Summa Cum Philanthropy

Giving to universities can be tricky. Here are 11 strategies for making sure your gift is used as you wish

Let me tell you about a man I’ll call Giovanni. (I’ve changed all of the names of donors in this article.) Giovanni’s life has been a textbook example of the American dream. His parents were immigrants. They believed strongly in the power of education and sent him to a state university. Giovanni excelled there, earning a Ph.D. in economics in record time. After a brief teaching career, he was recruited by a large firm that wanted to better understand the economics of mineral extraction. Through his meteoric career, he became convinced of the importance of limited government and economic freedom to the creation of wealth and the promotion of human fulfillment.

Recognizing his many blessings, Giovanni decided to express his gratitude through philanthropy. He wasn’t Forbes 400 rich, but he was comfortable. In retirement, he returned to his alma mater to teach and mentor.

The university convinced him to make a major donation—as much as half of his net worth. He had made a number of smaller gifts before, during which time he developed a rapport with the school’s development officers. The university was all too happy to accept his contribution. It readily agreed to create a chair dedicated to studying private enterprise, limited government, and wealth creation. The chair was named in Giovanni’s honor.

And that was the last time the school honored his wishes. After years of doing nothing, the university used his gift to defray the costs of a faculty member who wrote little, and what he did write had nothing to do with the purpose of the chair. Instead, the professor spent most of his time on administrative work. When Giovanni asked the development office what was going on, he was assured that the school took donor intent “very seriously.” When he began to push, the development office referred the matter to the legal department. There, the only response was, “We’re in compliance.”

The end of Giovanni’s story has yet to be told, but the basic narrative has been repeated many times, with only small variations in the details. Many philanthropists will make their largest gift to a college or university. I suspect, however, that contributions to higher education cause more donor’s remorse than do any other kind of charitable giving.

Over the past 16 years, I have been involved in educational philanthropy involving programs and gifts amounting to many millions of dollars, including a number of disputes between donors and colleges and universities. On the basis of my experience, I offer 11 strategies for how to be a more effective donor to higher education.

1. Be Clear with Yourself.

You need to ask yourself: What do I want to do? Do I want to support teaching of certain ideas, or research in certain areas? Do I want to provide financial support to needy students? Enhance student life? Support the basketball team? Perhaps most importantly, you need to ask yourself: Is this gift intended to support the institution? Or is it intended to fund a certain kind of activity which happens to be housed at that institution?

I’ve been involved in major gifts related to (among others) cardiac research, Israel studies, conservative political thought, and actuarial studies. In each instance, the donor had a particular, personal interest in the subject matter. One question I ask is: If the university ceases to offer the program, do you want your gift to be reallocated within the university (from actuarial studies to, say, mathematics)? Or would you prefer that the program move to another institution that will continue it? In each of these instances, the donor wanted the money to be transferred, a condition we made operative in the grant agreement.

In other instances, the gift is really about supporting your alma mater. In those cases, it is important for the donor to avoid trying to micromanage the university. Instead, it is better to express your ideas and then work with the university to be sure that what you want is also a priority of the part of the university you will be supporting.

Universities are enormous places, with huge budgets and lots of (sometimes conflicting) programs. Knowing what you want is essential to finding your way through the maze of people and programs. The best way to clarify your thinking is to spend some time talking with knowledgeable people who understand higher education and care about what you’d like to do. Unfortunately, people on the fundraising side of the business, who want to monopolize this role, often discourage donors from doing so.

2. Make Sure Scholarships Go to Students.

Scholarship donations are increasingly high on a university’s fundraising list—for good reason. When a donor thinks about making a scholarship gift, he usually imagines it helping poor students. Not so fast. After all, scholarship money is functionally identical to general support for the university.

Scholarship funding is part of the overall budget, and universities “top up” scholarship funds with general revenue. Adding money to a donor-funded scholarship may simply take it away from somewhere else—if not immediately, then certainly over time. Your scholarship to a particular student may, in fact, come at the cost of other scholarship money to another student. Given the fungibility of money, it’s difficult to say.

The only way a donor can ensure that his scholarship funding goes directly to deserving students is to create an independent, free-standing voucher program. Under a voucher program, students can take the money to any institution. Such programs can be set up and run by a range of organizations, including (within guidelines) private foundations. Scholarship America, for example, is a nonprofit that manages scholarship programs for corporations, foundations, and individuals, providing $148 million in grants to students in 2010. It provides an effective way of outsourcing the work of managing scholarship programs, while maintaining the involvement of donors.

Donor-managed scholarship programs add value in other ways, too. One foundation I’ve worked with has spent years supporting journalism students. Another does the same for law students. In both cases, the foundations have learned the benefits of creating a community of like-minded scholars, gathered through the scholarship process. The foundations have annual alumni gatherings, and are now working to create incentives for those alumni to support the next generation of students, building on the original donation both programmatically and financially.

3. Know the Truth about Endowed Chairs.

Remember Giovanni, the donor who endowed the chair to study free enterprise? Something like 150 endowed chairs in private enterprise were created in the 1970s. Only a handful are still held by a scholar dedicated to studying free markets. In one case, the professor holding the chair reported misuse of funds to the Attorney General, who has refused six different applications by the college to change the donor’s intended purpose. In the meantime, the college has refused to reappoint the professor to the chair and his chosen successor has moved to another school.

Funding a chair or professorship is functionally equivalent to contributing to the general budget. The donor pays the line item for a particular professor, which then frees up his former salary to be used elsewhere. Worse, endowed chairs are typically given to professors at the end of their careers, when their most productive years are behind them. And the next professor? She may have an entirely different agenda.

Sometimes universities don’t even wait that long. I recently worked with a family that wanted to create a chair in Austrian economics. The university was happy to create a Friedrich A. Hayek Chair, named for the Nobel-winning economist and prominent member of the Austrian School. What the school didn’t tell the family was that it had no intention of allowing the Hayek Chair to be filled with someone specializing in Austrian economics. Once the school’s real agenda became clear, the family moved on—taking the gift with them.

If endowed chairs are such a bad investment, why are they so popular? My theory is that it’s the price. An endowed chair usually costs a few million dollars. That hits a sweet spot for a relatively large number of wealthy alumni. To create a school or fund a new building is beyond the reach of all but the biggest philanthropists. But an endowed chair is set at an almost perfect price point for a one-time gift from, say, a successful orthodontist or attorney.

Moreover, development offices have lots of ways to pitch the idea to anyone with a million or so charitable dollars, even if the money won’t fully fund the chair. One way is to accept the funding, but not fill the position until additional resources are generated. (UCLA recently acknowledged having 86 “endowed chairs” with no professor occupying them.) Another is to wait for state matching funds, often promised in better times, but now with a small likelihood of ever being funded. It will likely be decades before many of these positions are filled.

It is much more cost-effective for a donor to provide discretionary funds to a professor whose work you want to support. The cost is a fraction of a chair, and the professor actually sees more benefit.

4. Shop Your Idea around at Other Institutions.

Large institutions usually hate competition, and universities are no exception. A good way to encourage a university to maximize adherence to your vision is to make it compete for your support.

This can be done in a variety of ways. For instance, the Smith family runs an annual request for proposals for programs in western civilization, Great Books, free markets, and the history of the American founding. Each year, it awards $400,000 in grants. In 2012, it has selected 17 proposals from about 60 invited applicants. Applicants range from community colleges to elite state research universities and Ivy League schools. While $25,000 may not seem like much money, if given as discretionary funds it can go a long way. This foundation is exposing thousands of students to people and ideas that they would otherwise never hear. It would not be difficult to place $5 to $10 million of such grants annually, were funds available.

Competition can also be revealing. Several years ago, a donor named Jim came to me with a request to create a program promoting the study of liberty at the alma mater of one of his three children. The school he wanted to fund refused to provide details on what it would do with the $2.1 million. The family responded by inviting faculty at other schools the family attended to submit proposals. The original school refused to participate, speaking volumes about its enthusiasm for Jim’s project.

5. Remember: A Fundraiser Is Paid to Make a Sale.

Think of university fundraisers as the used-car salesmen of the philanthropy world. They have a lot full of cars they’re trying to sell. You’re looking for the perfect model, but they are just as happy selling you this car as that one. Most importantly, they want to make sure you don’t comparison shop. A Chevy dealer won’t encourage you to browse at the Ford lot across the street. We all know salesmen who adapt their preferences to their customers. Universities are no exceptions. A school with few or no Republican professors always seems to have a major gift officer with elephant-embossed boxer shorts. Always keep in mind that the development office does not enact any programs. You need to know the character of the person managing the program, not the one handling the check.

6. Be Your Own Boss.

Donors should also realize that once they’re in a university’s fundraising system, they are “owned” by a certain part of the development office. Unless you steer the ship, the ship will steer you—and not necessarily present you with opportunities you might prefer in other parts of the university.

Here’s an example. A friend of mine teaches political science at a large state university. He invited a prominent outside speaker to campus as part of his lecture program. The speaker attracted a large, enthusiastic audience. During the Q&A, a man got up and said, “I think this event is wonderful! I want to support what you’re doing. How come I haven’t heard about this program before?” When the event ended, but before the professor could track the man down, a development officer approached the professor.

“Stay away from Bill,” the development officer said. “He gives to the business school, and they already have dibs on him for a major gift.”

Bill is not alone: lots of philanthropists are being managed without really knowing it. Most universities have strict rules about contacts between faculty members and donors. Professors need to adhere to it. But donors do not. Don’t let your “handler” tell you otherwise.

7. Partner with a Faculty Member Early in the Process.

The development office cannot effectively commit to fulfilling the terms of your grant unless there are professors willing to implement it.

Universities are big, multifaceted institutions that provide entertainment, housing, concessions, social services, and counseling. Only a minority of the budget is related to education. Donors need to think carefully about which of these sectors they want their money to support. At four-year public universities, of $1 given to the general budget, only about 25¢ goes to instruction. At private schools it’s about 32¢.

If you want to improve education, the only way to ensure your gift will provide the maximum instructional benefit is to work directly with the faculty members who will be responsible for implementing the program. As the old saying goes: “First, find a faculty friend.” 

Do not take it for granted that professors will implement a program negotiated by provosts and deans. In the classroom—where the actual teaching takes place—faculty members are notoriously good at adhering to the letter, but not the spirit, of the terms of a gift. It is much better to get to know a faculty member first, to become confident that she understands and shares your vision, and only then to propose starting a program.

8. Understand the Downsides of Endowment Giving.

Universities and administrators are graded by the size of their endowment. But for a donor interested in programs, contributing to an endowment is an expensive and perilous proposition.

Expensive, because to fund a modest program with a budget, say, of $50,000, a donor would have to contribute $1.25 million or more in endowment funds. (From which, the university is likely to deduct a minimum of $12,500 in fees annually, beyond investment fees.) For every $5 going to your program, $1.25 is going into the general fund.

Perilous, because the corpus of the gift grows in real terms over time. A gift given today will be worth much more 50 years from now. If the university then decides to do something else with the endowment, your gift may go to something you don’t want—or even strongly oppose.

A good example occurred a few years ago at St. Olaf College. St. Olaf was home to WCAL, the first listener-supported radio station in the country. Over the years, WCAL built a listenership of over 80,000 people, impressive facilities, and a sizable endowment.

In 2004, St. Olaf decided to sell WCAL to Minnesota Public Radio. Once the radio station had been sold, it petitioned for a release of restrictions on the proceeds of over $10 million, the endowment, and other assets connected to the station. A five-year legal battle followed as donors to WCAL unsuccessfully sued to have the sale invalidated.

When donor-funded programs cease to be understood as central to the core institutional mission of the place that holds the assets, those assets become an attractive target. Moreover, you cannot rely on an Attorney General to fulfill his duty to protect your intent. While the judge in the St. Olaf case refused to invalidate the sale, he described as “deplorable” the failure of the Attorney General to intervene when it might have made a difference.

9. When Making a Multi-year Gift, Consider an Escrow Account.

When donors want to fund programs over multiple years, they would do well to consider making a binding commitment to pay but then setting up the equivalent of an escrow account at another institution. Donor advised funds (DAFs), community foundations, and other similar organizations offer ways for donors without private foundations to set aside funds and get the benefits of an immediate tax deduction while at the same time preserving the accountability mechanisms created by annual payments.

A successful manufacturer named Tom did something like this. Tom agreed to provide five years of funding for a professor to dedicate his summers to developing a major new center. In return, the university would hire a junior faculty member to expand the center’s faculty. Rather than give the university five years’ worth of funding upfront, Tom made a gift to a DAF, which in turn contracted with the university. The DAF insisted that Tom contribute the full five years up-front, and the DAF makes the university submit satisfactory reports before it makes the annual payment.

There are several advantages to such a system. Fees are often lower than at a university foundation, for instance. A donor also may have more control over how the money is invested. But most importantly, if something goes wrong, the donor will not have to ask for the funds to be returned. It is extremely difficult to get a grant back once it’s in a university’s accounts. And legal issues, including standing to sue, are only part of the problem. Psychologically, it can be painful to ask one’s alma mater to return a gift, and the negative publicity for the donor and the university often makes donors simply walk away. If the funds are held elsewhere, though, it’s a different story.

10. Draft Your Own Grant Agreement.

Most universities have standard documents to codify grant agreements with donors. Those documents are written by the school’s attorneys, and are crafted to protect the rights of the university, not the donor.

I recently reviewed a draft grant agreement from a well-known university. It had three parts: The name of the program to be funded, a binding commitment to make grant payments on a specific schedule (with due dates for each payment clearly indicated), and a statement that should the university not be able to continue the program, it could change it without any obligation to have such changes reviewed. The whole document fit on one page, with the payment schedule taking up half the space and the signatures most of the rest.

Most standard grant agreement forms are nothing more than pledge agreements. The donor makes a binding commitment to pay, and the university agrees to receive the money. The parts that stipulate where the money will go are vague, and accountability is thin.

Perhaps the most important element in your grant agreement is an assertion of your cy pres rights. Cy pres is the common law doctrine that requires changes to a trust be made “as close as possible” to the original intent of the trust creator. The procedure for modifying a trust often applies to agreements between donors and universities and requires a court to determine whether the university is acting in good faith.

Universities obviously prefer not to have to ask permission to change grant agreements. For that reason, their grant agreements often include language eliminating a donor’s rights to a hearing. You must not waive this right. To be sure, the language in their grant agreements is often tricky; it subtly references the language of cy pres by stating that should it become “illegal, impossible, impractical, or wasteful” to continue as is, the university can change things on its own.

I strike this language every time I see it. I then substitute my own wording, emphasizing donor rights. To date, no university has ever insisted on restoring the original language. It seems that universities recognize that they have no moral right to take advantage of donor generosity (and inexperience).

11. Now Relax.

Charitable giving should be fun. It’s true that things can go wrong. But with a little planning, you’ll go a long way toward assuring that things will turn out the way you hope. Give your giving a little forethought, and the joy you experience when you hand over the check will be exceeded by the greater and longer-lasting satisfaction of watching your investment pay ever-increasing annual dividends.

Frederic J. Fransen is the founder and CEO of Donor Advising, Research, & Educational Services.

 

What Does a Good Grant Agreement Look Like?

Apart from standard contract clauses, a good grant agreement should include, at a minimum, the following:

  • A detailed program proposal. Rather than a brief purpose statement, the donor should solicit a detailed program proposal—with a budget. The proposal should be written by the faculty member (or members) who will use the grant. This program proposal can then be formally appended to the grant agreement.
  • Provision for an advisory committee. If the grant is to be spent over multiple years, it may be wise to create an advisory structure to help guide the ongoing development of the program, including additional fundraising.
  • A statement about overhead. Universities charge the federal government, on average, about 50 percent for overhead. Places like Johns Hopkins have sometimes charged more than 70 percent. While private donations aren’t taxed so heavily, universities often ask for 20 percent or more in overhead expenses. Overhead charges are highly negotiable, however, particularly on small grants. While a modest percentage for overhead—up to 10 percent, say—is reasonable, donors can often demand overhead charges be waived entirely. Doing so assures that the supported program receives the maximum available funding.
  • A gift-over provision. When you commit to a long-term grant to a university, it is worth considering listing an alternative beneficiary. The legitimacy of a provision to “gift over” to a third party was successfully defended in UCLA v. L.B. Research (2002). Gift-over clauses are an imperfect but effective mechanism. By spelling out what will happen if expectations are not met, the donor makes his grant a more difficult target for administrators—frequently faced with difficult budget decisions—who prowl about grant agreements, looking for weakly worded contracts.
  • A statement on prohibited uses. Include a provision excluding all non-specified uses of the funds. Recently, a number of schools have increased fees and reduced payout from their endowment accounts. Last summer, for instance, Dartmouth College raised fees from 14.3 percent to 19.1 percent. The University of Illinois and Georgetown University have similarly raised the amount they take.