On Nonprofits ©
April 2006

Clarifying Endowments

Q: I have several questions related to endowments. If an organization establishes an endowment fund, can other donors contribute funds to build it up? If so, can the donors restrict these donations to the agency's endowment to certain causes? Is it good business practice to use the interest from an endowment for operating expenses on a regular basis? Or, should an organization seek grants for operating funds and reserve the non-designated portion of the endowment fund for emergency expenses?

A: Before addressing your questions specifically, I think it would be helpful to clarify the term endowment. A true endowment is designed to secure an organization’s future for generations to come. Money is set aside to grow. The principal is never touched. The goal is that eventually there will be sufficient funds to draw out the interest to supplement current giving when that fails to meet organizational needs.

There is some confusion about the term endowment because organizations often talk about endowing programs such as scholarships, awards or particular client services. This type of “endowment” – generally supported by restricted gifts – may be initiated by a single individual or family with a dream and the financial wherewithal to put their money where their mouth is. But, it may also be initiated by the organizations when they identify a need that they know will resonate with a large number of people. Many times the money for these programs will be given “in perpetuity,” where again the principal is to be kept intact, but this does not have to be the case.

Given this distinction, the answers to your questions become more evident. Generally, multiple donors are welcome to help “endow” specific programs, though occasionally the terms governing such a program will prohibit additional gifts from outside sources. A broad donor base is actually essential to building an organization’s endowment though, since it is almost impossible to amass sufficient funds to ensure a secure future without such a base.

To give you an example, we all know education is expensive. Its costs escalate annually. With few families able to afford the actual costs associated with obtaining a college degree, there must be subsidies if this country is to continue turning out doctors, teachers, engineers and scientists. Recognizing this reality early in the game – and intent on not only keeping its doors open but continuing to turn out quality doctors, teachers, engineers and scientists – Harvard University aggressively sought to build an endowment program. The fund development office threw a wide net and today its endowment stands in excess of $26 billion – yes, that’s billion with a “b.” The interest on that sum can provide for a lot.

Of course, how that money is used relates to your next question. There should be written organizational policies dictating where, when and how the funds from an endowment can be used – this includes whether any of the monies can be restricted to certain programs or causes – how these monies are to be invested and what funds are to go to make up the endowment in the first place. So, when you ask about using these funds to pay operational expenses, one would have to look at the policies of the specific organization in question. Because endowment programs are relatively new outside of hospitals and universities most organizations don’t have sufficient funds in their endowments to use those dollars to pay current expenses – at least on a regular basis or without draining the corpus.

As to using endowment monies as emergency funds, while some organizations do permit tapping their endowments when faced with the unexpected, a distinction is generally made between endowment funds and reserve funds. Regardless of the pocket in which it’s kept, every organization should be setting aside money specifically to handle the unforeseen needs, such as hurricane cleanup and repair. As is often the case, these issues fall to the board to determine.