Ephemeral Perpetuity? Transforming Endowments Into Annuities

Are endowments essential? Almost everyone in the nonprofit world believes so. However, community foundations, major donors, and consultants who have insisted that organizations need to build endowments have diluted and at times even undermined those organizations’ efforts to raise annual operating funds.

An endowment assumes several things:

1. That the donors who give you a little each year for operations love what you do so much that they now want to bestow upon you the means to carry on your good work forever;
2. That the organization deserves to last forever for its present purpose;
3. That the endowment funds will always serve, and not handcuff, the managers of the organization;
4. That the value of the gift will not diminish in importance over time.

Except for #1, in most cases these arguments are false. Perpetuity is the concept that underlies all endowment funds. Often their proponents have a genteel conflict of interest: they are money managers (or community foundations) who draw a fee for their work. Their need to help their communities can be contradicted by their need to build permanent managerial opportunities.

After a lifetime of working at nonprofits, and during the stock market crash of 2008, it became clear to me that the whole system can be a harmful delusion.

I was teaching arts management at American University (AU), and one of the students came to class talking about how her employer, Lehman Brothers, was collapsing before her eyes. We changed our curricular emphasis to crisis survival.

Harvard, with the largest endowment of any nonprofit, laid off hundreds of workers due to a shortfall in income from endowment funds (was this what the donors had in mind when they gave all that money to the university?). The Rose Art Museum at Brandeis University came to the brink of selling off its sterling collection to make up for the decline in income from the university’s endowment. And, on the other side of the ledger, institutions like AU, which had been historically slow to establish large endowments, laid off no one because no significant income had disappeared. (Instead, the health of the university actually increased due to a recession-driven rise in tuition income.)

As I saw the healthiest entities suffer while under-endowed ones thrived, I realized that the paradigm of perpetuity has created more problems than it has solved. Endowment funds should have protected those organizations that had them, but restrictions on the funds weakened them instead. Put simply, most organizations should not have permanent endowments because very few should plan on perpetual existence.

Excepting some major educational institutions and museums (which have a mission to care for objects forever), it’s hard to name any organization or sector that should exist forever. Few of the Dow Jones stocks from 40 years ago are still in the index. Industries, business models, and outstanding players come and go. There’s no inherent reason why nonprofits should be exempt from the same fluctuations of emphasis and excellence.

What’s exciting about rejecting the perpetuity paradigm is that thinking differently can improve and increase programs and services by freeing up assets. I’m not advocating the liquidation of endowments— instead, they should be converted to long-term, self-liquidating annuities. The miserly 5 percent annual payout from an endowment routinely shocks generous donors (“My million dollars doesn’t even generate one salary?”). An annuity of about 15 years would in most cases double the annual payout to the operations. In essence, nonprofits would be able to feed twice as many hungry people, support twice as many artists, or heal twice as many sick patients.

Eventually the annuity would run out of money. By then—in, say, 15-20 years—it’s likely that the organization either will be declining and ready to shut down or thriving and able to replace the annuity, perhaps from the same family who originally donated. If the donor says no, prime naming opportunities are now open to others.

An expiring annuity also can be a moment of organizational, visionary, and programmatic renewal. No one understands the concept of the “fierce urgency of now” better than the founders of a nonprofit; a “new paradigm for long-term fundraising” might sound dry as toast at first, but it offers that same urgency and energy to a new generation of staff and board members.

The sooner we alter our paradigm, the better off the entire nonprofit sector will be. Perhaps it takes an economic disaster to cause real change.

Read more stories by Michael Wilkerson.