Preface

In my work with nonprofit organizations across the country - and occasionally around the world - I encounter a wide range of attitudes. Some board members build up treasure as they worry about an organization's future despite an enviable balance sheet. Across town, a scrappy executive director may be prepared to throw every dollar they have to solve a wicked problem today without regard to next month's payroll. Some prominent institutions consist of a small group of community stakeholders while other powerful movements build a global corps of supporters and partners. Between these extremes are almost two million 501(c)(3) organizations in the United States alone - and thousands more non-governmental organizations (NGOs) around the world - all striving to do good work today and ensure their impact for the long haul. The most resilient are built upon a solid foundation of loyal donors and dependable funding - from endowments or their functional equivalents - that enable them to pursue their mission with confidence.

This is a particularly opportune moment to focus on endowments and the people who create them. In May 2023, a headline in The New York Times declared that "The Greatest Wealth Transfer in History is Here" (Smith, 2023). The article estimates that older Americans will pass down $84 trillion by 2045. While the majority will go to heirs, as much as $12 trillion may be bestowed upon nonprofit organizations according to the financial research firm Cerulli Associates. Imagine an additional $12 trillion fueling the causes that save lives, conserve the environment, and elevate the human experience. If that amount were endowed, it would create perpetual revenue equal to the total amount given to nonprofit organizations in the year 2020. But the funds will not magically appear. The organizations that receive a share of this bounty will be the ones that do the hard work to create systems and nurture relationships. Those that simply wait and hope are unlikely to benefit.

The Purpose of This Book

This book is intended to help nonprofit organizations create and nurture the systems and build the relationships that will fuel their cause and elevate their mission. It is focused on two key resources: money and people. While there are other important keys to resilience, such as brand, reputation, revenue diversity, disciplined budgeting and planning, relevance and impact, as well as an engaged board, even these factors are rooted in people, money, or both.

Who should care about the health and resilience of the nonprofit sector? Everyone. Whether someone gives to, works in, or is served by the nonprofit sector, the impact of charities is abundant. Nonprofit organizations employ approximately 12% of America's workforce and represent 5% of the total economy. The annual report Philanthropy and the Global Economy1 produced by the research team at Citi estimates the global value of philanthropy at $2.3 trillion per year, or just under 3% of global GDP.

Many everyday citizens are unaware of all the ways their lives are impacted by nonprofit organizations. They are not aware that philanthropy supports the places where they learn, worship, and heal; the well-being of the environment that surrounds them; the experiences that bring them delight and wonder. A thriving nonprofit sector is essential to both our economy and our common good and can be achieved through the prudent management of these two critical ingredients: money and people.

More specifically, The Endowment Handbook is directed toward the current and future nonprofit leaders and development professionals who are responsible for nurturing relationships with donors, securing gifts, and managing endowed and reserve funds, especially those in mid-size and smaller nonprofits. Endowments are disproportionally held by larger, older, predominantly white institutions that have ample knowledge of how to build and manage endowments (although they, too, will find helpful guidance here). With this book, nonprofit organizations of any size and in every sector can develop the ability to begin an endowment and increase it over time by cultivating mutually rewarding relationships with their donors.

Overview of the Content

This is meant to be a practical guide, offering nonprofit professionals, board members, and donors with specific steps that can be taken to strengthen the organizations that serve the common good, organized in two parts.

Part 1

This is a discussion of financial resilience, most notably endowment: how it is defined, built up, and deployed in service to a cause as well as some of the criticisms and pitfalls to avoid. The first five chapters owe much of their content and inspiration to Diana S. Newman's book Endowment Building, which was published in 2005 by John Wiley & Sons as a part of the Nonprofit Essentials series. Here, the book is updated to reflect changes in the economy, donor behavior, and the regulatory environment. Diana is a friend and mentor who spent the final decade of her career as executive vice president of Benefactor Group, the firm I established in 2000. It was an honor to work with Diana, and an even greater tribute when she assigned her rights in the original publication to the firm.

Part 1 also discusses other means of financial resilience, such as strategic reserves, which may complement an endowment in strengthening an organization's resilience. Reserves have grown in importance and popularity as organizations - and especially their donors - confronted the constraints of endowed funds during the financial pressures of the COVID-19 pandemic. Much more than a "rainy day fund," modern approaches to financial reserves balance fiscal stability against the flexibility to invest in social ventures and other innovations. Reserves can provide the required startup capital when an idea shows promise to advance the mission and strengthen the bottom line, and may even fund the growth of the endowment, in a virtuous cycle. In recent years, entrepreneurial donors have shown a preference for the flexibility of reserves over the staid dependability of endowments. Chapter 6 also explores other, less common, ways to achieve reliable financial resources.

Endowment and Reserves Are Not the Same

While both endowments and reserves involve assets held for the long-term financial health of an organization, they are two very different concepts. One is meant to be held in perpetuity, releasing only a small portion of the invested funds to support programs and operations. The other is a revolving fund to manage temporary disruptions in operating cash or to provide one-time funding for episodic opportunities.

Comparing Endowment and Reserves

Endowment Reserves Purpose A permanent fund Temporary funds Primary types True, quasi-, and term Emergency (operating) and strategic Policy and regulation UPMIFA (true endowment only), GAAP GAAP Accounting treatment (time) Permanently restricted or temporarily restricted Unrestricted Accounting treatment (purpose) May be restricted or unrestricted Goal Perpetuity Temporary financial needs or opportunities Investment horizon Perpetual Short term

Part 2

This part shifts from financial matters to focus on the individuals whose hard work and generosity fuel causes, whether they are the donors who make gifts; the nonprofit professionals who secure and manage funds; or the broad corps of stakeholders who advocate, volunteer, and elevate the mission in myriad ways. Building resilience requires a coordinated and cooperative effort, rooted in enduring relationships. It cannot be delegated to any single individual. The keys to building enduring relationships are explored in these chapters.

Most nonprofit organizations, regardless of their fiscal heft, continue to call on donors to fuel their cause. The focus is on individual donors because they - rather than corporations or institutional foundations - provide as much as 85% of all charitable dollars given, according to Giving USA2 (through direct giving, bequests, or closely held foundations), and are therefore the focus of these chapters. This part explores questions such as how and why people make charitable contributions - especially contributions to endowment - and how to earn and maintain their loyalty. Like any business model, the most stable system is one that relies on a significant proportion of its current "customers" (that is, donors) to provide recurring support. Because customer (donor) acquisition is both expensive and unpredictable, it is essential to retain these long-term relationships.

Finally, the concluding chapter (Chapter 9) provides various means to achieve and measure the success of relationship- and endowment-building strategies and ensure the desired benefits for the cause and those it...