Why your nonprofit would benefit from an endowment
As universities and schools start to finalize back-to-school plans, many are leaning on their endowments during the current economic downturn. During the 2008-2009 financial crisis, nearly half of all institutions reported increasing their endowment spending amid financial challenges, while others shied away from spending their long-term funds in order to save for the future. Already in the first quarter of 2020, returns from college endowments are down, with smaller endowments taking the bulk of the hit.
We haven’t seen the full effects of how this pandemic will impact endowments, however it’s safe to say that it could have a lasting effect on philanthropy and giving to higher education. Endowments can help support nonprofits through that recovery.
What is an endowment?
An endowment can help any nonprofit, no matter the size of the organization or the amount of money, by establishing an ongoing stream of income to help prepare for and offset future expenditures.
Although most people have an understanding of the word, few know the real impact that an endowment can have. Unlike a general donation, an endowment is established for a nonprofit organization to use the income for a specific purpose. Endowments are able to grow donations as investments and provide additional income for the nonprofit’s cause.
Advantages of a growing endowment
When nonprofits set up an endowment, it not only opens multiple channels of income, but it can help your organization withstand economic crisis by managing resources well.
The 2019 NACUBO-TIAA Study of Endowments, which gathers data from 774 U.S. colleges, universities and affiliated foundations, found that institutions’ endowments returned an average of 5.3% and found that the 10-year average for endowment return reached 8.4%. However, with the normal movement in the stock market, the average long-term return objectives hovers around 7.2%.
This shows that endowments are paying – and have a significant return on investment. In this study, the majority of spending went back to the students through financial aid and other campus operations – for other nonprofits, this would mean spending on the upkeep of a building or on fulfilling the organization’s mission. The potential income is huge and gives organizations a way to build a long-term plan and giving strategy.
There are many benefits to creating an endowment for an organization including:
- Planning for future success: An endowment creates an ongoing pipeline of income for an organization that individuals can count on distributing for charitable giving and for upkeep of the nonprofit. It also creates a sense of stability for your organization to stay intact through financial hardships and instills fiscal responsibility by alleviating pressure on the annual fund and donation-based giving. The great part is that an endowment is invested and can grow over time, allowing the organization to fulfill its mission for years to come.
- Creates a lasting legacy: For both the donor and for the nonprofit, giving to an endowment is a gift that keeps on giving. Since an endowment gift is invested, it will extend the life of the donation and hopefully grow it as well. It also makes sure that the donor’s money goes toward their values and priorities. If you have an endowment set up, you can attract deferred gifts, and this ensures financial stability for years to come.
- Encourages donations: An endowment is established to encourage people to donate, with the promise that their donation will continue to go towards their passions. Most organizations also find that if someone is donating to the endowment, they are more likely to continue to give throughout the year to capital campaigns since they are committed to the organization’s cause and future.
In it for the long haul
Endowments can help protect an organization against market volatility and create a sense of stability. A well-managed endowment sets an organization up for future success by laying a foundation for fiscal responsibility and taking pressure away from an annual fund to allow for more independence and freedom. It can also add to an organizations long-term reputation.
For more information about managing investments for your nonprofit or institution, visit UMB’s institutional investment management.
This post is informational only and does not constitute legal or tax advice. For all the items discussed in this post, it is best to consult your own legal or tax advisor who knows your specific situation and can advise you accordingly.
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