute). Most states now have UPMIFA statutes rather than UMIFA states.

3. Would the answer be different if it were a separate corporation?: Generally, no. True endowment is governed by the statute wherever it is. With quasi-endowment, however, the board of the separate organization can establish rules on how those funds are spent, and when and how principal is spent.

4. If the board of the separate endowment entity is appointed by the operating board, does that change the result?: No, not for true endowment because the statute controls. However, it might influence how response the board of the separate organization is to the needs of the appointing organization.

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