RIVER FUNDRAISING
ALERT
River Network’s
Reserves
and Endowments Volume 10, No. 2 / Summer
2003
Reserves and Endowments: Creating a Financial “Nest
Egg”
By Pat Munoz
In these challenging times, it is important for all groups, large and small, to think about building a financial “nest egg” to help the organization weather difficulties of all kinds. Like families, organizations need different kinds of nest eggs for different purposes. In this article, we will discuss two varieties, operating reserves and endowments.
1. OPERATING RESERVES
What is an Operating Reserve?
An operating reserve is an organizational “savings account,” usually equal to a percentage of an organization’s annual budget, set aside for emergencies or other uses.
Why Have a Reserve?
The usual purpose of a reserve is to provide the funding needed to keep an organization going during a crisis, such as the loss of an Executive Director, or a devastating fire. However, reserves can have other uses. Thomas Raffa, in an article entitled “Criteria for Nonprofits’ Operating Reserves,” (see Hot Websites) mentions several more:
§ Enable an organization to survive operating shortfalls caused by economic conditions or management error. Without such reserves or use of other assets, survival of an organization during a steep or protracted budget deficit may be threatened.
§ Enhance the flexibility of an organization when used as venture capital to develop new programs, replace outdated programs or expand the organization’s interests and services.
§ Expand credit opportunities and permit favorable financing of an organization’s growth and expansion. This includes permitting a change in direction or focus of programs and activities.
Characteristics of an Operating Reserve:
§ Reserves are usually accumulated gradually over several years.
§ An operating reserve is usually very flexible; funds can be taken out when needed and put back when the need is over.
§ The staff, with board approval, usually has control over the reserve and can make decisions based on the needs of the organization.
Who Should Have a Reserve?
All organizations, no matter how large or small, should have some kind of operating reserve.
When Should You Establish a Reserve?
The best time to start a reserve is right now, or as soon as you can.
How Large Should Your Reserve Be?
Reserves generally range from 25% of the annual operating budget to 100%. The average appears to be around 33%. Thomas Raffa suggests that the size of your reserve will depend upon the individual characteristics and circumstances of your organization:
- The reliability and diversity of your revenue streams. If you are dependent on a few large funders, you may need a larger reserve.
- Stability of expenses. If your expenses are primarily fixed and predictable, reserves can be lower than if your expenses vary and are unpredictable.
- Nature of liabilities. Your reserve should be larger if your organization has significant liabilities including long-term debt.
- Nature of other assets. Your reserve may be smaller if you have an endowment or other assets.
- Nature of opportunities. If unexpected opportunities requiring large expenditures occur periodically, your reserve should generally be higher than if opportunities occur on a more predictable basis.
How to Set Up an Operating Reserve:
While establishing a reserve can be as simple as opening a separate reserve account, the board of directors should draft policy governing the reserve as soon as possible. This policy should specify 1) the desirable size of the reserve; 2) the purposes for which the reserve is intended; 3) the rules and restrictions imposed by the board upon the use of the reserve, including guidelines for replenishment; and 4) a policy for investing the reserve.
2. ENDOWMENTS
What Is an Endowment?
An endowment is the organizational equivalent of a trust fund or a retirement plan. There are two kinds of endowments.
- A pure endowment is a pot of money that you agree to invest forever, leaving the principal untouched and using only the earnings on the investment. Recently issued rules of the Financial Accounting Standards Board specify that the term “endowment” only applies if an external agent (such as a donor) makes the requirement that the funds be permanently invested, or if the organization advertises to its donors that the funds in its endowment will be permanently invested.
- A quasi-endowment, or board-designated endowment is similar to a pure endowment, with the difference that the funds, both principal and interest are controlled by the board.
Why Have an Endowment?
The purpose of any endowment is to generate a permanent, steady stream of income for your organization, sometimes for unrestricted purposes, often for some particular project or purpose favored by a particular funder or group of funders. While an endowment will never relieve your organization entirely from the stresses of fundraising, it can provide a wonderful complement to your regular fundraising efforts.
Some types of expenses that are particularly appropriate for endowment funding include:
§ Your general operating expenses (the hardest thing to raise money for!)
§ The ongoing maintenance costs of a building or property
§ Expenses for a particular ongoing program, such as an annual river cleanup
§ Costs of work in a particular geographic area, such as a particular watershed or stretch of river.
Characteristics of Endowments:
§ An endowment provides an exciting vehicle for funders to express their commitment to the future of an organization through planned gifts such as bequests and annuities.
§ Principal from an endowment can be used as collateral for loans (provided the endowment is held by the organization itself).
§ Most organizations reinvest some percentage of the interest generated by their endowments to keep up with inflation and grow their nest egg.
§ Donors often endow specific programs, which can become a problem if program needs shift dramatically.
§ Raising money for an endowment can be time-consuming and difficult, and may detract from your other fundraising efforts.
§ A very large amount of upfront capital must be raised before an endowment can make a significant impact on the financial situation of a nonprofit organization. For example, in order to generate an annual income stream of $25,000 from an endowment, you would need to raise approximately $500,000 (at 5% annual earnings).
§ Even endowments can let you down. There is no guarantee that your endowment will not shrink in a sagging economy or as the result of a bad investment strategy.
Who Should Have an Endowment?
The number one question you should ask yourself when considering creating an endowment is “Are we in this for the long haul? Will we still be delivering our services 50 years from now?” If your answer to this question is “yes,” Andy Robinson, an independent fundraising trainer and consultant, suggests certain additional guidelines:
§ The organization should be at least ten years old.
§ There should be a dynamic five to ten year plan.
§ The budget should have been in the black for several years.
§ There should be at least a thousand regular donors.
§ There should be a healthy “major donor” program in place.
§ There should be a “Planned Giving” program. Donors should be able to leave assets to the organization.
I would add to the above that there should be an operating reserve in place, since an endowment will not usually solve problems involving an immediate need for large sums of cash.
When Should You Create Your Endowment?
There is no “magic moment” for creating your endowment. Some event, such as a donor’s offer, a matching grant opportunity or an anniversary year, is often the trigger point. Christine Graham, in her article “Is an Endowment for Us?” (see bibliography) lists some of the most common points at which organizations usually start an endowment:
§ When a new building is purchased or built, and fundraising can include an endowment component
§ During a capital campaign that includes a variety of projects
§ When a special drive is established to honor a person or accomplishment
§ When the money is there, the organization is riding a crest of accomplishment, and donors want to secure the future of the organization.
She goes on to note, “probably the only bad time to establish and fundraise for an endowment is when the organization is in financial stress and needs to fund its operating budget. Even if you could convince donors to make endowment gifts at that point, the return would probably be too small to get you back in stable financial condition fast enough.”
How to Set Up an Endowment:
When setting up your endowment, the most important consideration is to establish clear governing policies that honor both the wishes of the funder(s) and the needs and wishes of the organization. Another consideration is the amount of staff time and expertise available to “manage” the endowment. For smaller organizations with limited staff resources and expertise, one good option is to ask your local community foundation to “hold” the endowment. This has several advantages:
- Placing your fund with a community foundation leaves you free to do your program work and puts your funds in the hands of “experts” who are experienced in stewarding such funds.
- The community foundation provides a “safety check” against your using funds from the endowment for inappropriate purposes, such as defraying a deficit or paying off a debt. The foundation staff can ask the tough questions and enforce the restrictions of the endowment more easily than can your staff and board.
- In case of a legal action against your organization, the endowment funds will be off limits.
- To encourage small groups to build endowments, some community foundations offer matching grants for creating, or expanding, your endowment.
- Because most community foundations have large amounts of money to invest, your endowment investments will be more diversified and will most likely perform better than if you, or your board, invested the money.
- Your endowment may receive more visibility due to the community foundation’s efforts to publicize the endowments they hold to others in the funding community (see the website of the Community Foundation of Tampa Bay, www.cftampabay.org/endowments).
- Endowments held by a community foundation are often more attractive to donors because:
· They cannot be “invaded” by your organization during times of crisis
· Should your organization fold, the community foundation will use the funds to endow another group similar to yours.
There are, of course, some disadvantages to placing your endowment with a community foundation:
1. Your endowment funds become assets of the community foundation. You can no longer show them as assets in your financial statements, or use them as collateral for loans.
2. The community foundation charges a fee (usually between1% and 2%) to manage your endowment. This will reduce the amount of payout you receive from the funds.
3. The community foundation makes the final decisions on the use of the endowment funds, both with respect to the payout rate that your organization receives, and with respect to any requests to “use” the principal for purposes other than fund generation.
To locate the community foundation nearest you, go to www.communityfoundationlocator.org and click on your state or use the search function on the home page.
3. HOW TO BUILD YOUR RESERVE
AND/OR ENDOWMENT
Here are a number of strategies you can use to begin building your financial nest egg:
- Budget a surplus each year. If you budget both your income and expenses carefully, and if you always budget 5-10% more income than expenses, you will generate extra funds which can go into your operating reserve or endowment.
- Put unexpected gifts into the reserve or endowment. Establish (and follow) a policy that all “windfall” gifts such as bequests and memorial gifts, go into the reserve or the endowment, not into the operating budget. These gifts were not anticipated; if your budgeting is well done, you will not need them to meet your annual fundraising goals.
- Inform your funders about the operating reserve and/or endowment. Funders usually make their renewal and special appeal gifts out of current income. They must be educated about your need for larger gifts out of their assets to help insure your organization’s future. Take every opportunity to educate your funders with articles and stories about gifts to the operating reserve and/or endowments in your newsletter or other publications and your website (see www.ci.hickory.nc.us/library/general/endowment).
- Conduct an annual appeal to your membership. Give your reserve or endowment a catchy name like “TheWhat Next Fund” (for unanticipated emergencies) or “The Fund for the Future” (for endowment) and send out a special appeal explaining your need and asking all your members to help keep you in business with a generous donation.
- Personally approach major funders (individuals, corporations and foundations) who have a stake in your organization. The best way to approach funders for contributions to the reserve and/or endowment is to meet face-to-face with them and explain your need. Most donors will perceive the establishment of a reserve/endowment to be a sign of good planning and long-range thinking on the part of your organization.
- Conduct a capital campaign. Capital campaigns seem to be the vehicle of choice for raising funds for an endowment, particularly when the endowment can be “piggy-backed” onto other projects such as acquiring land, building a new headquarters or establishing a nature center. Such projects much be maintained, so providing an endowment to insure their ongoing upkeep is logical and compelling. Capital campaigns can be a tremendous strain on an organization, however, and before undertaking one, be sure to read up on them, and consider undertaking a feasibility study to make sure you are ready. (See the Summer 2001, River Fundraising Alert on Capital Campaigns.)
- Invest your “Nest egg” wisely. An important part of building your nest egg, whether it be an operating reserve, an endowment or both, is to invest the monies wisely. While asset management practices differ widely among nonprofits, every organization should have a system for the responsible management and investment of its financial assets. This begins with a written investment policy developed by your board of directors which specifies what to—and what not to—invest in for each of your financial nest eggs. Your policy may also specify percentages to be invested in certain types of investments and certain criteria (such as Moody’s BBB rating for corporate bonds) for investment selection, and may prohibit certain practices such as investing in companies owned or controlled by board members.
Depending on the size and the purpose of your nest egg, you will need to decide who should manage your assets. Smaller “eggs” can be managed by the Executive Director, but as your egg grows, most experts recommend an investment or finance committee to draft investment policy, manage investments and recommend policy changes to the board. This committee is usually made up of the Treasurer and any board members or non-board members with investment experience.
If you have asked a community foundation to hold your nest egg, they will invest your money for you. Another route is to find a member who is also an investment advisor and engage his services. Both community foundations and investment professionals will usually charge an annual fee based on the size of the assets managed ranging from .4% to 2%.
In summary, all organizations, from the smallest to the largest, need to have some “rainy day” funds tucked away for emergencies. A small pot of money, equal to 90 days of operating expenses, may be all that your group can manage now, but as your organization grows, you should consider having a variety of nest eggs, for different purposes, tucked away in safe places and generating funds for your organization.
Pat Munoz is the Director of River Network’s Eastern
Office in Washington, D.C. She can be reached at 202/ 364-2550, or by email at pmunoz@rivernetwork.org.
The “Endowment Survey Report,” a survey of subscribers conducted by Planned Giving Today (see Bibliography), included the following ideas for effectively marketing endowment funds:
§ A new “Acorn Endowment” lets donors start small and build their funds over time.
§ We send an endowment brochure with a personalized letter to planned gift prospects, such as current and former board members and major donors.
§ We produce an occasional institutional “white paper” on our institution’s strategic financial priorities that always makes a very strong case for endowment gifts.
§ For us, the best cultivation for gaining endowment funds is to send letters from scholarship recipients or news reports from the departments benefiting from endowment resources.
§ We have an annual scholarship awards dinner where we recognize endowment donors and cultivate new donors.
§ Each year, a different trustee makes a $10,000 challenge to be matched by annual fund donors. We always exceed the match. So far we have created endowments for our music program, our outdoor program, technology and our middle-school teaching program using this method.
§ Our annual report always emphasizes endowments. We highlight donor stories and recipient testimonials.
§ We have an endowment campaign every five years to create visibility and encourage donations. It’s a yearlong effort and our endowment committee goes all out to make it a success.
§ We developed a slide-illustrated talk to communicate the history and mission of our organization as well as to emphasize the importance of endowments. It is interesting and entertaining, and we offer to present it as a program to local service clubs and other organizations in the community.
§ Each year we produce a “Catalog for Giving” and send it to our total mailing list. It includes information on all our endowment funds and what they are accomplishing. We include a response form, and we offer to send every donor of a certain amount or more a Christmas ornament identical to the one displayed on the cover of the catalog.
§ We are using our 75th anniversary as an opportunity to build endowment for the next 75 years.
BIBLIOGRAPHY
“Building Your Endowment,” by Edward C. Schumacher. Publisher: Jossey-Bass, 989 Market Street, San Francisco, CA, 94103; 415/ 433-1740 or 800/ 956-7739, 88 pages, $28. www.josseybass.com.
Chronicle of Philanthropy
“Endowments: Getting Started,” by Holly Hall, March 9, 1995.
“Building Endowments for Small Non-profits,” by Vince Stehle, October 16, 1990.
“Endowments Mark Fiscal Maturity for Environmental Groups,” by Thomas J. Billitteri, December 3, 1998.
“Saving for the Future,” by Thomas J. Billitteri, December 3, 1998.
Grassroots Fundraising Journal
“Is an Endowment for Us?” by Christine Graham. Vol. 21, #2, 2002.
“Thinking of Starting an Endowment?” August 1995, “Preparing for an Endowment Campaign,” October 1995, “Starting an Endowment: Feasibility Studies,” August 1996, by Kim Klein.
“If Only We Had an Endowment Fund!” by Hank Rosso, June 1985.
www.grassrootsfundraising.org.
The Nonprofit Times
“Cash Reserves—It’s Just Never Enough,” by Natalie Gardner, October 15, 2000.
“Endowment Funds, Discipline, Patience Key to Growth,” by Matt Williamson, December 2000.
“Donor-Sensitive, Endowments Built with Small Gifts,” by Jeff Jones, April 15, 2003. www.nptimes.org.
Planned Giving Today
“Endowments and How to Grow Them” includes “Seven Endowment Essentials,” by Joseph O. Bull, and “Endowment Survey Report: How PGT Subscribers Build Their Endowments.” $19 plus $6 shipping. To order, call 1-800/ 525-5748 or visit www.pgtoday.com.
Selected
Fundraising Training Opportunities
Listed below are a few fundraising trainings coming up soon.
For more fundraising training programs in your area, check out the websites of
the Alliance for Nonprofit Management at www.allianceonline.org, (go to
“Provider Search” and click on “Advanced Search,” then search by city, type of
assistance and services offered) or the National Center for Nonprofit
Associations, www.ncna.org (click on Member
Central, then State Association Directory) to find out what is available near
you. You can also check out www.fdncenter.org
(The Foundation Center), www.icl.org (the
Institute for Conservation Leadership), www.philanthropy.iupui.edu (The
Fundraising School), www.tgci.com (The
Grantsmanship Center) or www.nsfre.org (the
National Society of Fundraising Executives) for more training opportunities.
September 4. “Building Peer to Peer Relationships with Grantseekers.” Colchester, VT, with Andy Robinson. Call Vermont Alliance of Nonprofit Organizations, 802/ 862-0290. www.vanpo.org.
September 5. “What Makes Special Events Special?” Kansas City, MO, with Joan Flannagan.
For details, contact the Council on Philanthropy at 816/ 235-6259, www.kcphilnet.org.
September 12. “Grassroots Grants and the Nuts & Bolts of Fundraising.” Bucksport, ME, with Andy Robinson. Contact the Home Coop, 207/ 469-7961. Email: homecoop@acadia.net.
September 13 - Oct 17. Online course in “Fundraising Management” taught by Joan Flannagan at the University of Illinois. Completion counts toward the UIC Certificate in Nonprofit Management. Contact John Mudd, 312/ 996-9257. Email jmudd@uic.edu.
September 15. “Big Gifts for Small Groups.” Washington, D.C., with Andy Robinson. Contact the Association of Fundraising Professionals, 703/ 610-9023. www.afpdc.org.
September 25/26. “Building Your Membership for Effective Advocacy & Fundraising.” St. Paul, MN, with Ellis M. Robinson. For more information, go to www.MEPartnership.org, and check the community calendar for September 25/26.
September 30. “Nonprofit Marketing on a Tight Budget.” Philadelphia, PA, with Andy Robinson. Contact Philadelphia Free Library, 215/ 686-5423, www.library.phila.gov/rfc/rfcabout.htm.
October 10. “Mobilize your Board to Raise Money.” Atlanta, GA, with Andy Robinson. Call the Georgia Center for Nonprofits, 303/ 688-4845, www.nonprofitgeorgia.org.
October 14. “Social Entrepreneurship: Earned Income Strategies for Nonprofits.” Nashville, TN, with Andy Robinson. Contact the Center for Nonprofit Management, 615/ 259-0100, www.cnm.org.
October 16 & 17. “Building Your Membership for Fundraising and Support.” Sacramento, CA, with Ellis M. Robinson, pre-conference session for the Land Trust Rally. For more info, visit www.lta.org or call 202/ 638-4725.
October 16. “Schmoozing 101: Building Peer to Peer Relationships with Grantmakers.” Randolph, VT, with Andy Robinson. Call Vermont Alliance of Nonprofit Organizations, 802/ 862-0292, www.vanpo.org.
November 4. “Grassroots Grants.” Santa Barbara, CA, with Andy Robinson. Contact the Nonprofit support Center, 805/ 687-8560, www.nscsb.org.
November 5. “Nonprofit Marketing & Big Money for Small Groups.” Santa Barbara, CA, with Andy Robinson. Call the Nonprofit Support Center, 805/ 687-8560, www.nscsb.org.
November 6. “Members: Reliable Income and Political Power.” Terre Haute, IN, with Joan Flannagan. Contact Mark McConaghy, 317/ 232-8912, MmcConaghy@commerce.state.in.us.
November 13. “Nonprofit Marketing on a Tight Budget.” White River Junction, VT, with Andy Robinson. Contact Vermont Alliance of Nonprofit Organizations, 802/ 862-0292, www.vanpo.org.
Hot
Websites
The following websites will provide you with some actual examples of how other groups are marketing their endowments, as well as, some sources of additional information.
www.heiferfoundation.org. This nonprofit has a great website featuring several kinds of endowments. Click on Country Endowments or Bequests & Memorial Endowments to see how they do it.
www.commfound.org. This Community Foundation Serving Boulder County has great information on its endowment program for nonprofits. Click on “For Non-Profits,” and then on “Agency Endowments.” You will probably want to read “Frequently Asked Questions,” as well as, “The Great Giving Match,” a challenge grant matching program for nonprofits to build endowment funds.
www.ci.hickory.nc.us/library. Click on Library Information, then on Library Endowments. This nice website shows how a local community nonprofit has built its endowment and gives good contact information in case you want to ask questions.
www.deferredgivingservices.com. This site, belonging to a planned giving consultant, David Schmeling, has some very interesting free information under “Articles,” including one entitled, “The Stewardship of Endowment.” David also offers some reasonable-priced training seminars and workshops for groups who might want to introduce the concept of endowment to their boards.
www.communityfoundationlocator.org. At this useful site, you can find the community foundation nearest you, and in most cases, connect directly to that foundation’s website to see what information they provide on helping establish endowments and planned giving.
www.iknow.org. This site, put together by Raffa & Associates, P.C., an accounting firm, has a good article entitled “Criteria for Nonprofits’ Operating Reserves” and related topics under the heading “Weathering Uncertainty.”
Funder Deadlines for August 1 – November 15, 2003
Listed below are proposal deadlines for some funders with an interest in local river and watershed preservation efforts. This list is by no means inclusive and should only be used as a starting point for your research. We have done our best to verify deadlines, but if you are thinking of applying, be sure to double check well before the application is due. You can find out more about the funders by checking the website or doing a search in the River Network Directory of Funding Sources at www.rivernetwork.org. Before submitting a proposal to any funder, be sure to obtain their guidelines and read them thoroughly and, if possible, discuss your program with a program officer.
|
Funder |
Region |
Deadline |
Phone |
Email/Website |
|
Frank Stanley Beveridge Foundation |
FL, MA, NH, RI |
8/1/03 |
|
|
|
Merck Family Fund |
MA, NY, RI (Urban), ME, NH, VT (N.
Forest), S. Appalachia & SC coast (Ecosystems), nationally (Economics) |
8/1/03 |
(617) 696-3580 |
|
|
Mountaineers Foundation |
Pacific Northwest |
8/1/03 |
(206) 264-5691 |
|
|
Resist, Inc. |
National |
8/1/03 |
(617) 623-5110 |
|
|
Timberland Company, The |
National |
8/1/03 |
|
|
|
VA Environmental Endowment |
KY, WV, VA |
8/1/03 |
(804) 644-5000 |
|
|
Woodstock Foundation |
VT |
8/1/03 |
(802) 457-2355 ext. 12 |
|
|
U.S. Environmental Protection
Agency—Chesapeake Bay Program |
Chesapeake Bay States |
8/14/03 |
(800) Your Bay |
|
|
Joyce Foundation, The |
National, IA, IL, IN, MI, MN, OH,
WI and Canada |
8/14/03 |
(312) 782-2464 |
|
|
Envl. Support Center * (Training & Org Assistance) |
National |
8/15/03 |
(202) 331-9700 |
|
|
John Sage Foundation |
ME |
8/15/03 |
(207) 722-3543 |
|
|
Munson Foundation |
AL, FL |
8/29/03 |
(202) 887-8992 |