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Understanding Endowment

Endowments are hot topics these days. In nearly every issue, The Chronicle of Philanthropy describes multimillion-dollar gifts to the endowments of some of the largest and most powerful charitable organizations, especially universities and hospital systems. But many organizations are not included in this outpouring of largess. And often the executive directors and board members of nonprofit organizations are confused about the hoopla about endowments. Unfortunately, these leaders do not perceive that endowment building is possible—or even desirable—for their organizations.

Many small and midsized nonprofit organizations—colleges, hospitals and health centers, social service agencies, arts and cultural organizations, community foundations, secondary schools, religious congregations, neighborhood associations, and so forth—have no or very small endowments. These organizations have lived through decreases in federal, state, and local governmental support for many core programs. They have experienced the loss of grant opportunities from private and corporate foundations, receding support from local corporations that have been purchased by out-of-town interests, disappearing or nonexistent reserve funds, market declines, and exhausted, overburdened, and increasingly selective individual donors. These are the organizations to which this article is directed.

The decreasing revenue sources and rising expenses incurred by nonprofit organizations make endowment distributions an increasingly crucial funding element. Organizations that have relied heavily on one or two sources of charitable support have been particularly vulnerable to the uncertainties of the economy, the vagaries of the stock market, and the instability of other funding resources. They may be ripe to establish or reinvigorate an endowment building program.

Endowments, generally, are funds containing financial assets that are held permanently by nonprofit organizations and invested to generate income and capital appreciation for the benefit of the organization. A reasonable portion of the endowment’s value is spent annually to support the organization and its purposes, while the excess income and/or appreciation are accumulated in the fund so that it grows, over time. Endowments can be established to support the ongoing operating expenses of the organization or for designated purposes such as scholarships, projects, programs, institutes, professorships, or any aspect of its charitable work.

Although an endowment is not the panacea that many boards of directors hope for, it can offer ongoing operating funds and welcome sources of revenue when money is tight, as well as a wellspring of resources for new programs and innovations in prosperous years.

Click here to order a copy of Diana Newman’s book Nonprofit Essentials, Endowment Building to read more

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