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Column 16

The Daily Camera

Enid Ablowitz

Endowments:  Gifts that keep on Giving

Donors are used to being asked for annual gifts to support the operations of numerous charities and causes.  But as non-profit organizations become more sophisticated and think about their own sustainability and longevity, they also think about creating a base of funding that will be more permanent.  They begin to form endowments.

Generically speaking, an endowment is a fund that is set aside and invested, earns a return, and provides income.  That income is a revenue stream for the organization.   But like most things, it isn’t that simple. 

If the endowment is a pure endowment, the amount contributed can never be spent.  There is another form of endowment, the quasi endowment that does allow the spending of principal.  The governing document determines the restrictions. 

Taking this one step further, not all the income is automatically available to be distributed.  Again, the governing document, or the spending policy of the organization, determines how much of the income can be used.

One of the common principles of a spending policy is to provide a hedge against inflation.  As a result, there is generally a cap on spending, regardless of the investment earnings in that year. 

Suppose the ABC charity maintains an endowment fund that earns 9% in a given year.  The spending policy may be 5%.  What happens to the remaining earnings?  They are reinvested into the endowment fund.  The following year, when the earnings are also 9%, it is a percentage of a higher number, thus the “buying power” is preserved.

As we have seen, earnings may not always exceed inflation.  Many charities base the distributions on average earnings over a period of several years, in order to mitigate possible downturns.

Sometimes a charity creates an endowment fund as the result of a donor’s initiative.  If the donor wants to support a particular program, he or she can make a gift to create an endowment for a special purpose.  In this case, the donor may add language to the governing document that restricts the use of the distribution. 

Small and young organizations struggle with creating policies that encourage the establishment of endowments. There are many issues to consider:

Board must have clear, defining policies regarding their acceptance of and management of endowments, including determining the spending policy.  A critical decision is whether or not to “outsource” the fiduciary function to professionals (such as a community foundation or commercial endowment manager.)  In any case, donors should be fully cognizant of the investment policies and spending policies associated with their gift.

Documentation is crucial as to the donor’s intent and the organization’s fiscal responsibility.  While funds may be commingled for investment purposes, it is very important to separately account for each endowment fund.  While many donors may join together to create and support a general endowment fund, they have the right to know how decisions are made, the investment return, the distribution available, and how the distribution will be spent.

For stand-alone endowments with a special purpose, there is often a minimum requirement ($10,000 or more).  For those donors who wish to create endowments but find making a single payment difficult, making pledges can build an endowment fund over time.

Why are endowments so powerful?  While there is no guarantee that investment returns will significantly outpace inflation, a pure endowment is in “perpetuity,” which means forever. Creating an endowment is a surefire way to assure you can keep on giving.  Some even say, it’s a taste of immortality.

Send your questions about making charitable gifts to Enid Ablowitz, Features, Daily Camera, 1048 Pearl St., Boulder, 80302 or e-mail???/Fax????

Ablowitz, the Asst. Dean for Advancement at CU’s College of Engineering is a Certified Fund Raising Executive and has been working with donors for over a decade.  She is writing a book called Making Money Matter: 8 Steps to Thoughtful Giving.

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