From the issue dated December 11, 2003

Creating an endowment requires planning and patience but in the long run
pays off for most charities
By Peter Panepento

When Hillel of Colorado hired Pat Blumenthal as executive director six years ago, it had only one staff member and an annual budget of $150,000 -- resources too slim to allow it to meet its goals of helping thousands of college students around the state participate in Jewish social, historical, and religious programs.

Hillel has since expanded to eight staff members, an annual budget of $560,000, and programs that serve more than 4,000 students. Aggressive fund raising has gone a long way toward helping the charity grow, but Ms. Blumenthal also credits a decision by Hillel's board to create a $50,000 endowment with financial and management help from the Rose Community Foundation, in Denver.

"It's changing the thinking of our organization's leaders," Ms. Blumenthal says of the endowment. Besides talking about Hillel of Colorado's present needs, she adds, "we're also talking about our future needs."

Ms. Blumenthal's zeal for the transformational effects of an endowment is echoed by other nonprofit executives across the United States.

By forming an endowment, organizations like Hillel of Colorado are finding they can create a long-term financial safety net that can help them manage their costs, even when annual giving is down.

"If you're running a small surplus from year to year, you should really think about creating an endowment," says Thomas Smith, senior philanthropic adviser at the Vermont Community Foundation. "It creates a more predictable stream of income and puts less stress on having to raise money through more-volatile campaign giving."

Getting Started
Endowments are separate funds that help charities meet their annual costs or pay for recurring programs. For some organizations, endowments also help to pay for major expenses such as capital improvements, or for creation or expansion of programs and services. Typically, the principal in the fund is not touched, but a percentage of the investment earnings is available for the nonprofit organization's use. Professional money managers usually oversee endowment funds, investing the money in stocks, bonds, and other instruments.

For many charities, especially small ones with limited budgets, starting an endowment requires not only vision but also outside help. Increasingly, community foundations such as the Rose Community Foundation and the Community Foundation of Broward, in Fort Lauderdale, Fla., are creating incentive programs to help small nonprofit groups set up and manage their endowments. In addition to offering financial support, the foundations provide training programs to help nonprofit groups create, build, and manage their funds.

Hillel has been the beneficiary of the Rose Foundation's "Endowment Challenge" program, which the foundation began in 1999. Rose and the Allied Jewish Federation of Colorado agreed to match more than 50 percent of the endowment money raised by nonprofit groups that focus on Jewish issues. Nineteen organizations raised $12.3-million. That money was matched with $6.6-million in grants.

The program came at a perfect time for Ms. Blumenthal, who was just starting to chart Hillel's new financial course. Although she says its initial endowment is modest, Hillel has used its fund as a springboard to encourage planned giving and to send a message to donors that it is an organization with a long-term future.

In South Florida, 18 nonprofit organizations are taking part in a three-year challenge program, concluding at the end of 2004, that is sponsored by the Community Foundation of Broward. The community foundation is offering a $1 matching grant for every $3 in endowment money raised by the participating charities.

Different Approaches
The Kresge Foundation, in Troy, Mich., is widely credited with spurring community foundations to help charities start endowments. In December 1999, Kresge awarded $18-million in matching grants to help six community foundations, including the one in Broward County, build their endowments. The program was an effort to help strengthen the role of community foundations nationally and to encourage them to help charities create and build their own endowments.

While many charities seek help from community foundations to get their endowments started, other nonprofit groups have taken a different approach.

When the Lake Erie Arboretum at Frontier Park, in Erie, Pa., was founded in 1998, its board immediately created an endowment to help it fulfill its mission of maintaining and improving a popular city-owned park. To raise money for its fund, the arboretum asks donors to sponsor trees at the park for $750 apiece. Of that amount, $250 pays for the tree. The remaining $500 goes into the organization's endowment. The organization also offers sponsorships for assets as diverse as park benches and buildings.

To date, the arboretum has built a $70,000 endowment, though it has yet to tap into the fund, says Kathleen Dahlkemper, the project coordinator. That day will come later, Ms. Dahlkemper says.

"Ten years down the road, we're going to have more things we need to get done," she says.

Planning for an Endowment
Despite their attractiveness, endowments are not for every organization. Fred Stang, director of development at the Triangle Community Foundation, in Durham, N.C., suggests that nonprofit organizations have sufficient money for emergencies before they create an endowment. "They don't want to create an endowment if what they really need is a rainy-day fund," he says.

On the other hand, if an endowment is much larger than what a nonprofit group needs, it can lead the organization to become complacent about day-to-day fund raising, says R. Glenn Hubbard, a professor in the graduate school of business at Columbia University, in New York, who studies endowments.

And starting an endowment requires that a nonprofit group work for at least several years to cultivate donors, because many endowment gifts come through wills and bequests. Deciding to start endowment, Mr. Stang says, "is a delay of instant gratification. It's planting the tree you may never sit under." Still, he says, "when you've got low periods like we're going through now, the dream of a large endowment that can carry you through those times is like a pot of gold."

Practical Concerns
Of course, an endowment must be sizable before it will begin to provide major annual rewards. Typically, only about 5 percent of the value of the endowment is available to pay for expenses. That is because the endowment must retain its value if it is to keep pace with inflation and generate the investment dividends needed to produce additional money in succeeding years.

Thus, if a nonprofit organization receives about 5 percent of its endowment's value each year and the annual rate of inflation is about 3 percent, its endowment must earn about 8 percent to 9 percent to break even.

As a result, an organization with a $100,000 endowment fund will probably get only about $5,000 annually to help pay for its expenses. If the endowment reaches $1-million, however, the charity has about $50,000 at its disposal annually.

Because it often takes time for organizations to build sizable endowment funds, such funds may not be practical for some nonprofit groups.

For those that already are having a difficult time generating enough money for their annual operations, endowments may not make sense, especially because the charity's executives may be tempted to put the money toward unintended uses.

"The concern is, how do you make sure your endowment is used for what it is intended," says Mr. Hubbard.

Organizations without a strong system of internal controls may face another problem. As in any other case where cash accumulates at a nonprofit group, endowments have tempted some executives to use the money as personal slush funds.

For most organizations, however, endowments are practical, especially if they are raised above and beyond the groups' annual fund-raising goals.

Finding the Right Donors
With that in mind, nonprofit organizations should create a plan for soliciting donors, says Lisa Farber Miller, the Rose Community Foundation's senior program officer for Jewish life.

Unlike annual fund raising, which involves soliciting charitable donations from a broad spectrum of potential donors, endowment giving requires a pinpoint approach.

Ms. Miller says about 80 percent of endowment donations nationally come through wills and bequests, a fact that highlights the need for building long-term relationships with donors.

"Typically endowment donors are unique," Ms. Miller says. "They want to leave a different kind of gift -- a gift that will provide a legacy and a long-term future for an organization."

The organizations that are most successful in generating endowment donations are those that have a firm commitment from their boards and staff members to communicate with donors, says Karen Drumheller, vice president of donor and community relations at the Community Foundation of Broward.

"It's a challenge because there's such a tendency for the donor to say, 'I want you to use my gift now,'" she says. Organizations that have had the most success, she adds, "have a board and a staff that are 100 percent behind this. Even though they have other needs, they have kept this as a priority. They're publicizing it. They're enthusiastic about it."

For the Denver Campus for Jewish Education, an educational institution for students in kindergarten through 12th grade, soliciting donations for its endowment has become a regular part of its overall fund-raising effort.

The organization, which created a $2-million endowment with help from the Rose Community Foundation program, sets aside a section in its bimonthly newsletter that explains its endowment program and goals.

Krista Boscoe, director of development for the Denver Campus for Jewish Education, says she is also working with the school's trustees to create a database that will identify potential donors. Those donors will receive mailings about endowment giving every three months.

Help With Management
Because of the sophistication required for planning and managing an endowment, many organizations have decided they cannot maintain an endowment without outside help. The Lake Erie Arboretum, like many other nonprofit organizations with endowments, works closely with a foundation -- the Erie Community Foundation -- to manage its assets.

Some organizations with larger endowments, such as colleges and universities, create foundations solely to manage the funds. Others hire for-profit money managers to take care of their investments.

In each case, working with an entity that can properly manage the endowment fund is crucial, both for the organization and for its donors.

"Donors have worked very hard to gain their wealth," says Michael Batchelor, president of the Erie Community Foundation, in Erie, Pa. "They know how to manage money, and they're reluctant to give it up if they think it is going to be spent. Endowments are supposed to be forever."

That point is especially important for organizations that are already having difficulty managing their budgets, says Mr. Stang of the Triangle Community Foundation. Groups that cannot afford to set money aside should stay out of the endowment arena until they can prove that they will be financially solvent for the long haul.

For the vast majority of nonprofit organizations, however, endowments make sense, Mr. Batchelor says.

"I don't think there's any reason not to establish an endowment," he says.

"I talk to a lot of nonprofits that don't have one," he adds, "and I ask them if they would be better off if they had started one 20 years ago. The answer is always yes."

Has your charity started its own endowment, or considered doing so? Share your story in the Fund Raisers online forum.

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Copyright © 2003 The Chronicle of Philanthropy

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