Season 3, Episode 28
In this episode of “All About Capital Campaigns,” Amy Eisenstein and Andrea Kihlstedt delve deep into the world of nonprofit endowment campaigns. We’ll explore when and how to raise money for endowments, as well as the critical considerations involved. Join us as we navigate the complexities of endowment campaigns to help you make informed decisions for your organization’s financial future.
In today’s discussion, we address the common scenario of organizations reaching milestone anniversaries and wanting to celebrate with a massive endowment campaign, such as raising $25 million for their 25th birthday. While this may seem like a great idea from a PR perspective, it raises more questions than answers.
You have some board members who are just hell-bent on having a campaign to raise and build your endowment?
Hi, I’m Amy Eisenstein. I’m here with my co-founder and colleague, Andrea Kihlstedt, and today we’re going to be talking about capital campaigns and endowments and when you should raise money for endowments, how you should raise money for endowments and when maybe you shouldn’t.
All right, Andrea, get us started.
An Endowment Campaign for an Anniversary?
You know, Amy, we often or sometimes hear from organizations that are about to have a big birthday. Let’s say an organization is about to be 25 years old, and they come to us and they say:
“We’re about to be 25 years old and we want to launch an endowment campaign to raise $25 million for our endowment.”
Yes, it happens all the time.
Happens all the time. And you can understand it. They want to celebrate their birthday, and having an endowment sounds like a great thing to do. To them, it feels like, “Well, if we have an endowment, we don’t have to raise as much money, and wouldn’t it be great to have an endowment?”
And many times they don’t think through what’s required, what the questions are about endowment, and whether a birthday celebration is a time to be having a campaign and whether a campaign is the best way to raise money for endowment.
So for us, it raises more questions than it answers, even though we understand that, from a PR point of view, it sounds easy and right. So let’s unpack some of these questions, Amy.
Key Decisions the Board Should Make About Endowment
Let’s start with the question of decisions a board needs to make about endowment.
Yes, I think you’re right. When we hear an organization wanting to raise money for endowment, it raises more questions than answers. So let’s start with the questions that maybe you should be wrestling with your board. And it’s not as easy as saying:
“Yes, let’s raise money for endowment.” Okay, what questions should they ask for their board when somebody says, “Let’s have an endowment campaign. We want to raise money for an endowment.”
Well, let’s start out this way. Let’s start out by saying:
- Well, do we really know what an endowment is?
- Do we as an organization know what an endowment is?
- And do our board members understand what that is?
That there is something called a board restricted fund, which acts as endowment, but is really what’s in the field known as a quasi-endowment, and there are real endowed funds that are donor-restricted endowed funds.
Now, of course, in the first kind, the board can say, “Well, we need some money now, so we’re going to release money from that quasi-endowment fund and we’re going to spend it tomorrow.” If the donor has actually restricted the fund, the board can’t do that.
So that’s the first question to ask. What kind of an endowment fund do we want? Do we already have a fund? And if we were to have a fund, how do we handle things like investment, all those investment questions. What would you think of Amy?
Yeah, I think it’s about the policies around the endowment. Like you said, donor-restricted endowment, generally you can only use the interest, not the principal. And there’s a set rate, probably, that your organization, your board or your finance committee sets, the spend down rate of the interest, but the principal remains intact.
But as you said, the quasi-endowment is a board restricted endowment. So whether or not they invade the principal is a board decision. But policies, right? In terms of investment:
- Who’s going to be responsible for investing the money?
- How is the money going to be invested?
- What you will do with the funds as they come into, the dollars, as they come into the fund, all those are decisions that your board needs to make.
- Will you put the money in your local community foundation, for example?
- Do you understand the policies of your local community foundation?
- Do you understand the consequences of that?
- If you put it in a fund at your local community foundation, can you get it back out again? Right? What are the benefits? What are the disincentives for doing that?
Big Issues Surrounding Endowment
Yeah. Let’s back up a little bit and talk about some big issues that your board should consider as you are thinking about an endowment campaign or as an endowment as a component of your campaign.
We Believe Most Campaigns Should Have an Endowment Component
And just for the record, I think we should say that we believe that most campaigns should have endowment as a component of the campaign, but in most cases probably not be the sole focus. So we think that your campaign should have multiple priorities, often a building or a renovation.
But if you don’t have that, programs and services, technology, there’s lots of things that you can be raising money for, and endowment might be one of the pillars of your campaign, but probably it’s not the best idea for it to be the sole pillar.
5 Things Your Board Should Consider Regarding Endowment
That being said, your board should talk about, if you’re creating an endowment for the first time or thinking of seriously growing it, they should ask some questions.
- What’s the role of the endowment at your organization?
- Is it so that you never have to fundraise again? And if so, is that a good idea or is that a bad idea? What are the consequences of that?
- How big should your endowment be?
- What happens when it gets to X level or Y level and it’s generating a certain amount of money? What does that do for your organization?
- And finally, I think board members need to think about the ethics of an endowment. What does it mean to be sitting on a huge pot of money that could be benefiting people today? Is that appropriate for your organization? Does that make sense within the culture and the context of your organization?
What did you want to add?
A Personal Anecdote from Andrea
This conversation, Amy, reminds me of when I was young and didn’t know much of anything about the nonprofit world, and I was invited to serve on a committee at my children’s school. It was a private day school, and the conversation around the table was the conversation about endowment, and somebody said how much money there was in this fund.
Yes, there was a lot of, I don’t remember what it was anymore, but there was a lot of money in the endowment fund. And I remember sitting there as a total newbie to this field, saying to myself:
“Something’s wrong with this picture here.”
They have all these millions of dollars sitting there, and there clearly are educational needs that aren’t being addressed at the school. Who’s making these decisions about whether the money should be saved for somebody’s grandchildren or great-great-grandchildren or invested in the future? Why not spend this money today on changes at the school that are going to benefit kids today and tomorrow, right?
And I actually had the courage, even though I didn’t know what I was talking about, to voice that as a concern, and you would’ve thought that I had said something totally awful, right? I mean, I really questioned the existence of an endowment and people looked at me. It was like I could feel people moving their chairs away from me.
I had raised this. I mean, once I realized that I had laid an egg, I got quieter and I didn’t push it. But coming back to it now, I don’t know how many years later, this is 35 years later, I was onto something. I was onto something.
I think that’s right.
An Organization Saving vs. Spending Money
There is a serious question about how much money an organization should have in the bank as opposed to how much money you should be investing in short-term things that are going to have long-term consequences on the service you provide. And that’s a conversation you should be having with your board before you just easily decide you’re going to ramp up your endowment by $25 million, for example.
I think that’s right. It’s an important thing to think about.
Every Organization Has a Need to Fundraise
I sort of threw out this idea that everybody seems to want an endowment that’s big enough that they won’t have to raise money anymore. They won’t really have to raise money. There’s two consequences of that that I think need to be considered and articulated.
One is will you ever have enough money in the endowment to actually alleviate or not have a need to do fundraising? I mean, honestly, I think the answer is no. That’s never a possibility. You can look at an example like Harvard. They have one of the biggest endowments in the world, and they have hundreds of fundraisers that go out and raise money every day. The needs continue to grow, which is fine, but the idea that an endowment will somehow alleviate this need for fundraising, I think, is not realistic.
And maybe that’s a good thing because the reality also is that fundraising, or the need to fund raise, keeps you engaged with your constituency and with your donors and the community, and it keeps you out, actively involved talking to people about your mission and your case and your vision.
And so if, for some reason, the need for fundraising did disappear, all of that would stop. And I think that would be a mistake for most organizations. So two reasons that this idea that an endowment will somehow magically make everybody not have to fundraise anymore is probably incorrect and a bad idea.
Yeah. Amy, let’s talk a little about the relationship between endowment and a capital campaign. I mean, that really is our field of expertise, and we do have important feelings, important beliefs about it. Most capital campaigns have, not all of them, but most of them have, as one of their objectives, some kind of capital improvements or short-term investments in the program or capacity of the organization to do more good, right?
The idea of a capital campaign is that you raise a chunk of money bigger than you usually have, and you invest it in something that will actually improve your ability to do the work and to do more of the work for the people that you serve.
Now, in addition to that, you want to be able to invite your donors to give as generously as they possibly can, and some portion of your donors can give cash or gifts of securities or other more immediate ways. But some portion of your donors can give more through plan gifts, through estate gifts.
In fact, if you really look at giving overall, estate gifts tend to be much larger than the gifts that people give immediately to organizations. So you want to be able to craft your campaign with the possibility that people can give through their estate, can give a plan gift that won’t come in immediately, that would come in over time, in what we call a planned gift.
Now, if your campaign is only for immediate needs, then you have a hard time when the money people are giving you may not come in for 10 or 20 or 30 or 40 years, and you’re not sure how much that money is going to amount to in any case. So we encourage most people who are doing a capital campaign to include some component of endowment because endowment doesn’t have short-term spending needs. If that money comes in over a longer period of time, that’s just fine.
Yeah. The reality is that that is actually how most organizations grow their endowments, through planned gifts. And a campaign is an excellent opportunity to ask for a current gift and a planned gift since you’re having these deep conversations with, strategic conversations, with your donors.
So, while in some parts of this conversation we have been making the case not to have only a campaign for endowment probably, we also think that there should be a component of endowment for your campaign because it gives people the opportunity to give much larger gifts, to think about planned gifts, and an opportunity to have those conversations.
So I think we’re not saying one or the other, but a combination of both.
Why Donors Don’t Want to Give to Endowment Funds
And let’s talk about why donors don’t want to give to endowment funds. So if you just have a campaign for endowment, which many organizations want to have, we started by saying the example of it’s your 50th anniversary, you want to raise $50 million for your endowment, and everybody around the board table thinks this is a grand idea until you start to talk to your first donor and you find out that this is not a grand idea.
So why don’t donors want to give to endowment outright for sure? Maybe through a bequest, but not in outright gifts.
Consider this Endowment Scenario…
Yeah. Well, let’s imagine that you are a person of some financial substance, shall we say, right? And that you’ve been doing a pretty good job of investing your money, that you’re happy with how much money you’ve been making just on the money you have, that you invest, you run. That’s what you do. You run your money.
You spend a lot of time at your computer watching various funds that you invest in. It’s sort of a hobby, and maybe it’s more than a hobby, but you’re really quite proud of yourself at how well you’ve done over the years with a return on your own investments, managing your own funds, perhaps with the help of a financial advisor.
All of a sudden you have the organization you’ve been supporting for some time coming to you and saying:
“Gee, would you consider taking a million dollars out of your investments and giving them to us so we can put them into our endowment?”
Now, Amy, if that were to happen to you, if you were this person I’m talking about, what would you think?
I would think, no way. Right? I would think, well, I would think immediately, “What is the percentage that the organization’s going to use every year?” So generally it’s 4%, maybe 5%. And so I would think to myself, “I can make much more than that as the great investor that I am. So I’m going to keep my million dollars and give the organization $50,000 a year for the next 10 years, and it will be significantly less than a million dollars. I’ll still have my money to invest. I’ll make more than that, and I’ll happily make a donation.”
And I want, well, I was going to say, me personally, I want to see the organization putting the money to good use every year. I want to see what happens with the $50,000. Maybe at my death, on bequest, I’ll leave them a million dollars, but while I’m here, still playing with my money, investing my money, I’m not interested in turning it over to them to invest where they might lose it, if I think I’m such a great investor,
I’d have no confidence that they could invest their money as well as I can invest my money. Why should I believe that? Right? That silliness.
The other thing that comes to my mind is that let’s say the organization is 20 years old. The executive director has just retired or is thinking about retiring. It’s about to move on to another executive director. What really are the chances this organization is going to be continuing for the next 50 years or a hundred years? One thing to take an institution like Harvard, which has been around a very long time, and I have great confidence.
You’re pretty confident, yeah. It’s going to be around.
I’m pretty confident in Harvard, but am I confident in my local nonprofit that has been doing a great job for 20 years, but the founding executive director is about to retire? I’m not so sure.
So there are many disincentives for me as an investor, or for Amy as an investor, to consider carefully and, in fact, not to want to turn our money over to a nonprofit to put into their endowment fund.
Now, occasionally people are hot to trot on endowment and they’re willing to invest some money. The reality is that if you want to raise an endowment money that is big enough to make a real difference to your organization, it’s got to be a lot of money. It doesn’t make any difference at all to raise a thousand dollars for your endowment. You get nothing out of that, right?
Right. Let’s take that example a little further. So let’s say you need a million dollars a year to use to do whatever programs and projects and services. It’s one thing to raise a million dollars, which is hard enough for most organizations, but how much would you need to raise to generate a million dollars? You’d have to raise, I don’t even know.
Yeah, $20 million. $20 million, right?
20 times. To have that million be 5% you have to have $20 million to generate a million dollars at 5%.
Right. So it’s just so much harder. And I mean, start with your board members. See if they want to give half a million dollar gifts to your endowment. I’m guessing that if you do little case study with your board members, you’re going to find out they’re reflective of the community.
You might have one or two people who are willing to give and able to give big gifts. Maybe they’ll consider giving to the endowment, but maybe they’ll tell you why they don’t want to, and then you’ll have your answer.
Strategic Conversations with the Board Are Essential
So anyways, I think the moral of the story is you need to really have these conversations in deep and meaningful and strategic ways with your board members. What are the ethics of having an endowment and sitting on this huge amount of money? Does it make sense for your organization at this time? What is the role of the endowment? How big should it be, does it have to be?
Now, listen, we’re not saying that you shouldn’t have a rainy day fund. We are not saying that you shouldn’t have cash reserves. It is absolutely smart management and good financial management for nonprofits to have a year or two years of reserves in the bank so that if the roof falls in or if there’s a fire or something happens, whatever, COVID strikes, that you are able to sustain the ups and downs of running an organization. But that doesn’t mean that you have to have a hundred million dollars in the bank in order to successfully function as an organization.
So Amy, I think this is such an important topic, and I suspect that many organizations and many board members lightly say, “Well, let’s raise money for an endowment,” without ever really thinking about all the important questions they need to consider.
So if I were to take this kind of free-flowing discussion you and I have had today and boil it down to what I think is the most important issue, it’s to make sure that you have encouraged and had, with your board, a really serious conversation about the role of endowment.
- What is the endowment?
- How big should an endowment be for your organization?
- Does it make sense to be putting money away in a restricted account for endowment with an organization of your size and scope?
- If you’re going to raise money for an endowment, what’s the best way to be able to raise that kind of money?
I mean, there are so many questions that you need to discuss before you ever launch a campaign for endowment. So start there. And then when your board has really grappled with those questions and has still decided that they want to have an endowment, then come and talk to us about campaigns.
Yes. So I would encourage you, actually, to let your board members listen to this podcast. Share it with them. Send them the link. Ask them to listen to it before you have this conversation so that they can do some pre-thinking about this conversation.
And then at the end of the day, ask them to self-reflect. How much would they give to an endowment today if that was the case? And if most of them hesitate, I think you’ll have your answer.
So listen, there’s wonderful ways to have campaigns and have components of endowment and to raise money for your endowment or a quasi-endowment. We think you should. We also think should think carefully and strategically about it.
So thank you for joining us. We hope we gave you food for thought, and we’ll see you next time.