Dear Kim Q&A Column Archive
June 2005
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
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