Saving for the Future

Charity endowments are growing popular, but the trend has risks

The United Way in Sarasota County, Fla., has always focused on raising money for annual needs, but lately it has been working on another goal: a multimillion-dollar endowment fund.

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By funneling bequests and other planned gifts into the fund, the United Way has increased its endowment more than threefold in recent years, to $5-million. The fund’s principal remains untouched, but its earnings, about $250,000 per year, are added to money that the United Way collects in on-the-job giving drives and distributes to local charities.

Officials project that donors — especially longtime older contributors who want to leave a lasting imprint on the United Way — could help push the charity’s endowment to $20-million by 2010.

Building an endowment is a goal that is increasingly common among a growing number of charities — even small, local groups that would not have considered such a move just a few years ago. More than half of the 1,400 local United Ways, for example, now report having endowments, double the number of just four years ago. And many other non-profit organizations, from advocacy groups to social-service providers, also are creating such funds, often by holding special endowment campaigns.

While the trend could put many charities on stronger financial footing — and generate new cash to expand their work and to pay for more sophisticated fund-raising efforts — starting an endowment can be risky, particularly for small non-profit groups.

As donors contribute to endowment campaigns, some charities report a decline in annual giving and other donations. Other groups have had to be careful not to alienate donors and trustees by giving the impression that they are creating a permanent fund while the immediate needs of the organization or its clients go unmet. And, some observers say, the benefits of setting aside endowment money have quickly evaporated for some new charities that start a nest egg before being able to pay their monthly bills.

“I have seen cases in which, after a campaign, agencies may have a new $1-million endowment, but they are unable to spend it when they need money,” says fund-raising consultant Robert F. Hartsook.

Still, many non-profit groups are successfully undertaking endowment drives. One reason for the endowment boom is a new commitment by several community foundations to fostering philanthropy and raising the amount of charitable assets in their regions.

Some examples:

* In the Detroit area, the Community Foundation for Southeastern Michigan, working with the Kresge Foundation, this year began a six-year program to build charity endowments through planned gifts. It follows an earlier program that offered grants to charities that raised cash to start endowments. Kresge recently broadened its endowment-building efforts nationally. It will offer $18-million in challenge grants over five years to six community foundations to help them and charities in their region build permanent endowments. Community foundations that apply for the grants must have assets of $10-million to $25-million and meet other qualifications.

* In the Raleigh-Durham area of North Carolina, the Triangle Community Foundation is helping to spearhead the Catalyst Project, a long-term effort aimed partly at encouraging charities to create endowments.

* In the Denver-Boulder area, the Rose Community Foundation, in partnership with the Allied Jewish Federation of Colorado, this fall announced a $10.6-million grant program for Jewish charities and synagogues that start endowments.

In addition, other non-profit groups and state governments have been working to increase endowment holdings.

The National Committee on Planned Giving is sponsoring a publicity campaign called “Leave a Legacy” to promote endowment giving and other forms of philanthropy using estate-planning techniques. And the Lilly Endowment announced last month that it has approved the allocation of $153-million for endowment building and other purposes among community funds in Indiana.

Some state governments are also working to encourage endowments as a way to strengthen charitable programs in their regions.

Michigan and Montana have both passed tax credits for donations to such funds.

Montana’s law, enacted in May 1997 and made retroactive to January 1 of that year, allows a 50-per-cent tax credit, up to $10,000, for qualified planned gifts or corporate gifts donated to the permanent endowments of Montana charities. Michigan’s law, which became effective in 1989, grants a 50-per-cent tax credit of up to $200 for endowment gifts made by married couples and up to $5,000 for gifts from businesses.

The endowment trend could have profound effects on the way non-profit groups operate in the future, observers say.

Dennis R. Young, a professor of non-profit management and economics at Case Western Reserve University, in Cleveland, says that charities with strong endowments could beat other groups in the contest for donor dollars because they have extra money to pay for fund-raising campaigns.

“Well-endowed institutions have more reserve and cushion to be aggressive,” he says. Endowments also can help save charities from entering into commercial ventures to raise money, Mr. Young says. Some of those ventures have generated controversy among donors.

Equally important, say non-profit executives, building an endowment can show donors that a charity is serious about its mission and its financial integrity.

At the Goodwood Museum and Gardens, a non-profit antebellum plantation property in Tallahassee, Fla., a $3.5-million capital campaign is under way that includes a $1-million permanent-endowment goal.

Executive Director Larry Paarlberg says the endowment component was added after donors said that they wanted to see some of their money set aside to insure that the facility would be properly run in the future. In addition, he says, museum officials felt that to secure gifts for capital expenditures, the organization needed to show that it had a healthy endowment.

“We always knew ticket sales would not cover the costs of running a 19-acre historical property,” Mr. Paarlberg says. “Having an endowment makes people feel better about giving because they have confidence the facility is going to make ends meet and be viable.”

Even some newly created non-profit organizations are seeking endowment money. While such a move can be premature, lest a charity run short of ready cash, some executives insist that it isn’t wise to wait too long before creating an endowment fund.

“It’s never too early to start saving money,” says Nicholas Masi, executive director of Gilda’s Club South Florida, a support organization for people with cancer that opened 20 months ago in donated quarters in Hollywood, Fla.

An independent affiliate of Gilda’s Club, a New York charity named for the late comedienne Gilda Radner, the Florida organization last month began a $4.3-million fund-raising campaign that includes a $1-million endowment goal.

Earnings from the endowment will be used to even out cash-flow dips, maintain a permanent headquarters, and expand in the Miami-Fort Lauderdale area.

The growing interest in creating endowments among charities is fueled by the recent run-up in Wall-Street stock values and the dramatic rise in personal wealth among retirement-age Americans, as well as baby boomers.

Some charities fear they could lose out on capturing a share of that wealth.

Charities “have heard about an $8-trillion to $10-trillion or $20-trillion transfer of wealth and they’re thinking, ‘How do we get into this business?’,” says Mariam C. Noland, president of the Community Foundation for Southeastern Michigan. “The rhetoric about wealth transfer has stimulated a lot of urgency. All of a sudden, people are saying, ‘This is a once-in-a-lifetime opportunity.’”

To make the most of that opportunity, charities looking for endowment money are promoting planned gifts.

“There is a very close intersection between endowment building and planned giving,” says Shannon E. St. John, executive director of the Triangle Community Foundation, in Research Triangle Park, N.C. “If donors are looking at making a gift through their will, a lot of them want to know that the gift will benefit that organization in perpetuity.”

Many endowment campaigns are linked with planned-giving programs from the very start.

Before state lawmakers passed an endowment tax credit last year, the Montana Community Foundation, which holds endowment funds for about 150 charities, had received only three planned gifts for endowments in its 10-year history. What is more, all three of the gifts were from the same donor.

But in the 20 months after the tax credit took effect, donors contributed $2-million to the community foundation in 51 planned gifts.

Charities benefiting from the endowment gifts range from arts and human-services groups to education and environmental organizations.

“It is just starting to snowball, and I see no reason it won’t continue,” says Sidney Armstrong, the community foundation’s executive director.

Montana charities are getting other endowment-building help as well. The Northwest Area Foundation, in St. Paul, for example, has offered a total of $50,000 in challenge grants in the past three years to help local Montana community foundations start permanent endowments that benefit charities in their communities, according to officials of the Montana Community Foundation.

Like those in Montana, charities in Michigan historically have been endowment-poor. Charities in the seven-county Detroit area, for example, held only $1 in endowment money for every $7 at comparable groups located in Cleveland, a study by the Community Foundation for Southeastern Michigan found. In 1991 the foundation joined with the Kresge Foundation, which offered $18.3-million in challenge grants, to help southeastern Michigan charities raise cash to create or expand endowments.

When the program ended last year, 38 charities, ranging from the southeastern Michigan chapter of the American Red Cross to the Chamber Music Society of Detroit, had raised nearly $50- million in endowed funds, including the original $18.3-million in grants. The funds now have a market value of $65-million.

The program, however, did not focus on planned gifts for raising endowment money. So the community foundation this year introduced a new effort, called “Touch the Future,” with $8.32-million in challenge grants from Kresge.

Beginning in 1999, grants will go to 12 to 15 charities that can match them with gifts in the form of charitable remainder trusts, gift annuities, pooled-income funds, and life insurance, all of which must be earmarked for endowments. The charities will serve as models for other non-profit groups looking to build endowments through planned gifts.

The program also will help underwrite planned-giving workshops and other training assistance for estate planners, charities, and donors.

Charities that received some of the earlier endowment grants distributed by Ms. Noland’s fund have responded enthusiastically to the fund-raising challenge. “It was like, wow, with that incentive, why not go for it?” says the Rev. Eddie K. Edwards, founder and president of Joy of Jesus, a 23-year-old Detroit social-services group. The charity received $250,000 in challenge-grant money by meeting, and slightly exceeding, an endowment goal of $750,000.

But many charities were dubious of their ability to raise endowment gifts, says Ms. Noland.

The challenge grants, she notes, came during a particularly difficult time, when Detroit’s economy was in a downturn and charities were having to take over more and more social services that had been provided by the government. When charities were asked, “Why don’t you go out and raise endowments?” Ms. Noland recalls, they said, “Does it pay my bills tomorrow?”

The grant makers were not suggesting that charities risk insolvency by creating endowments. The point was to teach charities that they could persuade donors to give to the long-term viability of the organization while also sustaining its day-to-day work.

“When an organization, large or small, lives day by day, it is very hard to have the quality institutions that our communities deserve,” Ms. Noland says.

For all the rewards that endowments offer, however, they also can lead to problems.

One danger is that a charity could dip into its endowment earnings to hide financial losses stemming from mismanagement, malfeasance, or an overly aggressive expansion program.

Another risk for fund raisers is that the charity could turn donors off by directing contributions into an endowment at the expense of programs that communities need right away. Yale University law professor Henry B. Hansmann, a specialist in non-profit issues, says that having an endowment can make sense if a charity expects its income from donors to be uneven. Nonetheless, he says, “if you are running an organization to aid the poor, every dollar you save is a dollar you don’t spend on helping the poor. You may spend it on helping the poor in the future, but then you have to ask yourself why you think the poor in the future are more needy than the poor today.”

Putting too much money into an endowment was a concern for Earthjustice Legal Defense Fund, an environmental group in San Francisco, as it made plans recently to expand its fund from $6-million to $13-million.

“We’re an advocacy organization, and we’re dealing with immediate needs as they occur,” says Tjiska Van Wyk, the organization’s vice-president of development. “There was some concern about building a huge endowment and jeopardizing our ability to raise money for annual expenses.”

In the end, trustees set the endowment goal to match one year’s worth of operating expenses, a conservative figure that few donors would be likely to see as unreasonable. In addition, Earthjustice is appealing for endowment gifts from a select group of long-term donors who have the means to keep contributing to the annual campaign as well.

While Earthjustice’s strategy of going to wealthy donors may be sound, it’s not an option for every charity. Sometimes a group committed to starting an endowment has no way to avoid hurting its annual fund raising because it lacks a pool of well-heeled donors who can give to several campaigns at once.

Mr. Edwards, the Joy of Jesus founder, says donations to the Detroit charity’s annual campaign fell because of its endowment drive, which ended in November 1997. And the impact is “still reverberating,” he says. Donations to the annual campaign were down 15 per cent, or $150,000, in 1997 compared with prior years and remained down in 1998, he says.

“We tapped out our donors” to meet the endowment objective and collect the challenge grant, Mr. Edwards explains.

Still, Mr. Edwards says he has no regrets. He expects Joy of Jesus’ normal giving patterns to resume next year, and he points out that checks designated for the endowment continue to arrive nearly a year after the campaign ended.

“I believe in the endowment,” Mr. Edwards concludes. “Because we have an endowment, the future will be more stable.”