June 18th, 2013
It’s important to consider whether endowment fundraising is right for your chorus and to carefully plan before taking the leap.
You’ve heard this one before: healthy nonprofits derive their revenues from a variety of sources. It’s risky to an organization’s long-term stability to become too dependent on just one source, such as a single major benefactor or annual foundation grant. The standard recipe for a good funding mix includes an endowment—funds that are invested to generate either restricted or unrestricted income for a nonprofit organization’s operations. Only a portion of the earnings are spent each year. The rest is re-invested to grow the funds and generate more income for the future.
Chorus America's 2012 Operations Survey Report shows that roughly 39% of nonprofit choruses have endowments. For the past four years, the median endowment has averaged at about $52,000, with the highest reported total at over $6 million.
Endowments are sometimes seen as an easy way to alleviate the burden of annual fundraising. After all, the thought of having money in the bank working for your chorus is an appealing prospect. “Why can’t we just endow our conductor’s position?” one of your singers might ask.
It’s true that endowments can help your organization weather tough financial times, strengthen programs, and provide flexibility to take advantage of new opportunities that arise. But endowments can also weaken organizations. It’s important for chorus leaders to consider whether endowment fundraising is right for their chorus and to thoroughly plan before taking the leap.
What an Endowment Is - And Isn’t
Endowments are “funds for the future,” providing support for the long-term. Often they are the vehicle for receiving gifts of appreciated assets and estate gifts—as opposed to outright cash—from your closest donors and friends who want to see the mission of your chorus perpetuated. For strong organizations that aren’t likely to change drastically and have missions addressing needs that won’t go away, an endowment provides a marvelous way to help donors share their values and safeguard the organizations they support for future generations.
But, as the recession showed us, endowments do not necessarily bring financial stability. Just think of all the foundations and universities whose programs depended on endowment earnings. Their endowments lost significant value when the stock market took a downturn, forcing them to cut back on programs and operations. And revenue tied up in endowment funds is not available to help an organization make up for a decline in ticket sales or to ensure a positive bottom line at the end of a difficult fiscal year.
There are different types of endowment funds that meet various organizational needs, including:
- True Endowment: The principal is invested in perpetuity, meaning it may not be tapped. Typically 4-6% of the earnings are used annually for restricted or unrestricted purposes depending on the agreement with the donor. The rest is re-invested in the principal.
- Example: Your former board chair gives an endowment gift of $100,000 to support commissioning projects. The fund is to be permanently endowed—i.e. the $100,000 is invested and only a portion of the earnings (roughly $4,000 - $6,000 to start)—is used for commissioning in any year.
- Board-Designated Funds: The board, rather than a donor, designates unrestricted assets into funds for certain program activities or future time periods. Board-designated funds can also include quasi-endowment funds. Quasi-endowment funds function as permanently restricted funds from which income is available for general operations or specific purposes. However, the board can decide to spend the principal of quasi-endowment funds according to guidelines they establish.
- Example: A foundation provides a $100,000 dollar-for-dollar matching gift challenge so that your chorus can build a $200,000 reserve fund. The board develops guidelines for the use of the reserves, including specifying how and when a portion of the invested principal may be used.
- Term Endowment: These funds are similar to a true endowment, but after a stated period of time (per the donor’s wishes), the principal may be used for different purposes.
- Example: Through a bequest, a donor gives a $1 million endowment gift, with the requirement that it fund the conductor’s position for 10 years. After that time, the principal may be added to the chorus’ general endowment or board restricted funds.
Six Key Elements to Have in Place
In general, organizations positioned for successful endowment fundraising have these attributes:
For strong organizations that aren't likely to change drastically, an endowment provides a marvelous way to help donors share their values and safeguard the organizations they support for future generations. But, as the recession showed us, endowments do not necessarily bring financial stability.
1. A clear mission and shared understanding of how to make the case for seeking endowed funds and how the funds will be stewarded once they are raised. Appeals for “We need support for current operational expenses” campaigns versus “We need support for our vision and programs far into the future” campaigns require different messages and are appropriate for different prospective donors. Top board, administrative, and artistic leadership need to agree on how to craft a message and who to target. Donors today are paying more attention to how their gifts are stewarded and want to feel confident that their wishes will be honored.
2. A smoothly functioning board and stable leadership. Since endowment funds are linked to ongoing operations, long-term stability, and an enduring legacy, organizations are most successful in securing this type of funding when they can demonstrate strength, effectiveness, and trusted management. Ideally the organization is not in a leadership transition, although when a beloved, long-time conductor leaves, it can present an opportunity for endowing a fund in his or her name.
3. Sufficient operating reserves. Operating reserves provide a critical cushion for the ups and downs of cash flow. They can also help an organization weather emergencies or take advantage of unexpected opportunities that will benefit the chorus in the long run. As a component of a chorus’s long-term stability and overall health, reserves reinforce the concept of endowment giving.
4. A loyal donor base that is likely to continue growing. Endowment fundraising relies on your closest donors and long-time “family” members. Many an endowment gift has resulted from building a relationship over time with an individual who has given a modest gift annually for many years. If you imagine the classic “pyramid” model of fundraising, endowment gifts typically come from those at the middle or top of the pyramid. New donors must continually be added into the broader base of supporters.
5. A Financial Management or Investment Committee. Established by your board, this Committee is charged with offering guidance and developing a written endowment policy. The group can include outside volunteers in addition to board members. Of course, choruses should check with an experienced accountant or financial advisor before launching an endowment campaign.
6. A board-adopted written endowment policy. A carefully considered and documented endowment policy, developed by the Investment Committee, ensures resources will support the full mission of your chorus. As the Commonfund Institute, an institutional investment firm, states in its Principles of Endowment Management publication, “The Board’s policy statement sets the course for endowment management. Before assets are allocated or investments selected, the trustees, through their policy making, will have made the most significant contribution to the achievement of their objectives.” The endowment policy addresses issues such as who is responsible for endowment oversight and investment, how the funds will be invested and disbursed, and what portion of an undesignated gift can be allocated to an endowment. Donors will want to know that your chorus is managing endowment funds according to best practices. They will also want to know the board’s policy on naming funds and the amount of earnings that will be available annually to fund the specific program they wish to support.
One of the easiest ways to establish an endowment, especially for choruses with small to mid-sized budgets, is through a regional community foundation. Many community foundations offer “agency endowments” as a service to nonprofits. Typically, the endowment is provided at no cost to the nonprofit, freeing the organization from the administrative and investment burden of their assets; however, they often charge a small fee annually based on the fund balance to cover the administrative costs associated with the fund.
Of course there are times when an endowment gift arrives when it’s least expected, such as when a long-time constituent leaves a surprise bequest. A potentially transformational gift can be the impetus for an endowment campaign that asks other donors to build upon and leverage these unanticipated funds.
Raising an Endowment without Compromising Current Fundraising
“If we only had a large endowment we could spend less time on fundraising!” one of your board members might say. Ah, if only that were the case! An endowment campaign should be positioned as in addition to annual fund giving, and donors must also be asked to help support current operational needs every year.
Michael Kaiser, president of the John F. Kennedy Center for the Performing Arts and a world-renowned arts administrator, cautions arts organizations that endowments often fail to relieve the pressure of raising annual funds. “I find that organizations with substantial endowments simply raise the level of their budgets to accommodate the investment income generated and don't routinely cut the level of contributed income they plan to raise,” he writes in a blog post. “This is not necessarily a bad thing; it means we are more dedicated to pursuing our missions than to creating a period of fiscal relaxation. But it also means that the notion that endowments reduce the need for private fundraising is faulty.”
In order to maintain the momentum of your chorus’s annual giving, before starting endowment fundraising, take some time to plan carefully. The plan has to be very clear from the start of your fundraising effort.
•Identify a visionary and ambitious purpose for the endowment fund or funds. Do you want an endowment to support commissions for regional composers, an education program for an elementary school, or a top-notch soloist each year?
•Put together a steering committee to lead the endowment effort. The committee might include board members alongside other generous donors who are willing to make an endowed gift themselves, speak on behalf of the endowment effort, manage strategies, and approach others to make gifts.
•Prepare a written case for endowment support that will inspire donors to invest in your future. The “ask” could be as simple as appealing to donors to consider making an endowed gift through their estate plans so that the earnings will replace their annual giving when they are gone.
•Prepare a list of donors who have demonstrated commitment to your chorus through their consistent giving over time. Remember that you will actually be making two asks: one for current needs through their vital annual giving and the other for future goals through endowment funds—not either/or.
The process requires strategy and hard work, but choruses who have planned for endowment fundraising and cultivated their donors can take inspiration from one of the world’s leading experts on investing in the future. As Warren Buffett says in his famous paraphrase of an ancient Chinese saying, “Someone's sitting in the shade today because someone planted a tree a long time ago."
Catherine Dehoney is the chief development officer at Chorus America. Her experience includes capital campaign management, development consulting for a variety of arts nonprofits, and fundraising positions at Gallaudet University, the League of American Orchestras, the Council for Advancement and Support of Education, and the Friends of the John F. Kennedy Center for the Performing Arts.
This article is adapted from The Voice, Summer 2013.