Monthly Archives: February 2012

Steps to starting an endowment

Two week ago we shared our thoughts about what nonprofits should consider before starting an endowment. If you’ve worked through the pros and cons, and your organization plans to start an endowment, how do you get started? Your Board must agree on the role of the endowment, authorize its establishment, and put several essential policies in place. This week, a look at these important steps.

1. Agree on the purpose.  Why does your organization want an endowment? You may be surprised that Board and staff have different ideas about the role an endowment would play. Is it to provide some relief from fundraising? Pay for new programs? Start a satellite office?  What you use it for will help you figure out how big your endowment should be.

2. Authorize the endowment. This is a Board move, signaling its commitment to create the fund and hold the money in perpetuity. The endowment becomes part of their financial responsibility, and will be included as a separate line item in financial reports.

3. Create an endowment policy. You must create a policy that specifies how the interest income from the endowment will be used. The challenge of creating a policy is to make it broad enough to meet your needs without being too vague. Take time to think through the details, and include how the endowment will apply to expected change and growth.

4. Create an invasion policy. It sounds violent, but “invasion” refers to using the endowment principle. You wouldn’t do so unless circumstances are dire or you would be using it to pay for another long-term asset, like a building. Most policies stipulate that the principal can only be used if the organization is in danger of closing. Some Boards rule that the principal can be used to balance the budget for one or two years, and others rule that it can’t be touched at all, ever. It’s also important to detail how much of the principal can be taken and when it must be paid back. Last, invasion policies should specify who has the authority to decide whether to use the endowment principal—the whole Board, a percentage, the executive committee?

5. Develop a gift acceptance policy. You may have a gift acceptance policy in place before you start an endowment. But whether you’re adapting an existing policy or starting fresh, you’ll need to decide what types of gifts you’ll accept, who has the authority to accept them, and under what circumstances. Will you take buildings? Land? Expensive collectibles you may not be able to sell? If you decide to accept stock, are there sectors or companies that you don’t want to support? Complications associated with non-monetary gifts are why some experts recommend nonprofits start with a policy to accept cash, securities, and life insurance only.

The gift acceptance policy is also where you’ll have to explore the possibility of restricted gifts. If someone wants to endow a particular program, what will you do?

6. Establish an investment policy. An investment policy will state whether you’ll invest entirely for income or you’ll have a mix of investments to grow the principal and income. Will you require socially responsible investing, choosing screens to filter out tobacco or gun companies, or those that don’t support unions, for example? And how will you set or rank these priorities?

7. Create an investment committee. Once your endowment is established, your Board should create an investment committee. Non-Board members such as donors can be part of the committee as well. Although the committee manages the fund, the Board must still take responsibility for monitoring it. It’s important to have strong faith in the knowledge and intentions of the committee.

With your endowment authorized and policies in place, you can announce the fund and start including it in your fundraising efforts. You can also conduct an endowment campaign, with specific goals and timelines, which we’ll cover next week.

Social justice funding declines

Funding for social justice nonprofits has seriously declined since the economic collapse in 2008, according to a new report.

Social justice organizations work for systemic social change based on principles of equality, solidarity, and human rights. They include groups focused on progressive taxation and legislation and the rights of vulnerable and marginalized populations. They strive to eliminate disparities in areas such as health, housing, and education, and to create a level playing field for social and economic opportunity.

The report, published by the Foundation Center, analyzed the giving of 54 foundations that actively support social justice organizations. Grants from these foundations fell to below 2007 levels in 2009, the researchers say, and they’re unlikely to bounce back until at least 2015.

Social justice funding was on the rise in the first part of the decade, spurred in part by a “sense of optimism for the future with the start of the Obama administration,” according to a previous Foundation Center study published in 2009.

The new report, Diminishing Dollars, found that smaller foundations suffered the biggest losses and were most likely to have decreased giving for social justice. Grantees in the field are also typically small, community-based or member-led organizations without substantial financial resources. They have small, dedicated funder bases and high vulnerability to funding cuts. The report’s authors write that these groups “often lack the capacity to compete with larger nonprofits for public funds or for funding from more ‘mainstream’ foundations as the environment becomes both increasingly competitive (due to scarce resources) and focused on scalability and outcomes.” They rely on the funders that are struggling most to recover in the current economy. According to projections, foundations in the field with less than $50 million in assets will have 17 percent less in 2015 than they did before the crash.

The report notes that in response to the downturn, many foundations in the field have changed their processes and policies. They are spending less, either by changing review criteria, refusing unsolicited proposals, or funding only existing grantees. For this reason, the authors write, newer organizations and those seeking new funders will have a tough time securing grants in the next few years.

It’s no secret that the wealth gap is increasing, along with the social disparities it creates. Given the grim outlook for grants, social justice organizations will likely have to turn to non-foundation funding if they intend to stick around. It will become even more critical for most to build a solid base of individual donors who support their goals and means. At the same time, other mission-driven nonprofits will need to incorporate social justice advocacy and organizing into their work, and bring their funders along.

Read the Foundation Center report, Diminishing Dollars, here.

Starting an endowment: what to consider

Starting an endowment is easiest when the economy’s strong, but it’s also a way to create a reliable source of income for lean times. Just as we personally save money for emergencies and retirement, nonprofits that can set aside money should. This week, we offer a few thoughts on the benefits and drawbacks of endowment funds, and next week we’ll share tips for getting them started.

An endowment is money set aside to invest in mutual funds or certificates of deposit. Endowments are permanent savings accounts, and nonprofits that intend to stick around use them to generate income for ongoing needs and capital for long-term growth.

To start an endowment, an organization puts aside money as principal and a small percentage of that principal (typically five percent) is used for annual needs. In years when the principal increases more than that percentage, the organization has more money it can use. When the principal doesn’t increase, the nonprofit can still take out five percent of the asset without affecting the principal too much.

During a market crash, even the principal may lose value, and there may be nothing to use for operating expenses. With a good mix of investments, an endowment can usually tolerate economic flux, but it should always be part of a nonprofit’s diversified income stream.

In addition to boosting annual income and long-term financial security, endowments are useful for several reasons. Most importantly for some organizations, endowments enable people to make larger gifts than they would through an annual fund. Donors who make large one-time gifts appreciate that their gift is an investment and will help support a nonprofit’s long-term growth.

Having an endowment is also very important if you expect your organization to be the recipient of bequests. For the most part, people who write nonprofits into their wills want their donations to go into a permanent fund.

One potential benefit of an endowment is that it can provide unrestricted income for operating or program needs. If donations to the endowment are no-strings attached, they help nonprofits be self-determining. Endowment income can be used to prioritize operating or program support, invest in capacity building, and respond to new opportunities. Sometimes principal from endowments can be used for capital purchases and loan collateral as well.

But not always. There have been notorious lawsuits when endowment gifts are linked to certain donor stipulations with which organizations have been accused of not complying. This can happen when a donor dies and no terms were developed for changing how the funds can be spent.

There are plenty of other reasons not to start an endowment. First, managing an endowment is more work for staff and Board. Investment policy can also be contentious, and leaders may not agree about controversial investments. Most importantly, like any investment, endowments represent a financial risk, and as we saw in the post-Madoff years, they can disappear in a flash.

Some critics point to millions of dollars sitting in the endowments of large institutions, suggesting that the practice disconnects nonprofits from their constituencies and compromises their missions. If a nonprofit has that much money, they say, it should be doing more.

More ideologically, endowments are perceived by some as contributing to the privatization of services that our tax dollars should be paying for. Endowment money is diverted from the tax stream but it isn’t used directly for tax-exempt activities.  Should nonprofits be building tax-free nest eggs to compensate for government spending cuts?

Nonprofit leaders considering starting an endowment should carefully consider the pros and cons. If they wish to forge ahead, they’ll also need to agree to how their endowment will be used—open a new office? Expand a program? Raise salaries or staff retirement benefits?

Next week, the logistics of starting an endowment. In the meantime, we’d love to hear from you. Experiences with endowments? Questions or opinions?

What not to do in a crisis (Part 2)

Back in November, we shared our thoughts on how Penn State and UC Davis grossly mishandled their PR responses to major campus scandals. By failing to be open with their constituents, issue timely apologies, or take responsibility for their institutions’ failures, leaders at both universities incited the outrage of the public.

This week, the Susan J. Komen Foundation brought another lesson in how a lack of open communication can result in massive public backlash.

On Tuesday, the story broke that Komen would withdraw its longtime funding of many Planned Parenthood affiliates, due to a new policy that prevents grants to organizations under investigation.

Since early fall, Planned Parenthood has been the target of an investigation initiated by Republican Representative Cliff Stearns of Florida into whether government money was spent on abortions.

This morning, Komen Foundation CEO Nancy Brinker released a statement reversing the decision to defund Planned Parenthood, after an enormous outpouring of criticism, online organizing, and a direct request from 26 Democratic senators.

The statement included a public apology for what Komen described as “recent decisions that cast doubt upon our commitment to our mission of saving women’s lives.” Although it goes on to say that “politics has no place in our grant process,” and that only “criminal and conclusive” investigations will affect its funding decisions, it’s unclear whether the foundation is really backing down. Just yesterday, the foundation said the investigation was not the cause of the cuts, and that the real issue was that Planned Parenthood did not directly provide mammograms. The statement issued this morning doesn’t address that concern at all. While some are celebrating the statement as a victory, others are saying it leaves open the possibility that Planned Parenthood’s future grant applications could be rejected.

But even before its current skirting, the foundation made a grave error in delaying its response to an angry public. By not addressing its decision in due time, and letting its critics speak for it, Komen once again demonstrated how a lack of a communications plan can crush an organization’s reputation in a matter of days.

Abortion is clearly one of the most politically divisive issues in the country, and Komen also received praise for its actions from anti-abortion advocates. But regardless of our personal positions and whether or not our work deals with hot button issues, we can all take another lesson from Komen in what not to do in a crisis: stay silent.

In the age of social media, word travels fast. Within a few hours of the AP story breaking, Planned Parenthood sent a fundraising email out to its network, asking supporters to replace the money that Komen pulled for breast cancer screenings for low-income women. It was only minutes before Facebook and Twitter blew up with pro-Planned Parenthood, anti-Komen response.

For two days, the Komen Foundation said zilch. No press release, nothing on the website. It didn’t update its Facebook page, although it did delete critical comments and add a post welcoming Energizer as a new sponsor (leading to a flurry of negative comments on Energizer’s Facebook page and a call to boycott the company.) It didn’t respond via its active Twitter feed,  although somehow it found time to tweet about prostate cancer found in a mummy.

Komen officials ended their silence on Thursday, attempting to manage public outrage. In a conference call with the media, Brinker said the decision was due to changes in its grantee selection process and had nothing to do with Planned Parenthood’s role as an abortion provider.

Brinker’s explanation was not only late, but evasive. It was already clear that the decision was related to a politically motivated investigation, not a simple change in administrative process. A top public health official at Komen even resigned over the decision. By not responding to the criticism and then pretending the decision was unrelated to such a highly controversial social issue, the foundation broke the trust of many of its supporters.

This isn’t Komen Foundation’s first bad PR move. Remember the Buckets for the Cure campaign? Or when the foundation sued smaller nonprofits for using the phrase “for the cure”?

How will the Komen Foundation move forward in the face of an even bigger blowup? It will have a lot of work to do to repair its image. But as a lesson in the value of preparation, honesty, and respect for people on all sides of an issue–hopefully the third time’s a charm.