ENDOWMENT DEFINED

Most nonprofit organizations have a variety of funding mechanisms such as memberships, annual appeals, capital campaigns, special events, and planned giving programs. Another component is the endowment fund building a permanent source of dependable income for an organization. This permanent pool of assets is intended to both grow and help financially stabilize an agency. Whenever a nonprofit board considers establishing an endowment fund, they should do so within the true definition of endowment. To endow is to “enrich with property by gift or bequest for a permanent purpose.” Legally, there is no single definition; however, a New York court defined endowment as “the bestowment of money as a permanent fund, the income of which is to be used in the administration of a proposed work.”
  
With similar language, the Uniform Management of Institutional Funds Act and the Financial Accounting Standards Board (FASB) define endowment, “as a fund comprised of assets to provide income for the maintenance of a not-for-profit organization. The use of the assets of the fund may be permanently restricted, temporarily restricted, or unrestricted. The principal of a permanent endowment must be maintained and not used up, expended, or otherwise exhausted.”
 
Restricted: The assets in a permanent fund must be expended for the defined purpose outlined in an agreement, trust or other governing document.
 
Temporarily Restricted: The assets in a permanent fund are restricted and may not be expended based on a set period of time, the fruition of an event or the completion of a defined purpose as specified in an agreement, trust or other governing document.
 
Unrestricted: The assets in a permanent fund are not encumbered by any defined purpose, guideline or stipulation; however, the principal still cannot be expended, granted or exhausted for any reason or purpose.
 
Endowment Purpose 

Some of the general reasons often used in support of endowments are:
 
Tax Incentives: Endowment funds of tax-exempt institutions are themselves exempt from tax; therefore, all the subsequent income and growth of the endowment also accumulate tax-free. Thus, a donor’s gift today can meet future needs when a building must be replaced, new programs are needed, or new services are needed.
 
Maintaining Liquidity: Income from an endowment can level the peaks and valleys of current fundraising efforts. The less dependent an institution is on federal, state or grant funding, the more resilient it is during adverse economic circumstances. This allows an institution to absorb reductions in current donations without a corresponding reduction in the level of services.
 
Subsidizing Values: An endowment fund allows the current generation to instill its values in a subsequent generation. Endowment funding is an affirmation that an organization should play a role in the future of the community. It is a statement by donors that an organization has an important mission worthy of sustaining.
 
Donor Preference: Donors in many cases want to see their gifts, or a portion of their gifts, placed into a permanent fund. Thus, it is very common for donors to give both to annual operations and to an endowment fund. It represents an enduring relationship with an organization and its public mission.
 
Endowment Size

Once an organization embarks on building a permanent endowment, donors or board members will begin to question its size. Most new endowments should continue to increase until they match the organization’s annual operating budget. If the goal is reached in a short period of time, the board may decide to expand the endowment to generate enough income to support the annual operating budget. This is a much more aggressive task. 
 
Other goals may include allowing endowment funds to grow to the point that they can support overhead or a specific administrative expense. Most importantly, the endowment fund is not a rainy day fund or the first place the board turns in an emergency. The board members who establish the endowment should clearly set a policy for future boards to honor.
 
Gift Documentation

The Financial Accounting Standards Board issued ruling 136. This regulation requires that donations to an endowment must be accounted for in one of two ways:
 
i)        Money transferred to an endowment fund, which is the property of the charitable organization, is classified as quasi-endowment or available to be expended by the organization’s governing body.
 
ii)       Money donated to the same endowment fund by any third-party other than the organization is permanently restricted; therefore, the gift principal cannot be expended or granted for any purpose. Only the income from these gifts can be distributed.