Puzzled by Perpetuity Planning

Dear Kim:

We’re a small educational nonprofit that helps people and organizations understand and plan for the many aspects of technological change. We have free monthly workshops in five cities, a free bimonthly enewsletter, resources on our website, and an annual conference. Our income is currently almost entirely derived from registration fees and sponsorship income from the conference. One of my board members and a potential major donor who wants to contribute to our soon-to-be-created endowment want us to dedicate a certain percentage of our total income to go into the endowment. They suggest starting with about 40% and eventually moving up to 70%. I am concerned that this will divert resources from our main programs and staff, who are underpaid as it is. They argue that if we shoot for higher goals, we will bring in enough money to be able to do this.

I can’t find any nonprofits that put a % of service fee income into an endowment, but I do think it’s very wise to build an endowment. I think it would be wiser to bring in enough income to pay a full-time development director who can fundraise for the endowment (as well as the general fund).

If you have a spare few minutes, could you let me know what you think?

— Puzzled by Perpetuity Planning

 

Dear Puzz:

Your letter comes at an opportune time, as the lead article of the July/August issue of the Grassroots Fundraising Journal is on the topic of endowment. You will want to check that out in addition to what I am going to say here.

I am pleased that a board member and a major donor want the organization to have an endowment, and are willing to put their money where their mouths are. And, it is not unusual to devote some portion of income to endowment, just as people, if possible, devote some portion of income to savings. Generally, this portion is not more than 5%, however. The problem with devoting 40-70% of income to endowment, aside from the utter unreality of it, is that the IRS will wonder how it is that a nonprofit can afford to do that, and why you are not spending the bulk of your money on current mission fulfilling programs. Your better bet for building an endowment is to build it from new income. It sounds like you don’t have very many individual donors, but as you develop that income stream, you can go to them for endowment gifts.

Certainly I agree with you that money should not be socked into an endowment at the price of poorly paid and overworked staff. High quality, competent staff who enjoy their work and want to stay in their jobs for several years are a kind of endowment, and organizations are foolish to not take care of their staff as best they can. Having said that, a development director may be a good next hire, but that person will help the board and volunteers raise money, and will not raise money themselves.

I think a good use of about $2,500 would be in hiring a consultant to help your whole organization understand roles and responsibilities of staff and board, as well as roles and responsibilities of annual income and endowment income. With this understanding a consultant could help your organization draft the beginning of a five year fundraising plan that makes the most sense for what you need now, and in the future

— Kim Klein