You can’t blame them for trying. From a certain perspective, one might argue that it would be irresponsible for them not to try. But that doesn’t mean you have to fall for it. If ever there was a problem emblematic of prosperous times it is this: What should donors do when confronted with grant requests by charities that have more money than the donor?
Buoyed by generous donors and an even more generous stock market, many grantseeking organizations now boast endowments larger than all but the largest foundations. And this presents a peculiar, if increasingly common, dilemma to donors. Is it “charitable” to fund programs at organizations that could just as easily fund these programs themselves?
Endowment funds at big nonprofits—universities, hospitals, cultural institutions, and even some human service organizations—have skyrocketed. Harvard University recently concluded the largest campaign drive in fundraising history, vacuuming in over $2.6 billion in contributions. That sounds like a lot of money—until one realizes that it represents less than 17 percent of Harvard’s $15 billion pile.
But even as the wolf of need retreats from the door of many charities, the inertia of fundraising keeps building. In fact, judging from the gold rush mentality besetting the market for development officers (help wanted ads in the Chronicle of Philanthropy are up by more than 100 percent in just the past four years), the pace of big-time fundraising by big-time charities is picking up.
How is it that those large nonprofits that are swimming in money are so successful at garnering more money?
“Because they have eight floors of researchers,” is the response of Bonny O’Neill, president of O’Neill and Associates, a high-powered Atlanta public relations and fundraising firm. “The reason that the highly endowed groups keep getting your money is that they already have money. They can afford the best fund raisers and professional development staff.”
From these researchers comes a stream of creative fundraising concepts. Harvard, for example, was one of the principal investors in House of Blues, a chain of live music venues and blues music-themed restaurants that “blend live music with food, retail, and art into an exciting, interactive entertainment adventure.” Taking some chances with their investments can redound beneficially to the institution’s portfolio. But as a philanthropic donor, do you want your money going to capitalize the House of Blues?
The Dribble Factor
The issue of endowment is a traditional fault line of philanthropy. Nonprofits want endowment grants, but foundations want to avoid them.
Why have donors historically avoided giving to endowment? The main reason is that, simply put, donors believe that they can manage the money better than the nonprofit can. And why shouldn’t they? Making periodic donations to a grantee allows donors to respond to the changing needs of the group.
Ken Ristine, program officer at the Ben B. Cheney Foundation in Tacoma, Washington, observes that “Foundations mostly see themselves in the business of managing endowments that will respond to needs as they change over time. After all, if the foundation’s benefactor had wanted to endow the local family services agency, he or she could have done so in their will. That they didn’t speaks to the desire to see that the funds they left will respond to changing needs, whether through a foundation or whether through a fund at a community foundation.”
Ristine goes on to point out that “The fear of foundations is that endowments assure continuation of the present work and activities, and isolate organizations from changes. True, one can argue that freeing staff from having to do fundraising might make an organization more efficient, but over the span of decades (which after all is the functional life of an endowment), is there not a greater cost paid because an organization is isolated from having to respond to what donors feel is important?”
There’s also a healthy skepticism on the part of many donors who want their gift to have immediate impact—not to dribble out in 5 percent (or lower) annual doses.
While endowments can build an organization’s capacity to help constituents in the future, most donors are interested in seeing their grantees perform all those good things they do now.
And then there’s the problem of fungibility. However endowment funds are restricted to a certain donor purpose, there are usually clever ways to get around it. For instance, if an endowment pool is strictly designated for the support of, say, the Classics Department, but the university wants to use the money on something else, they can simply cut the general operating funds that they had planned to spend in Classics, and let the “Classics endowment” pick up the slack. The classics-loving donor never gets a whiff of what he or she is really subsidizing.
But there is mounting anecdotal evidence that donors at all levels are becoming more comfortable with the idea of giving to endowment. Last year, for instance, Sotheby’s chairman A. Alfred Taubman donated $30 million to the University of Michigan’s College for Architecture and Urban Planning for unrestricted endowment. A Minnesota man recently left $75 million specifically to the endowment funds of three local nonprofits. And, demonstrating that endowment giving is not just for high-profile supporters of an organization, the Milwaukee Symphony Orchestra’s endowment received a $10 million infusion—equal to more than one third of its total endowment at the time—from an anonymous donor.
Moreover, some states have enacted legislation encouraging their residents to pump up local nonprofits’ endowments. Both Michigan and Montana are now offering special tax credits to individuals and corporations who make certain types of endowment gifts to local charities.
Sandra Ambrozy, senior program officer at the Kresge Foundation, explains that “endowment money is tough to raise, but necessary.” She explains that as grantors and grantees are becoming more sophisticated and professional, “more and more organizations are including endowment as part of their proposals, which lets donors know that this is very much a need. Organizations are getting more sophisticated at fundraising and planning, folding their needs into a more unified theme—capital needs, financial assets, program merging together, like a university-style campaign.”
Endowment giving is especially appropriate for groups that have close ties between giver and recipient. Harry Cerino, director of charities and foundations at GivingCapital says, “A lot of smaller, family-oriented foundations might be more inclined to give to endowment because they’re donor-driven and might be more directly or personally involved with a grantee.”
John P. Mulroney, a trustee of the Philadelphia-based William Penn Foundation, believes that “People giving to endowment come out of two categories. One who thinks that things are going fine now for this group and I want to ensure that they continue to in the future. The other group is someone who says, right now, in my lifetime, I want to make a difference for this particular group,” to get them to the next level.
Mulroney recognizes what inspires people to give to groups that already have large bankrolls—security. “People think the single most laughable situation imaginable is to write a check to an organization that is about to go under. Everyone thinks that their friends will think they’re a fool, they think that other people will call them a fool. That’s why they want to give to groups that they feel secure about.”
Avoidance of embarrassment and the desire to be associated with a winner are powerful forces in philanthropy. Bennett Weiner, vice president and director of Philanthropic Advisory Service, the national watchdog program of the Council of Better Business Bureaus in Arlington, Virginia, cautions donors that when approached by a highly endowed nonprofit, they should “Use the ‘front page of the newspaper test’—if tomorrow’s paper had a front page story about how much money a group you made a grant to had in reserve, would you feel comfortable with your funding of them?”
Big Is Beautiful
Make no mistake: some types of nonprofits really need large endowments relative to the size of their operating budgets, no matter how “prosperous” this may make them look to potential donors. Hospitals and universities are subject to enormous capital costs, and having a significant endowment is critical to making future plans. Both are also subject to enormous unexpected liabilities, and other unplanned-for political or legal costs.
Georgetown University has struggled for years to amass an endowment on a par with its academic reputation—only to see it threatened by the gusher of red ink that its hospital has been bleeding in recent years. The University of Pennsylvania, flush with donations to its various schools (especially Wharton) has recently had to confront stupefying losses run up by its once-healthy medical facility.
Endowment money is important to any organization because it diversifies the group’s funding. It gives an organization “room to move” financially. Robert Driver, general director of the Opera Company of Philadelphia, insists that endowment support is critical. “It lends stability, and stability gives you the ability to make decisions with confidence,” he said.
Moreover, financial rating services like Moody’s Investors Service look at endowment health when rating an organization’s credit. That’s especially important for any organization looking to build, take on debt, or engage in real world financial transactions.
Consider the fundraising math applicable to one indisputably good organization, Shriners Hospitals for Children. According to an analysis by the Washington, D.C.-based Capital Research Center, the Shriners Hospitals “has the largest endowment of any U.S. charity, valued at $6.8 billion in 1997. That year, 60 percent of its income came from this source.
Another 16 percent came from individual Shriners, fundraising events, bequests, and foundations and the remaining 24 percent from such sources as real estate holdings. In 1998, the Shriners Hospitals spent $457 million, including $67 million on capital improvements and $21 million on research.”
Assuming a modest 5 percent return on endowment, they could operate at that spending rate for 30 years without ever raising another penny. Assuming an investment return rate of 7 percent, they could meet their current operating costs forever.
And yet next year, thousands of well-intentioned American donors will write checks to Shriners. Last year they raised another quarter billion dollars in private support.
And then there’s Harvard. Everybody talks about the great endowment returns achieved by the nonprofit behemoth, but that’s only part of the story. Last year Harvard raised over $450 million in donations. The truly astonishing statistic here though is that this figure is almost 30 percent higher than the total take raked in by the number two school on the list, Cornell.
According to the Chronicle of Philanthropy, in 1998 Harvard brought in $3.6 billion against $1.6 billion in expenses. Everybody loves a winner. Hence, Harvard’s appeal to donors—the school no donor can say no to.
John Mulroney recognizes that the conundrum of funding the well-funded is, at least partially, process-driven. “What do you do when a Harvard comes along? You’re under pressure to fund quality programs—and when a quality program comes along and it’s in your program area it’s hard to say no.” Even when compared to similar proposals from less well-off institutions? “The average places need to make quality proposals—and maybe they can’t do this as well as the Harvards and Whartons. People fund proposals that they find the most attractive.”
But how much is enough? As Warren Buffet is reputed to have said when asked what was the right amount of money to leave to one’s children: “Enough to let them do what they want—but not enough that they don’t have to do anything.”
Many donors emphasize that the lens for deciding on these grants to wealthy grant recipients should be a realistic, mutually eyes-open approach.
Cerino admits that “It is something of a paradox—you’re penalized for being a success.” Having a large endowment does make it “harder to make a compelling case to a foundation. Most foundations are looking for an expression of need. But I think there’s a balance. I wouldn’t subscribe to the notion that no foundation should fund a well-endowed institution. But a well-endowed institution has to make the case as to why this particular proposal should be funded.”
What is an endowment fund for if not to pay for crucial elements of the organization? For emergencies? OK, fair enough—so is Harvard expecting a $15 billion “emergency”? Is Shriners expecting a $6 billion “emergency”?
It’s well and good for an organization to be raising rainy day money when the economic sun is shining as bright as it is now, but when is enough? As one donor complains, “Traditionally, endowment was ‘supposed to be’ two or three years of operating budget. Now a lot of these organizations have five or ten years of cushion. Is this healthy?”
The Harvards and Cornells of the world will tell you that “the poor will always be with you.” But isn’t helping the poor what private philanthropy is for?
Tom Riley is associate editor of Philanthropy.