Endowment

An endowment is a pool of money that is invested so that the income can be used to support the nonprofit. Often, donors restrict these funds so that the principal (the amount initially donated) cannot be used to cover day-to-day expenses.

Endowments are frequently raised through a separate fundraising effort.

There are different ways of determining the appropriate size of an endowment. One approach is to decide baseline level of annual income to fund operations (say $2 million) and then calculate how much endowment is necessary to generate this level of income. In this example, if we assume a 5% annual income rate, we'd need $40 million to generate $2 million a year.

Pros:

building a capital base and then living off the income can stabilize cash inflow and reduce risk of funding shortfalls
having a capital base can reassure donors about organization stability
provides donors alternative for a gift that provides ongoing funding instead of meeting a one-time need
we take advantage of capacity to raise more money

Cons:

could discourage future donations by suggesting we are already well capitalized
could discourage volunteer work by sending signal the organization is wealthy
some donors want to fund current needs, not a warchest
could make us a bigger target for litigation
with the financial market volatility over past year, endowments don't necessarily represent the image of stability they once did

Wikimedia Potential

In preparation for a Board meeting a few weeks ago I did some background research on endowments and put together some notes. See below. Stu 17:56, 7 December 2009 (UTC)

As a general observation, thanks to our 300+ million monthly audience, and high profile credibility, we clearly can raise more money. For example, we do only one community fundraiser a year, while public radio in the US which may do one in the Spring, one in the Fall, and occasionally do other targeted drives. At the moment, we don't necessarily need more money than our current plan as we have neither a focused strategy for spending more nor frankly the execution capability to spend it well. But I am optimistic that the strategy project will prioritize and drive agreement on some additional opportunities. And more importantly my cardinal rule is always "raise money when you can, not when you need to."

That said, we need to investigate many areas before we could make an informed decision on pursuing an endowment. Here are a few:

Will it be a net positive for long-term financial sustainability? Healthy community giving has worked pretty well for us so far, and given the scope of our audience and its geographical distribution is well diversified so comparatively low risk. An endowment could be valuable supplement but assuming a conservative 5% annual income rate would have to be huge ($150 or $200 million) to completely cover our costs. So the two would have to co-exist.
WIll it negatively affect volunteer motivation? Will a significant endowment, or campaign to raise one, create an impression of boundless resources and therefore less need for volunteer help?
Will it negatively affect existing donors? We currently cover our needs between community giving, major gifts, and institutional grants. Would an additional endowment alternative affect this?
What is right legal structure and resulting risk profile? How much would having deeper pockets affect litigation against us?

Key questions for a board resolution creating an endowment

What is the purpose of this endowment and how will it tie in with the mission?
Who will manage the endowment? Will we have an investment committee or will we hire an outside manager?
What is going to be our investment strategy? How can we ensure that the separate and detailed investment policies remain in accordance with this strategy?
What will our disbursement policy be? Will the board have the authority to transfer funds under special circumstances?