Endowment Donors Are Hungry For More Info. Here's What to Give Them

Donor communication is the foundation of a fruitful development program—one that encourages continual gifts from both new and prior donors. Yet, when I speak with development officers, they are continually asking for suggestions about what to communicate to their prior donors. And the donors I speak with are thirsty for information about what has happened with their prior endowment gifts.

The solution to this situation is simple: Institutions should regularly inform their prior donors of the current balances of their endowment gifts, the amount of current income that the gift has produced, and how it was used.

At this point, it may be helpful to read my prior post about the UPMIFA law that governs all donor-restricted endowment gifts.

Donors may make endowment gifts either to the charity’s general endowment fund, to a specific endowment fund, or they may create an endowment whose income is restricted to a specific purpose that may be unique to the donor. Let’s examine each one of these types of endowment gift.

Most charities have a general endowment fund. This is a fund for which the principal has been restricted in perpetuity by the donors and the income that the fund produces is available to the charity for use in any of its charitable programs. When a donor makes a gift to a charity’s general endowment fund, the donor’s gift is comingled with the general balance and is separated from any identity with the donor.

General endowment funds are very important to charitable organizations. They provide a financial foundation and annual stream of income that supports the organization in perpetuity. While organizations speak of their general endowment funds—what size it is and what size they would like it to be—most organizations seldom discuss what the endowment fund has allowed the institution to do over the past year or years. Because the income generated by the general endowment fund is unrestricted, it frequently goes into the budget without being associated with any particular expenditure. This is unfortunate.

So the first thing that I suggest organizations do is to construct a budget that associates income with specific program expenditures. Program income should be used to support the program that generates the income. Some organizations shy away from relating income to expenditures because some programs make money and nonprofit people are generally uncomfortable with providing a program service that generates a profit. They incorrectly believe that services should be provided at the lowest possible fee to the public being served. I don’t want to get too deep into this tangent, but every not-for-profit charity should be trying to maximize its revenues by having the population served pay what they can afford. Some people will be served for free, and that is only possible because those who can afford something are making a contribution. There are unlimited needs in the world, and charities will only be able to grow and service those needs if they maximize their revenues.

Back to the compelling reason for contributing to the general endowment. If you prepare a budget relating revenues to specific program expenditures, you will see where your endowment income is being used. Now, instead of merely telling donors and potential donors that the general endowment provided revenues for the general operation of the organization, you will be able to say (for example) that the general endowment provided 70 percent of the funds needed to conduct the XYZ Program. Donors will love this correspondence as it provides them with tangible evidence of why and how their endowment gift is important to the organization.

The specific endowment fund is one for which the purpose or use of the endowment income is specified by the institution. For example, most educational institutions have an endowment fund for scholarships. Here, the income generated by the fund is used exclusively for providing financial aid to current students. It is generally somewhat easier to raise money for a specific endowment fund, because donors have previously acknowledged the importance of the fund’s purpose.

When a charity creates a specific endowment fund, it should be aware of the fact that sometime an endowment fund can produce too much income. And the charity should also be aware of the difficulty of changing the purpose of a specific endowment fund.

I once saw an educational institution whose scholarship endowment fund was producing more income than the school was awarding in financial aid. And they were about to embark on an endowment campaign for which the development director freely acknowledged that scholarship funds were the easiest to raise—but they did not need any more scholarship endowment funds unless there was going to be a significant increase in tuition! 

As with the general endowment fund, the specific endowment fund does not maintain records by donor. However, this does not mean that the specific endowment fund donor is not interested in the status of the fund. The institution should report to all past donors the current balance of the endowment fund and how much income the fund generated for the specific purpose during this past year. Breaking that income down into more specific and easily identifiable units communicates very clearly to the donor. For example, indicating that the endowment scholarship fund generated $356,000 for scholarships is good information. But that information becomes more personal and meaningful when the institution states that this money allowed 113 students to attend the school who otherwise would not have been able to afford to attend.

The uniquely specific endowment fund is one for which the charity has accepted an endowment gift with a specific purpose unique to the donor’s wishes. For example, a donor may give his or her college $100,000 to create an endowment that will be used to annually purchase business books for the library. If the organization’s spending policy is to spend 4.4 percent, then this gift will produce $4,400 for business library books in the first year. If the total return on the invested $100,000 was 7 percent, the remaining 2.6 percent is reinvested into the fund, bringing the fund’s end-of-year balance to $102,600.

During the second year, this endowment fund would produce $4,514 for business library books. (This is 4.4 percent of the $102,600 balance). These figures are great subjects for communication to the donor. The donor can see that the charity is investing the gift wisely as it is increasing in value—and because it is increasing in value, an ever increasing amount is available each year for the purchase of business books for the library. The donor has made a gift in perpetuity, and nothing pleases that donor more than to see that his or her gift is being used wisely and is keeping pace with inflation so that it has the same impact year after year. This is called generational equity.

In 10 years, the $100,000 donor would like to see that their gift is now worth at least $124,300 (assuming 2.2 percent inflation) and is producing $5,352 for the purchase of business books in year 10. Providing information such as this keeps a donor involved and invested in the organization. This information is a fantastic subject for donor communication. And this information is not difficult to come by. The fiscal office should be keeping track of uniquely specific endowment funds in just this manner.

I believe that the unique purpose endowment gift is the easiest donation to solicit. Here, the donor can support that which means the most to them and will remain involved with the institution forever. Institutions will want to check with the fiscal office to determine if there is a minimum investment required for such an endowment and they will want to include variance power in the gift instrument.

A well designed endowment program with regular, powerful communications to past and prospective donors is achievable with understanding, planning and persistence. I have a plan for an annual endowment special event, but it is more complex than can be communicated in a blog post. Get in touch with me and we will discuss it. (fam@fmonti.com)