critical questions about endowmeent...

CRITICAL QUESTIONS ABOUT ENDOWMENT BUILDING

William C. Austin, M.A., ACFRE, CAP®AUSTIN PHILANTHROPICS, LLC

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QUESTION #1: CAN ONLY LARGER AND OLDER ORGANIZATIONS BE SUCCESSFUL IN

ENDOWMENT BUILDING?

In 2014, 86,726 US foundations held $865.2 billion in assets, while 3,012 Massachusetts foundations held $23.6 billion

Gates Foundation at $44.3 billion ...Harvard University at $35.7 billion

Yale University posted a 3.4% investment gain, while Harvard lost 10.2% loss in equity investments

Largest in category: Metropolitan Museum at $2.7 billion, The Kamehameha Schools at $11 billion, Kaiser Foundation Hospitals at $20.8 billion

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SMALLER ORGANIZATIONS WITH SIGNIFICANT ENDOWMENTS

Lake Erie Arboretum in Eric, PA

The St. Labre Indian School in Ashland, MT

Grinnell College

The Denver Campus for Jewish Education

The Oregon Food Bank

Hospice of Southwest Florida

Yellow Springs (OH) Senior Center

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THE BENEFITS OF ENDOWMENT

For your organization Encourages outright gifts Enhances organizational image Greater flexibility for management Program expansion Reduces pressure on annual fund Creates a pipeline for future gifts

For your donors: Perpetuates life-time values Promotes ultimate gifts May endow annual gifts Allows leadership example for

family/community Permits incremental funding Provides life income without management

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A PRESSING NEED FOR ENDOWMENT BUILDING,ACCORDING TO BOSTON FOUNDATION RESEARCHERS

42% of organizations reported break-even budgets or losses

Median real revenue growth of 1.3%, coupled with unsustainable real expense growth of 2.1%

By 2007, most small and medium not-for- profits in the “current services trap”

Neglected wise long-term financial and infrastructure investments by not treating economic gains as windfalls

2008 “Call to Action recommended for restructuring and consolidation, repositioning, and reinvention and investment = capacity building

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UNIFORM MANAGEMENT OF INSTITUTIONAL FUNDS ACT (UMIFA, 1972) DEFINES ENDOWMENT

“An institutional fund, or any part thereof, not wholly expendable on a current basis under the terms of the donor's gift agreement.”

The Financial Accounting Standards Board (FASB) identifies three types of endowments:

True Endowment (Permanent Endowment)

Quasi-Endowment (Funds Functioning as Endowment—FFE)

Term Endowment (FASB defines as a temporarily restricted net asset)

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QUESTION #2: HOW DOES THE LEADERSHIP OF AN ORGANIZATION DETERMINE ITS READINESS FOR

ENDOWMENT BUILDING?

An endowment assessment both educates and measures the interests of the constituency

Personal interviews with board members, staff members, community leaders and major donor

Focus groups to elicit and gather attitudes and reactions

Review of print and electronic materials

Bench-marking with comparable organizations

A written assessment will report crucial findings

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THE REQUISITE FACTORSOF ORGANIZATAL STRENGTH AND READINESS

Heightened professional commitment of board/staff Trustees' priority gifts, leadership outreach, and

diligent oversight of policy and practice Staff eagerness for enhanced training, for the

professional input of counsel, and for the reward of new challenges

The organization is respected for its worthy mission, strong program growth, careful planning and resource management, as expressed in a powerful case for support A diverse and successful development program has

been established based on a solid marketing plan Detailed endowment policies from gift acceptance to

endowment spending are in place

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OVERCOMING THE “EXPERTISE GAP”

Identifying and nurturing the endowment interest of key individuals in your constituency

More than 80% of endowment gifts are bequests

Help prospects find the estate planning expertise that they need

An experienced gift planning consultant

Many prospects will not learn of the financial and security benefits of planned gifts from their trusted advisors

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QUESTION #3: HOW DO WE DEVELOP AN EFFECTIVE CASE FOR SUPPORT AND DEVELOPMENT AN

ACTION PLAN?

A board resolution, integrating the endowment into the organization's strategic plan

Includes case for support, measurable goals, strategies and tactics to reach these goals, the timeframe, and staff and budget requirements

A well-integrated endowment plan will increase rather than decrease current operating revenue

Endowment gifts are from wealth rather than income

Planned gifts can enhance income and security The bequest process builds greater allegiance Endowment campaign raises awareness and

confidence in the organization

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“ENDOWMENT CHAMPIONS” ARE THE KEY FACTOR

Highly regarded trustees and volunteers

Counsel and senior staff are the catalysts

The very board members and past members, who are the leading proponents of endowment

Endowment co-chairs, who can complement each other

Co-chairs will personally recruit Champions identified in the assessment

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SALIENT FEATURES OF A POWERFUL CASEFOR ENDOWMENT SUPORT

Defines organization's dreams and elicits donors' dreams

Assures prospective donors of the long-term value and viability of the organization

Convinces the board and staff leadership that endowment is essential and requires dedicated resources

Presents types of endowments, gift options, the campaign timeline, methods of donor recognition

Focuses on past accomplishments and the philanthropic impact that donors can have

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A COMPLETE DEVELOPMENT ACTON PLAN INCLUDES

Methods of raising gifts, donor categories and giving options for donors

“Endowment Champions,” committee and program structure

Endowment case for support

Recognition and stewardship of donors

Marketing and managing the endowment

Methods of evaluation

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QUESTION #4: WHAT ARE THE NECESSARY MANAGEMENT PRACTICES NECESSARY FOR

A SUCCESSFUL ENDOWMENT PROGRAM?

Tax-exempt status requires the board of directors publicly accountable for all resources

Must assist donors to become “informed consumers”

Investment policy must specify endowment goals and required investment strategies

Endowment must be used to provide stable and perpetual program support

Overly aggressive spending policies can threaten programs

Hoarding endowment funds discourages donors

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ENDOWMENT FUND DOCUMENTATION

Gift Agreements

Implied agreement with written materials A written agreement specifies the donor's intent

and the organization's commitment

The Uniform Management of Institutional Funds Act (UMIFA) requires the preservation, both electronic and in hard copy, of all transaction documents

Exceptional attention must be given to named endowment documentation

A personalized fund description can be a powerful marketing tool

Written policies must specify consistent stewardship

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INVESTMENT MANAGERS AND ENDOWMENT POLICY

Limited options for investment and management for smaller organizations

A public service from local financial institutions or from a community foundation

A joint finance/development subcommittee and a formal investment review in the contract

“What Development Officers Needs to Know about Investment Performance” by Steven L. Mourning

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WRITTEN POLICIES BUILD TRUST OF BOARD/STAFF, PROSPECTIVE DONORS AND PROFESSIONAL

ADVISORS

Investment and spending policies Total return—includes dividends and interest plus

gains and losses in the market Net assets released—a three to five year rolling

average of endowment's value multiplied by a board-approved percentage (spending rate or endowment withdrawal rate)

Trustees must establish a spending rate and approve administrative fees

Gift acceptance policies are designed to prevent misunderstandings about gift valuation and processing

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QUESTION #5: ARE THERE INNOVATIVE STRATEGIES TO HELP SMALLER NOT-FOR-PROFITS

Charitable Gift Annuities are life income gifts in which donors donate cash or securities to a 501(c)(3) in exchange for fixed annuity payments.

Concerns for donors: Fear of “locking up” their assets in irrevocable gifts Concern about the “guarantee”

For decision makers at smaller organizations: Anxiety about longevity and investment risks Many CGA's are “under water” Concern about expertise and resources “Deferred gratification” and budget pressure

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RE-INSURING CGA'S WITH TOP-RATED INSURANCE COMPANIES CAN ALLEVIATE THESE COCERNS

Advantages of reinsurance are: Pass on investment and mortality risk Reduce investment cost Obtain CGA upfront profits

An 80 year-old male funds a CGA with $200,000, bringing a lifetime 6.8% annual income of $13,600.

A commercial annuity would net $70,000 upfront.

$70,000 averaging 7% yields $114,000 in 7 years.

At ACGA rates, organization “might” receive $100,000

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ESTABLISH A CHARITABLE REMAINDER TRUST WITHOUT DISINHERITING THE FAMILY

A charitable remainder trust (CRT) provides the donor fixed or variable annual payments for lifetime, or for a a period up to 20 years; trust property is transferred to the charity when benefits end

Increase income from low-yield, growth assets May avoid all capital gains taxes in the transfer Diversify assets without tax consequences

Fear of disinheriting heirs may block the CRT

Closure of the CRT may also be discouraged by professional advisors, who emphasize only tax savings

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A CRT COUPLED WITH QUALITY LIFE INSURANCE AND AN IRREVOCABLE LIFE INSURANCE TRUST BRINGS THREE IMPORTANT BENEFITS:

The gratification of a leadership gift(s) to a favorite charity(s)

Increased income during retirement

Avoidance of capital gains taxes and estate taxes on the assets involved

Wealth replacement may be used with any outright or deferred gift

A guaranteed inheritance for family members

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HOW A CHARITY OR FOUNDATION CAN SIGNIFICANTLY INCREASE RETURN FROM FIXED VALUE INVESTMENTS

Current returns of 1-2% on fixed dollar assets

Using conventional investment strategies, there is no way to improve on these returns.

William Sapers, M.A., CAP®, Chairman of Sapers & Wallack, has developedCharitable Enhanced Income (CEI®) Strategy.

CEI® is a proven method of investing charitable funds

Return of principal

Guaranteed income of more than 6%

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A COMMERCIAL ANNUITY COUPLED WITH A LIFE INSURANCE CONTRACT ON THE LIFE OF A HEALTHY SUPPORTER

Benefits are higher income for charity, guarantee of principal, steady predictable income, and less cost in managing endowment

Charity invests $1,000,000 in a commercial life annuity on a 73 year-old supporter, who is a preferred risk applicant

In 30 days produces a monthly cash flow of $7,262

Guaranteed monthly premium of $2,072 provides a death benefit of $1,000,000

A guaranteed net annual return of 6.2%, or $62,280

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I shall pass through this world but once. Any good therefore that I can do or any kindness that I can show to any human being, let me do it now. Let me not defer or neglect it, for I shall not pass this way again. -Mohandas “Mahatma” Ghandi-

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