Fundraising Buzzwords: Endowment

Fundraisers and Development Professionals have a language all their own.  One of the most popular words right now is, Endowment.  The oldest endowment is attributed to William of Durham, when upon his death in 1249; he left 310 Marks to Oxford University to support scholarships.  While there is no true conversion to US Dollars, if you take a very conservative interest rate of 1% over the 865 years, the value comes closer to $2M.*

According to Investopedia, an Endowment is:

A financial asset donation made to a non-profit group or institution in the form of investment funds or other property that has a stated purpose at the bequest of the donor. Most endowments are designed to keep the principal amount intact while using the investment income from dividends for charitable efforts. 

Weave Knot -
Looks Very Complicated but is
surprisingly easy to do.

It further explains:

Endowments provide ongoing benefits for those that receive them by earning a market rate of interest while keeping the core endowment principal intact to fund future years of scholarships, or whatever efforts the donor sought to fund. In some cases, a certain percentage of the assets are allowed to be used each year, so the amount pulled out of the endowment could be a combination of interest income and principal. The ratio of principal to income would change year to year based on prevailing market rates.

Got it? Nope, don't worry; it is one of the hardest fundraising concepts to describe, yet one of the most important concepts to understand for the future sustainability of a nonprofit. 

One of the biggest challenges is to take a buzzword and find an analogy that makes it easier to understand.   There are a few ways that I try to describe endowment hopefully one of these resonates with you.  First the goal is to change the way people may view endowment:

The concept of making a donation that will never touched but will just grow and grow and grow over time may seem like it is doing a disservice to a nonprofit that may need the money now, however if you take a look at your own personal life and think of ways that we put money aside today for an investment in the future, endowments then start to make more sense.

Stocks:

Sure there are day traders that buy and sell stocks often, however most investors in the stock market put their money in a stock and let it sit there for a while, hoping the company they’ve invested in continues to succeed, grow and the stock continues to gain value.  The stock market has grown rapidly over the past few years and the initial investment in the stocks that were made is still there and now the initial value invested is worth even more.  Also, some stocks kick off dividends which provide a little money each year to help with your annual expenses.

Real Estate – Mortgage:

When looking at the initial cost to buy a house, between the down payment, the greater monthly payment for a mortgage over rent, interest on a loan, honestly, in the short term, buying a house does not make sense.  When you calculate that interest payments are usually fully tax-deductible, providing a nice little benefit when you file taxes.  Also, if you purchased a house with a 30 year fixed rate mortgage, your monthly payment today will be the same as it will be 10, 20 and 30 years from now and then potentially dropping down to zero.  One can only estimate that rent costs will be significantly higher 30 years from now than they are today.  In addition, rent is paid, the money is gone, however a mortgage payment will be paid back to you upon the sale of your house. 

Investing in a house is much like endowment; putting money aside today that will grow in value and provide significant support in the future.  In addition, if enough of the mortgage has been paid off you can always refinance or take a loan against the house to increase a revenue stream should the need arise.

401K/403b:
We are all concerned about our long-term financial sustainability and many people have chosen to plan for the future by setting up a retirement plan.  By taking small amounts of money now and investing it, the hope is the money will continue to grow and using the rule of 72 (see post “Right Now, It’s Your Tomorrow) the money will grow and the hope is there will be a significant amount of money when time for retirement comes.  It also creates an emergency fund that if needed you can pull funds from.   It guarantees that in a worst case scenario there are emergency funds available or can be borrowed against if absolutely needed.

If these analogies do not have resonance, there are others ones that might.  Ultimately, the key concept to understand about endowment is that it is an investment today to guarantee financial sustainability tomorrow.  It does that by providing an annual spend (money that can be applied to annual operations) while continuing to grow to offset inflation growth.

It is important to note that the Annual Campaign always takes priority over a Capital or Endowment Gift! 

http://www.investopedia.com/terms/e/endowment.asp#ixzz3hR7PvZwr

* A Mark is equivalent to approximately 2/3^rd of a British Pound.  By calculating that number and providing a conversion of approximately 1.6 to the US Dollar, William of Durham’s legacy gift was valued at approximately $330 US Dollars (I know the US did not exist in 1249.)  Then take that $330 and compound interest at a conservative 1% annually for 865 and you get the number of $1,805,104.  If you bump that to a 2% growth annually the value becomes $9,071,153,456.

What's In a Name?

The Go211 Life Rolls On Expression Session presented by Disaboom at the 2008 Honda US Open of Surfing presented by Hurley - this might be the longest title for an event I have ever helped coordinate.  It was also an event where I fulfilled a life-long dream and was able to guest announce a professional sporting event, but that is another story for another time.

Naming opportunities have been a significant part of revenue enhancing opportunities for both for corporate and nonprofit communities.  One of the places where naming is most recognizable today is with professional sports stadiums.  The history of naming in honor of the donor dates back over a century.  While it is up for debate, the first named stadium dates back to 1912, which is Fenway Park in Boston, believed to be named for Fenway Realty (owned by John Taylor, who also owned the Red Sox at that time) but it is argued that it was named Fenway because the stadium was built in the Back Bay Fens neighborhood.  Perhaps the most recognizable stadium name, Wrigley Field dates back to 1926, named for William Wrigley, the founder of Wrigley's Gum.  An interesting story dating back to 1953 is that the Busch family initially wanted to name the stadium in St. Louis, Budweiser Stadium; however, the MLB Commissioner rejected that proposal at that time.  They instead named it after August Busch, the founder and it became known as Busch Stadium.  After the stadium naming, the Budweiser Company released a new line called Busch Beer.

Traditionally, as all these names are still applied to stadiums today, places named in honor of people were set in perpetuity.  Corporate naming rights for stadiums is a fairly new concept; however, those often have time boundaries associated with them.  Historically, nonprofit donations for naming opportunities were often believed to be in perpetuity, but recently a decision by the Lincoln Center to rename Avery Fisher Hall has challenged the concept of perpetuity.  In 1973, Avery Fisher made a $10M gift for the naming rights in perpetuity.  Since that time, the theater has become outdated and very much in need of repair.  The Lincoln Center now faced a challenge of how to renovate the theater that had limited ability to leverage revenue without potentially insulting Mr. Fisher's family.  Mr. Fisher's family and the Lincoln Center came together on an agreement to withdraw the Fisher name yet also honor their father's memory. 

In the end, the Lincoln Center paid $15M to the Fisher family and included additional opportunities for recognition.  While it may seem perplexing that the Lincoln Center would pay out $15M on a $10M gift, when doing projections for inflation (approximately 4.15% annually) Mr. Fisher's gift would be valued at approximately $55M today.   I applaud the Lincoln Center and the Fisher Family for finding an amicable resolution to this challenge. 

This situation has now raised the question for many fundraisers as to whether they can offer a naming opportunity to be in perpetuity.  In accounting for inflation and the needs for renovations, many naming opportunities now include "Sunset" clauses which allow for the naming rights to expire and families that made the initial gift to have the opportunity for first right of refusal.  Surprisingly, most donors have been very receptive to these sunset clauses as they are aware of the need to infuse these organizations with funds.  The ability to generate news funds will guarantee that the donor's passion and impact can continue.  Donors have realized that while their gift today may have great value, the value of that gift will not be the same in the future. To limit the ability of the organization to raise addition funds (after a fair amount of time) would actually counter the purpose of their initial gift, which was an investment in the future of the organization they supported.

We now live in a world where naming rights to honor someone, while admirable, creates challenges to fiscal responsibility.  Naming opportunities will continue to be critical in providing ways for nonprofits to infuse their organization with significant amounts of capital; however, in doing so, they must carefully weigh the amount the naming opportunity should cost.  The newest challenge with sunset clauses is that nonprofits now need to play the role of actuary and try to predict when the next capital campaign may need to occur or when the value of a gift today will need to be infused with more dollars in the future to maintain its impact.

As a fundraiser it is a challenge to not only focus on the dollars needed to succeed today, but to also make projections of what dollars will be needed for success in the future.  Not only to focus on the capital campaign today, but to predict when the next capital campaign will occur and provide sunset clauses that will be meaningful to the donor, yet beneficial to all parties involved.

Goblet Knot - resembles an ornate chalice

Right Now, It's Your Tomorrow

As I was listening to Van Halen Radio on Pandora this week, one of my favorite songs of all time came on, Right Now, by Van Halen.   When the song was first released I was in middle school and it was used for our track team video (I still have that on VHS somewhere) and has always had special meaning to me for that reason.  The song has a ridiculously awesome piano intro which builds and builds and from there the song remains stuck in your head and you can't help but sing along, however when listening to the lyrics this time, something resonated in a way it hadn't in the past.  (Just listen here:  https://www.youtube.com/watch?v=rMV-fenGP1g ^* )

As a development professional (and this is applicable to most professions) I need to focus on reaching this year's fundraising goal of $1M yet also need to put strategies in place to guarantee the financial long-term affordability and financial sustainability for my organization.  Over the past week, I have been doing some financial projections for what dues and tuition may cost in the future using some standard compounding rates to see estimates of how costs may grow.  Based on the rule of 72^** (http://www.investopedia.com/ask/answers/04/040104.asp), day school tuition, not only for my school, but also across the entire country will double in the next 15 or so years.

Therefore, the challenge truly is how to be focused on the Right Now, but also at the same time setting goals for future affordability.  How do you make current donors care about tuition and dues in 14 years when they will likely no longer have to pay tuition and may or may not be a member of the synagogue?  How do you inspire current older donors to leave legacy gifts in their estate plans to help offset future cost increases?  In Judaism, in the Babylonian Talmud in chapter Taanit on page 23a, you find the following story:

Adding an additional childhood reference "The Auryn Knot"
Bonus points if you know how I chose the name Auryn

One day, Honi the Circle Maker was walking on the road and saw a man planting a carob tree. Honi asked the man, “How long will it take for this tree to bear fruit?" The man replied, “Seventy years.” Honi then asked the man, “And do you think you will live another seventy years and eat the fruit of this tree?”The man answered, “Perhaps not. However, when I was born into this    world, I found many carob trees planted by my father and grandfather. Just as they planted trees for me, I am planting trees for my children   and grandchildren so they will be able to eat the fruit of these trees.”

If others before us did not set up the framework for our children to have an amazing experience and opportunity at Day School, we would be missing a great opportunity; therefore, we have the obligation to make sure the same opportunities are afforded to the next generation of day school students.

To inspire people to follow the teaching of Taanit 23a, you may need to "Catch a Magic Moment," which is not an easy task, however if you never ask you will never get.   In addition, it takes planning, coordination and multiple meetings with a prospect to obtain a legacy gift.

It is easy to focus on the future, just like I did in the prior three paragraphs, but I cannot forget about the here and now!  I still have the goal of leading the community to raise $1M this year despite having limited capacity and if I do not, then it won't take 15 years for tuition to double (which it hopefully won't because we are putting plans into place) but it might only take 10 since we will need to address larger budgetary gaps.

So you see that Right Now, it truly is our tomorrow and it is important to package opportunities that address the here and now, but also provide investment for the future to offset projected increases.  If you are interested in helping the amazing team working on this either with your time or financially, I welcome that!

^*Please note that statements included in the video do not necessarily reflect my personal views

^**Taking an estimated growth of 5%, you would divide 72 by 5 and come up with just under 14 1/2 years.  If you take the current cost of tuition and multiply it by 1.05 compounded over 15 years you will see the amount more than double. Test it out using excel or on this investment tool: http://investor.gov/tools/calculators/compound-interest-calculator

Go Big!

Monster Knot - aka The Double Windsor

July 1st marked the start of the new fiscal year and the Annual Giving numbers reset to $0!  Regardless of whether goals were achieved or not, that number is now $0.  While we may have other opportunities for people to donate financially in our community (Campus Expansion, Endowment, Scholarship etc.) the campaign a Development Department is most judged by is Annual Giving and you are only as good as last year's annual giving.

In approaching any new year, it is important to set both attainable and audacious goals.   I have been working with our new VP of Development (Lay Position on the Board of Directors) over the past few months to set new goals, build the vision of the department and strategize the key conversations that will help us build upon last year's successes.   While the economy is in an upswing, there is still much uncertainty.  In April, our community lost a major supporter this year, whose donations represented 2.5% of our annual fundraising goal. In addition, there were a few unexpected gifts this year that we can't assume will be replicated.  It will be a great challenge to reach the same levels of success this year, but I am confident it can be done.

What I am most excited about are the audacious goals that our VP of Development and I are setting to move the agency forward.  Our greatest challenge that will have the biggest payoff will be the "Enhance the Culture of Philanthropy" in our community.  For many years, we have been approaching giving as an option rather than an expectation; we have been apologizing for asking rather than explaining to people why their investment matters.  I am excited that all of our leadership, both lay and professional, see this change in presentation as very important.  In addition, we have been in the middle of a Campus Expansion Campaign and have treated Endowment as a lesser priority; I am looking forward to officially rolling out my $20'20 vision to the community and putting equal import on both needs of our community.

There will be many challenges for 2015-2016, but I am excited and ready to go BIG and achieve as many goals as possible and work towards the long-term financial sustainability and success of TBA/JPA.