Endowments have both benefits, downsides

Last year, a donor offered Simpson Housing Services a $10,000 gift to create an endowment to help recently homeless families get beds, bedding and other basics for their apartments.

It seems like a no-brainer: Take the money and start helping people who desperately need help.

Turns out, it’s not that simple.

If the board decides to start an endowment, does it have a community foundation run it or manage it itself? What are its investment policies? How does the organization track spending to make sure it matches the donor’s wishes?

And that leads to a very basic question for the board: What kinds of gifts — with what kinds of strings attached — does it want to accept?

Simpson Executive Director Julie Manworren said individual gifts are well-intentioned, but managing them could take staff time and effort away from the mission. Donations that come with directions must have the right fit.

“We absolutely do not want to get into a situation where someone else is directing, with little drips and drabs, where we need to spend our time,” she said. “Our time is our most precious resource here. Our primary service is in building trusting, respectful relationships with people who have never experienced that in their lives.”

Simpson’s board created an Endowment and Planned Giving committee to sort out the issues.

Seeking stability
Places like Minneapolis-based Simpson are in constantly roiling financial waters. The money stream depends on whether the state or county has a financial crisis and on individual and corporate charity. If the economy tanks, it can be a double hit: More people need help and money is tougher to come by.

Manworren said an endowment could generate annual income, giving Simpson “more rudder for charting our own course.”

What are potential downsides? It’s tough to sit with thousands of endowment dollars in the bank when homeless people have immediate needs. Some worry a successful capital campaign could divert donations from the annual drives to raise operating money.

Sondra Reis, associate director of the Minnesota Council of Nonprofits, said whether an organization should start an endowment depends on whether it could build one of meaningful size. For instance, assuming a 5 percent return, a $100,000 endowment generates $5,000 annually.

”It is a cost-benefit analysis of the effort you put into building that endowment to a level so that the 5 percent … is meaningful to the annual budget,” she said.

For starters, Simpson set a tentative endowment target of $250,000.

Changing course
Board Vice Chairman Dan Poorman is the longest serving board member and chairs the Planned Giving Committee. He sees some irony in the effort.

When Simpson started as an emergency shelter in 1981, people thought it would run for a couple of years until the homelessness crisis ended, he said. Now, it’s looking at an endowment for long-term sustainability.

Simpson also is evolving. Last year, it bought the 17-unit Passage Community Housing in South Minneapolis, which provides supportive housing for recently homeless families.

Simpson is working on a new strategic plan,  said Bob Barr, chairperson of Simpson Housing Services’ Board of Directors. “We see the organization moving toward supportive housing and transitional housing, which from our perspective is going to require some sustaining capital.”

There are other options to consider. Manworren also is interested in investigating a “working capital fund” as an alternative to an endowment. Such a fund functions more like a savings account except that the group can borrow against it. For instance, the board could tap it to buy a building, but the building would need to generate money to pay back the fund.

The Planned Giving Committee is expected to make recommendations later this year, and Simpson’s full board will vote on recommendations in November, Barr said. If the endowment gets approved, Simpson would kick off a campaign late 2008 or early 2009.

“This is new ground for Simpson,” he said. “We are being cautious.”

Questions about nonprofit endowments? Resources include MAP for Nonprofits and the Nonprofit Assistance Fund.

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Comments (1)

  1. Submitted by Triplett Triplett on 05/19/2008 - 07:13 pm.

    A true “endowment” has an additional limitation. Earnings from the corpus of a true endowment can only be used for the purposes specified by the donor, and the corpus itself is forever tied up for that purpose unless a court order is obtained (which is usually hard to get). A better recourse may be to encourage donors to give to a “board designated reserve.” The donor can still express an opinion about how the gift and its earnings should be used, but the ultimate decider is the organization’s board of directors.

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