The Great Debate Continues: Invade Your Endowment or Not?

by Robert I. Evans and Avrum D. Lapin

The volunteer and professional leadership of every non-profit organization across the globe face a number of critical questions presented by the current financial crisis. There is probably none more serious than the question we (and others) address now: under what set of circumstances, IF ANY, is it an acceptable practice to invade the principal of an organization’s endowment?

We previously noted that attorneys general across the United States are addressing this question from a legal perspective. Bloggers and others have voiced their opinions and reactions, and predictably, they vary widely. Some say that the times compel drawing dollars from the corpus of endowments as there is no better – or seemingly simpler – way to keep a non-profit running. At the other extreme, people are stressing the importance of maintaining a long term perspective and a financial position that reflect both donor intent and a strategy for the future.

In the decision-making process, we recommend that non-profit leaders of every organization (regardless of size or mission) adopt a philosophy that recognizes that the past can always be repeated so we should learn from actions of others. In this light we strongly encourage you to not take the path of invading endowment funds, a strategy that can have dire long-term consequences. Rather, we believe that the proper approach requires framing and implementing a fundraising strategy that may be different than techniques you have utilized in the past.

Here are two actual experiences from Jewish congregations we have served:

• “Congregation Aleph” is a 1,000+ member respected synagogue that traces its roots back at least 100 years. Some years ago (when the economy was not especially rosy but not nearly as bad as the situation today), the leadership drew down its unrestricted endowment funds from levels that were within acceptable ranges (at least three times the annual budget). Its endowment today is barely equal to its annual budget and the congregation now faces serious problems and financial jeopardy. Re-building its endowment will be nearly insurmountable right now so the congregation is being forced to take major staffing and budgetary reductions…just to keep its doors open.
• “Congregation Bet” is a 750+ member synagogue that also traces its roots back at least 100 years. Five years ago, the leadership embarked on an innovative endowment-building initiative that enabled members to endow their annual dues, support specific cost centers within the budget, create and fund “chairs” for major clergy and staff positions, and concurrently build unrestricted endowments.

Today, “Congregation Bet” is experiencing financial pressures that mirror other North American synagogues but it is in a far better position than similar Jewish organizations that did not take that more far-sighted approach.

Important lessons learned:

1. Endowments are critical for the financial strength of every organization.
2. Both restricted and unrestricted endowments reflect long term viability and the proactive wishes of donors and should not be invaded.
3. Donors support endowments today because they have a longer term perspective with the plan that their gifts bring value and exist in perpetuity.
4. Invading the principal of an agency’s endowment is a short term solution that represents a “point of no return” that can tarnish an organization’s image and long-term profile in the philanthropic marketplace and can lead to the decline of the organization.
5. Younger as well as older non-profits must commit themselves to solid financial transparency and proven financial management strategies. This applies to endowments, investment policies, and formal gift acceptance policies.

We strongly advise non-profit leaders to adopt a disciplined long-term fund development perspective, especially in this time of economic uncertainty. Organizations must think and act assertively to create new short-term opportunities for revenue, together with operating efficiencies, and adopt strict policies and procedures to govern operations now and into the future. We urge them to not succumb to the pressures from many respected circles to dip into their endowments.

Robert I. Evans, Managing Director, and Avrum D. 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.