Episode 127: Endowments - Their Value and Importance

Welcome to another edition of "Around with Randall" your weekly podcast for making your nonprofit more effective for your community. And here is your host the CEO and founder of Hallett Philanthropy, Randall Hallett. Thank you for joining me on another edition of "Around with Randall". Of course, I'm Randall.

We delve into the subject matter of endowments today, and for me, this came about in kind of three pieces. Number one is, you might remember the podcast on a few episodes ago on Rob and Karen Hale who created this interesting way of being philanthropic or driving their philanthropy, a million dollars for 52 different smaller nonprofits, and a part of those gifts - $500,000 had to be put into the endowment - and you can go back and listen to that Great Philanthropist series. I think it's number 12 on Rob and Karen Hale and some of the details of why they did that.

The second thing is that I came across an article from the Nonprofit Pro that talked about what to do with unrealized and unrestricted gifts. And then the third piece was more of a personal one. I and myself, along with my sister, started a scholarship fund in my parents' name for their 40th wedding anniversary, and that was 13, 14, 15 years ago, almost 15 years ago now. And we did so because we wanted to celebrate them but also we wanted to help others, and that scholarship fund has grown quite a bit to fund multiple kids, impartial scholarships going to the University of Nebraska and my mom and dad's name, and there was something that we needed to do with the scholarship fund, which brought me to this idea of how important endowments were and are. I think we, coming out of the pandemic, organizations that really did okay through the pandemic were ones that had some kind of ability to draw into a savings account. And for those who may not know, an endowment is kind of a pseudo savings account. The only difference is much of the time endowments are not just free-flowing cash. They're usually restricted for a particular purpose, which we'll get into here in a moment. The key here is that most non-profits don't have endowments or don't talk about them.

If you look at the University Systems or the higher ed as a whole there's some better details on endowments because they've been focusing on this since the early days of Harvard in 1624. And certainly nowadays it's become the driving force for much of their philanthropy in one way, shape, or form. In a 2021 study, universities had, and again it's really the only data out there, had an average endowment level about $1.2 billion, but of the 700 or just short of universities that were pulled, the the median was $203 million. So the average is all reported and then, you know, find the middle. The median is the actual one that's in the middle, I.E, if you list them all which one comes up in the middle. And I think the $203M is a much more accurate number in terms of maybe the endowment levels, particularly of a lot of smaller schools. What we know is that endowments can help provide stability for your organization, and really that's what needs to be done to create a sense of longevity or sustainability.

So today we're going to talk for a second about the kind of the three benefits of having an endowment. How maybe donors would look at them, some of the details, and the tactical are really about how you build an endowment. We'll give you a couple maybe thoughts to think about.

So number one, why are endowments important? As mentioned they create a steady ongoing source of income, and we'll get into some of the details about restricted and unrestricted here in a few minutes. But basically what it does is if you take that endowment, like a savings account, and you invest it like a retirement account, if you think about it on the personal side what you end up with is an annual draw, meaning the endowment makes money. There's a million dollars in it and it makes five percent. That gives you $50,000 to spend. So endowments create a sense of income that didn't take hardcore philanthropy, or membership, or tuition, or if we're in healthcare, reimbursables, reimbursements, things of that nature.

Number two is it creates financial independence. If you have more of an endowment, you as a board, governing, or organizationally executives, can have more flexibility in the planning that you do.

the third is that organizations that have large endowments are seen as more prestigious. Harvard has a legendary, unbelievable endowment level, $60-$70 billion. They could operate almost forever without taking any tuition in, and yet it still grows and they still full fundraise. It's seen as a value-add, and it actually provides for growth. Donors look at it from that perspective. Number one we just talked about the prestige. My organization I believe in has such financial stability that it's going to be here forever and I can invest into that knowing that it's going to continue to do good things. Number two is is that like most donations, depending on your tax situation, gifts are tax deductible. And number three is for people who really believe in a mission, believe in a cause, it creates a sense of legacy. If I think about my parents scholarship fund, we did that to honor them and people have given to it over the years to honor them for the commitment they've made to the community, to their friends, and the commitments they've made about those relationships, and just about being good people. We're proud of that scholarship because it's helping other people and doing so in the name of my mom and dad who, at least in this humble opinion, deserve the credit to serve the name and light, so to speak.

Setting up an endowment, in terms of accounting, is not that difficult. Managing it in terms of accounting actually is not that difficult, but there's a couple key things just to keep in the back your mind is that when you are creating an endowment it needs to be a long-term strategy that starts with your leadership team and is endorsed, and embraced, and vocalized positively from your board. This can't be done willy-nilly because what happens is there's a moment where somebody needs some cash for something and if you're not committed to creating that endowment, we'll talk about the details of it legally here in a second, there's a tendency to want to say well can we get into that or you know do we need to fundraise as much because we have this endowment. There has to be a long-term commitment that that money is going to be used for growth and for perpetuity to ensure we're around.

Number two is you need some policies around it, and I'm not going to go into detail on these although I could spend a couple hours talking about them. Number one is you need a formalized policy for the endowment and number two is you need the ability to create an investment process or policy. Who is taking that money and investing it? If you need more information on that you can contact me at podcast@hallettphilanthropy.com, glad to talk you through that. But probably a little more detailed than here.

The third and missing piece which I see most often, which is most concerning, is when you do an endowment you also need a reporting structure. People have given to this endowment. Maybe they gave to a general endowment. Maybe they gave to a specific endowment, meaning something like the how a scholarship fund for my parents. We want reporting where the kids that got the scholarship and you know can we know just a little bit about them, and how does the selection process work. There's a stewardship angle to this and depending on the number of funds and depending on the number of accounts within the endowment, that can be a lot of work. So being prepared for that is critically important. People ask questions about what their money went to.

Let's jump into the tactical. Where is it that, or how is it, or how can you build this idea of an endowment? And this is all about funding this opportunity. So let's start with the kinds. Inside endowment there may be a couple of different ways of looking at it. A permanent endowment is usually the portion of the endowment that was done because there is a legal contract, a gift agreement, that helped create that part of the fund. So the money that we've given to my, and others have given, to the scholarship fund is restricted for that purpose, and the IRS and the courts all the way to the Supreme Court have said that when you restrict funds in that manner they can only be used for that manner unless or until they can no longer be used, and then there's a whole legal process of called scipray that gets into what's closest. But the at the end of the day they've got to be used for that, so that's a permanent restricted endowment or a part of the endowment you might hear the word quasi endowment, which means that while there wasn't a gift agreement or a legal obligation, somewhere along the line extra funds came in and we'll talk about that in a moment as well, and the board took action. And you can find that in the minutes voted and said we're going to take this piece of money and we're going to move it into the endowment, they can move it in generally, they can move it in specifically, but they have the right to take extra money or any money really that's not restricted into an endowment purpose and that's called quasi.

Now the third is there's just money left over and it's shoved into an investment accountant. We use it for such. I don't advise that from a planning perspective usually we see permanent and quasi as the most used terms when we talk about endowments. One is donors gave money with a restricted purpose or the board allocated those resources into the endowment, and by the way then they can change it later on if they want in the Quasi.

So how do you build an endowment? Well first let's start with kind of the mechanisms. Number one is we see most often that endowments are built through planned giving programs. I'm doing some research and speaking more and more often on the value of maximizing relationships. I refer you again probably for the ninth millionth time to Nathan Chappelle and Brian Kerman's book, The Generosity Crisis, which I hold up right here on the screen if you're watching on YouTube in my autographed copy. And the idea of the concept of radical relationships, meaning we get to know our people. Considering that less than half the population in the United States or households is making a charitable gift, well what we know is that the most engaged someone can be philanthropically is through an estate gift. And if they truly believe in your mission, if they truly believe in what their the organization's long-term viability, sustainability, and impact on the community, then that's when you get into this concept of the deepest possible relationship. But we also know that the largest gifts given through, if we look at research from AHP, AFP, is through planned giving. And so many more organizations are jumping into this planned giving process to endow certain pieces of their organization through planned giving efforts. Now the dream scenario is unrestricted gifts come through planned giving and they can be quasi-endowed through the board, and that's how you build it. But many times people have a particular angle on what they want to support, so planned giving is a key aspect. We're also seeing a number of a greater increase really in the number of campaigns that are built for endowments, or minimally that a certain portion of a campaign has an endowment component.

So you've got your regular activities, you've got your specialized activities highlighting the needs. We also have what is being done by someone like MacKenzie Scott who is kind of an amazing philanthropist and obviously one who doesn't like a lot of attention, which is fine. It's her money, she do whatever she wants with it. But they're unrealized or unsolicited gifts and they come in. We're seeing organizations who aren't prepared for that, and that's where your policies come into place that if you get unrealized or unsolicited gifts, meaning they just kind of came in no one knew about them, they weren't a part of a plan, they weren't really asked for, does your organization have a policy that says a certain percentage of those should go into the endowment, quasi- endowed meaning that we're not going to spend it all right now and that could apply also to your annual giving budget. Does 10% of our unrestricted annual giving budget automatically become part of a quasi-endowed program? If you, it's like retirement savings, if you have mechanisms like that for unrealized, unsolicited gifts, or even in the annual giving program as a percentage year-over-year-over-year like your retirement, if you start early enough you start building up serious amounts of funds. And so it's something to consider. Is taking a piece or a portion of unsolicited gifts and putting them into the endowment, and you can do it by category meaning by size huge gifts- it's 50% annual giving it's five percent- I'm not saying take your cash-strapped organization and strap it more. But this is where that long-term discipline comes in.

There are some organizations that have moved towards the idea of creating give percentage of every gift goes into the endowment, almost like a tax. It's harder to explain to people, but that's another option for you to consider in building an endowment based on your current activities. Maybe there's a year where you've had better revenue than expected and less expenses so there's an operating net revenue or profit. Do you take that and put it in the endowment so it's just not spent automatically? Or a certain percentage of that? Is there a way to take those opportunities and create longevity with them? All of these are mechanisms that can be instituted in isolation or in totality, meaning all of them are, one or two of them are, but the key here is to have a conversation. What are we doing with unsolicited gifts and how can we create a sense of longevity with those through an endowment? What about operating that revenue at a year. And can we put that somewhere? What about campaigns? Are we a piece of a campaign or a whole campaign built on building the endowment?

The other thing to consider is how you endow, what you do, and that's what I want to spend the last maybe a minute or two on. People look at their organization and they think oh my gosh I'm a $10 million nonprofit. We'd need $200 million to endow the whole thing. We just can't do that. And I look at them and say hold on a second here. That $10 million isn't one check. that's a million little checks meaning you've got positions and programs and outcomes and various processes. The key to building out a great endowment, particularly for a restricted purpose meaning the donor chooses to restrict the dollars to the organization in a specific way like the scholarship fund, is to break it apart. And universities have done this brilliantly. They have chairs for personnel, meaning faculty members, so they can substantiate them in perpetuity. They have scholarship funds to make the university cheaper. You can endow in athletics at least at the University of Nebraska, but I think in a lot of places you can endow positions, I.E, on the teams. Like the center blocker position for that scholarship for $10,000 is a $200,000 gift that's in doubt and it becomes that scholarship fund or the starting quarterback or the third golfer on the golf team. What we need to do is get better in non-education about endowing parts of our organizations. Do you have a part of the organization that provides, let's say you're a food bank, a certain kind of outreach and it costs $25,000 a year could you endow that for $500, 000. Is there someone who's bought into that? If you're a homeless shelter or homeless nonprofit helping those in the community and you need you know $5,000 per person to take care of someone over a year's period, could you endow that for $100,000 to ensure one person gets help that they need every year? And even into this position, why not endow a critical position in the organization? If you have a tremendous executive director or CEO and they're beloved and you're paying them $100,000, could you endow that position for $2M? Is there someone out there that would say I want to make sure we have people just like this person who was the leader we all dreamed of? how do you break down what you do?

One last option. Let's say you have someone who gives you $500 every year. Couldn't you sit down with them and say you love this organization so much you give us $500. We are so grateful. Have you ever considered a $10,000 estate gift that will guarantee your $500 every year because that $10,000 will be invested and five percent will come out. That's going to be a $500 gift every year forever, making sure your legacy stays intact.

The trick to endowments is breaking them down so that they're workable and manageable for you and for the donor to see the value. It doesn't have to be the whole organization. There are a couple places that might be close to Harvard, but most of us never going to get there. Key is what can you do to help offset some of those expenses, program, people. you know, annual giving, whatever, to make sure that there's of sustainability long-term for your organization. And I'm hoping today gives you a little bit way, a different way of thinking about it to go back and say what could we do, how do we build this, starting today if you haven't. Or how do we enhance it if we've already started to grow.

Endowments are going to be one of the critical keys in the future for nonprofits. And if you're not talking about it, you should. And if you're, if you won't you're going to put your nonprofit in jeopardy. Those that have them will survive and that's a good thing for your community in what you do and what value your nonprofit brings to it.

Don't forget to check out the blogs at Hallettphilanthropy.com to post it a week, maybe three, just things think about, 90 second reads. And if you want to get a hold of me it's podcast@hallettphilanthropy.com. Don't forget what you're doing is important. I, every day I drive to work, drive home, I see places where nonprofits and philanthropy make all the difference in the world. If you open your eyes you can see it too and you're part of that. Don't forget some people make things happen, some people watch things happen, then there are those who wondered what happened and at the end of the day you're someone who makes things happen for people and things that are wondering what happened, and I can't imagine a better way to spend a career. That's why I love what I do and I hope you feel the same. I'll look forward to seeing you right back here next time on "Around with Randall", and don't forget make it a great day.