Endowment Building and Management
Definition
An endowment is a permanent asset of an organization that is invested to earn income. The money to build the endowment can come from many sources. Many times, an individual donor will contribute money to their favorite cause in order to sustain the efforts of specific programs and organizations. Monies for the endowment can also come from businesses, government agencies, foundations, or other nonprofit organizations. While money is mentioned as a major portion of an endowment, property and securities are also important to this savings.
Managing endowments can be quite tricky and usually depends on how conservative the organization. The concept behind investing or managing an endowment fund is similar to an individual's retirement fund. There is the option of taking a risk on large caps, small caps, equity accounts, real estate, bonds and more. With a more traditional mix of stocks and bonds, the assets are more liquid. By diversifying into hedge funds, private equity, real estate, or venture capital, organizations put themselves at a greater risk and have less liquidity (Commonfund 2002).
Liquidity of funds is very important for some organizations. If they must dip into their endowment for operating expenditures, they need to have the money available quickly. Most large organizations resist such temptation in order to maintain an endowment in perpetuity.
The majority of endowments are created in order to maintain perpetuity. This means that organizations limit their payouts in order to have a continual, permanent stream of money. The Tax Reform Act of 1969 mandated a six percent, and later a six and a half percent payout by private foundations. However, with strong lobbying efforts, the foundations were able to get the rate down to five percent (Dowie 2001). The payout rate applies to those foundations that fall under the 509(a) tax code. Community foundations and other charitable organizations are designated as 501(c)(3) and have no rate at which they have to spend their assets, as long as the money goes for those purposes they identified when incorporating.
Historic Roots
The beginning of endowments in the western civilization can be traced back to Roman times when Plato left his academy and surrounding farmland to his nephew for the use of his followers (Orosz 2000). While this was the start of a new idea, it later progressed to a more modern view of foundations and endowments.
Benjamin Franklin was the first American to initiate a foundation concept in the United States. He left a will of $4,444.49 equivalent dollars per year for 200 years to Boston and Philadelphia. Although the money was originally earmarked for "young married artificers of good character," later the funds were to be used for generally useful purposes (Ibid.).
The foundations of America had yet one more change in structure to become what they are today. Although Franklin's concept seemed fairly modern, the interest from his endowment was not redistributed to the community in the form of grants (Ibid.). This is where the great philanthropists, John D. Rockefeller and Andrew Carnegie, come into play.
Andrew Carnegie was a major influence in philanthropy and one of the first of the millionaires to state that the "rich have a moral obligation to give away their fortunes." While Carnegie donated much of his money prior to becoming exceptionally wealthy, after he sold his corporation to J.P. Morgan, seven philanthropic and educational organizations were created by him (Carnegie Corporation 2002). His major initiatives were not modeled after traditional charities, providing free food, clothing, or need-based services for the poor. His initiatives were aimed at providing educational and health services for those citizens who would help better themselves -- assistance was mainly given to universities, libraries, hospitals, public parks, and cultural centers (Orosz 2000).
John D. Rockefeller was another pioneer of the modern version of foundations. While he started to donate money as a young man to his church and, later, other denominations, his first major endowment went to help establish the University of Chicago. Soon after, Rockefeller hired Rev. Frederick T. Gates to manage his philanthropic activities. With Gates' help he established a series of institutions that are important in the history of American philanthropy, science, and medicine and public health (The Rockefeller University 2002).
Importance
Endowment building and management are very important for nonprofits and foundations. Without endowments, many organizations would be unable to maintain their programs over a long period of time. Also, by managing them correctly, organizations will have the flexibility they need to survive during times of economic downturn. While not all endowments are created in perpetuity, they are created in order to last for a number of years.
Endowments allow nonprofit organizations to have options for financial management. The funds can be used for programming or for (operational) emergencies when needed. Funds from an endowment are not subject to involuntary bankruptcy and are therefore protected during hard economic times (Bowman 2002). Organizations are allowed to gather debt and maintain the endowment. This practice could create profit making if the interest on the endowment is greater than that on the debt.
Ties to the Philanthropic Sector
Endowment funds go hand-in-hand with philanthropy. Such funds provide the resources necessary to maintain the sector and its important programs. Most large nonprofits and foundations rely on endowments for key programming now and in the future.
Educational institutes are a great example of endowments at work. Grand Valley State University's Development office, for example, plays a major role in building the endowment for the university. They must build and maintain the endowment to sustain the University's "growth and strength, to provide scholarships, and to provide the technological and other educational resources needed in support of our region's economic vitality" (Grand Valley State 2002).
Key Related Ideas
Foundations are the concepts most closely linked with endowments. Most of them have endowments of their own in order to provide funds through grants to other nonprofit organizations or individuals. Also, the funds they provide are sometimes used to create endowments for the receiving organization. Concepts related to the building of these endowments within foundations are donor relationships and donor cultivation (building relationships with potential donors) and fundraising (a process used to raise money to support the institution).
While talking about foundations, it is important to differentiate between the different types. Most private foundations are endowed, community foundations usually have multiple endowments as established by their donors. Corporate foundations are rarely endowed and are usually just a pass through for for-profit entities. Finally, operating foundations may be endowed but most of the money is spent on internal programming.
Important People Related to the Topic
Andrew Carnegie and John D. Rockefeller made major contributions to philanthropy and the modern idea of endowments and foundations. Carnegie made his fortune in the steel industry. He is known best for the establishment of thousands of free public libraries throughout the United States and the world, and for writing The Gospel of Wealth (1889) in which he stated it was the duty of the wealthy to give away what they had amassed for the betterment of society. Rockefeller amassed enormous wealth in the oil industry and established the world-renowned Rockefeller Foundation.
Rockefeller looked for an advisor who could donate his surplus in the best manner. He found one in Frederick Gates, a young Baptist minister with a sharp mind and a colorful personality. Gates was quick to understand Rockefeller's predicament: "Your fortune is rolling up, rolling up like an avalanche!" he told him. "You must keep up with it! You must distribute it faster than it grows! If you do not, it will crush you and your children and your children's children" (PBS 2002).
While Gates played an important role in prioritizing and distributing the money, he also confirmed a valid point for endowments and foundations. He indicated that money should be distributed back to the community and other necessary causes instead of for self-purposes. Only a small number of millionaires felt that way in the past, and some still do not in the twenty-first century.
Related Nonprofit Organizations
Some of the first modern endowed organizations were those created by Carnegie and Rockefeller. Carnegie endowed many institutions including:
- Carnegie Corporation of New York's mission is to promote "the advancement and diffusion of knowledge and understanding" (https://www.carnegie.org/).
- Carnegie Endowment for International Peace, founded in 1910, strives for "advancing cooperation among nations and promoting active international engagement by the United States" (https://carnegieendowment.org/).
Bibliography and Internet Sources
Bowman, Woods. "The Uniqueness of Nonprofit Finance and the Decision to Borrow," Nonprofit Management and Leadership 12 (2002): 3, 293-311.
Carnegie Corporation. About Carnegie Corporation, Biography. https://www.carnegie.org/sub/about/biography.html/.
Commonfund. Homepage. [cited 14 September 2002]. Available from http://www.commonfund.org
Dowie, Mark. American Foundations: An Investigative History. Cambridge, MA: The MIT Press, 2001. ISBN: 0-262-04189-8.
Orosz, Joel J. The Insiders Guide to Grantmaking. San Francisco: Jossey-Bass Publishers, 2000. ISBN: 0-7879-5238-9.
PBS (Public Broadcasting Service). People and Events: Frederick T. Gates, 1853-1929. https://www.pbs.org/wgbh/amex/rockefellers/peopleevents/p_gates.html.
The Rockefeller University. John D. Rockefeller, 1839-1937. http://archive.rockefeller.edu/bio/jdrsr.php.
University of Chicago. A Brief History of the University of Chicago. http://www-news.uchicago.edu/resources/brief-history.html.
This paper was developed by a student taking a Philanthropic Studies course taught at the Center on Philanthropy at Indiana University. It is offered by Learning to Give and the Center on Philanthropy at Indiana University.