Is padding your endowment an ethical use of unrestricted funds? My first response: “You’re kidding, right?”

Tom Ahern
This was the query:
Hi all-

I’m on the board of a small non-profit and we recently completed a matching challenge from our local community foundation to raise gifts of $5000 or more. The gifts were solicited as unrestricted gifts and matched dollar-for-dollar by the foundation. A board member recommends that we split the funds raised ($100,000) between the general operating fund and the endowment, which is managed by the community foundation. Is it ethical/legal to take funds solicited as unrestricted and without a donor’s explicit direction, deposit them (or percentage of) into an endowment? Does it raise any questions that we’re investing the funds with the foundation that was the matching partner?

Regards,

Q.

——

My answer:

It’s tempting to say, “What is it about the word ‘unrestricted’ that’s confusing?” On the other hand, I’m ethically challenged; full disclosure.

If your original case for support implied “strengthening the organization,” then putting a portion of the resulting gifts into endowment certainly qualifies (I think).

Here’s why I think that, using an example from the top of the food chain: last time I looked, Harvard U. was covering something like 43% of its annual operating from endowment income ALONE.

In other words, endowment income IS operating income … eventually.

And endowment, well invested (which is what community foundations can be VERY good at), steadily grows.

Give your genius an extra term…

The board member who suggested a half/half split is a financial-planning genius, in my view.

Warning: At the same time, I would write something into the by-laws about extracting from the principal: mainly, that extractions should be done with GREAT and SOBER restraint. See true story below.

Permanent endowment (i.e., where your nonprofit gets to use the annual interest income but can’t touch the principal) is much better for the long-term health of the org. than an endowment you can dip into for emergencies.

For instance (true story)…

I’ve been working with nonprofits now for 20 years … after a lot of work in shark-infested commercial marketing waters.

At the very beginning of my consulting career, I worked with a Boys & Girls Club that had a noticeably, notably weak and incestuous board … and YET (at the same time) offered to a struggling post-industrial inner city a growing slate of good (even VITAL) programs for children and youth.

They were doing what’s right.

Now let’s revisit the “weak, incestuous” part.

Every year this Boys & Girls Club lived further and further beyond its means. The board covered these yearly gaps by dipping into endowment principal.

Until there was nothing left in the cupboard.

The ED quit suddenly on a Friday; left the state on Monday.

The board flushed itself down the toilet in daily front-page disgrace.

And this very effective, much-needed Club ALMOST closed. It took a dedicated, saintly, willing-to-do-whatever-it-takes staff a decade of painfully hard work … but this Club rose from those ashes.

Two years ago, that very same staff completed a major capital campaign for Club improvements, going over goal. Today, they’re stronger than ever.

Got a building? Endowment NOW…

In 2020, I’m watching from the sidelines as another board — at a worthy but small museum — eats into its endowment to keep the doors open … instead of tackling the problem of sustainability head-on, with true grit.

Prediction: they will close. (And that prediction came two months BEFORE the coronavirus pandemic, which will not treat small charities kindly, I also predict.)

Dear clients: if you have facilities, you MUST have a strong endowment; maintenance on those buildings will kill you otherwise.

Also: if you plan to be around doing good in 25 years, have a STRONG endowment: you’ll need it when the winds shift … or when the next weak board comes along.

The moral?

Weak boards kill. But they’re in charge, so it’s hard to say no.

The board member who suggested parking half the $100,000 as endowment with the community foundation should be awarded AFP’s “Foresightful Award” … and a sturdy pedestal to stand on.

Oh, and your worry about the optics of parking that money with the same community foundation that matched the gifts?

Classic example, in my view, of nonprofit overthinking, which is a chronic disease in our sector.

The community foundation is where smart nonprofits park their money, to grow. (Generally speaking. Results vary. Check your community foundation’s investment stats first. Our delightful community foundation, the Rhode Island Foundation, is a superstar in that regard.)

  • Tom Ahern