Dipping into Endowments: Entering a Danger Zone

by Robert I. Evans and Avrum D. Lapin

While we acknowledge that difficult times require unusual measures, non-profit leaders across the globe must be vigilant in their decisions regarding their finances, keeping in mind how these critical choices will impact their organization today and tomorrow. Specifically, we address raiding the corpus of an institution’s endowment: a taboo step that carries extreme implications for donor support and institutional management.

We read with some consternation, tempered by compassion, of non-profit leaders who feel compelled by the current economic environment to raid their endowments and use earmarked funds to pay for operations. While we can understand the desire to keep organizations as whole as possible and functioning at a maximal level, we caution that this can become a dangerous approach from which an organization may never recover, even after the economy rebounds.

Endowments represent the capacity and the intent of an organization to function for the long term. The principal of the endowment, obtained through current and deferred giving, is invested and kept whole. A percentage of the income from the investment is used to provide predictable funding to the organization’s core programs and services and to specific activities where the mission and the interests of donors intersect. The balance of the income is reinvested into the principal, generating growth and building the corpus for the future.

An organization’s commitment to establishing substantial endowments is an essential part of successful fund development. Normally an endowment should be at least three times an organization’s annual budget. In that way, an institution’s commitment to endowment development creates confidence for prospective major donors who, doing their due diligence, will become more apt to give generously in our competitive and recessionary environment. The marketplace demands it; an aggressive posture compels it.

Thoughtful organizational leaders committed to the long term need to look to new solutions, without jeopardizing credibility. Needless to say, it should never be a “path of least resistance” and decisions relating to the use of endowment principle and income should be considered in light of these questions:

  • Is it worth undermining the confidence of past, current and future donors and funders?
  • How will this short-term palliative be measured against the long term loss to the organization’s profile and real capacity to function?
  • What potential is being lost and what becomes impossible when the economy ultimately emerges from this crisis?
  • What is the probability that the endowment can be made whole again?

As alternatives, institutions need to act, to consider and achieve new solutions.

  • Professional and Board leadership must seize this opportunity to become more agile, look at new approaches and efficiencies, seek ways to restructure the organizations and become more nimble in providing core services. This will capture the attention of individual and institutional funders for the short term AND put the organization in a stronger competitive position going forward.
  • Now is the time to ramp up short-term fundraising. Address specific needs that must be met and engage leaders and donors around accomplishing those goals. Articulate the organization’s vision with clarity but be equally clear that deliverables will come in phases…these now and those later.
  • While this does not relate directly to endowment practices, find ways to collaborate with other organizations to achieve economies of scale, pooling talent and saving money. Pride and turf must mean less in an environment where serving the community is paramount. This also makes funders take notice.
  • Immediately review investment practices as well as policies regarding the use of endowment income and share these decisions with donors.
  • Communicate your new approach and the plans to achieve it. Let your stakeholders, leaders, donors and constituents know that you are taking steps to own your future.

There is no easy answer to the challenges that face dedicated non-profits today. Spending the principal of an organization’s endowment implies imminent disaster and discourages future philanthropic support from your current and future donors. Therefore, non-profits should absolutely seek other viable alternatives to ensure organizational security and future growth. 

Robert Evans, Managing Director, and Avrum Lapin, Director are Principals of The EHL Consulting Group, of suburban Philadelphia, and are frequent contributors to eJewishphilanthropy.com. EHL Consulting works with dozens of non-profits on fundraising, strategic planning, and non-profit business practices.