Rethinking Endowment

Do you think it’s possible to have an endowment that is too big?

I’ve watched with sadness and morbid curiosity as many of central Indiana’s great cultural institutions have announced budget cuts and layoffs in recent months, as a means of dealing with 30 and 40 percent drops in the value of endowments that last year generated over half of their operating revenue.

For most of my career, the eight- and then nine-figure endowments accumulated by the Indianapolis Museum of Art, the Indianapolis Symphony Orchestra, The Children’s Museum, and the Indiana Historical Society, among others, were things to be envied. This year, they became traps.

No matter how many lines they add to the Form 990, I really think there are only four main categories of revenue for non-profits: earned income, contributed income from private sources, endowment interest, and government grants and contracts.

Most organizations I’ve worked with were aware of the need to achieve greater balance between the two, three, or four streams on which they were dependent. I think in most cases, a 50-50, or 33-33-33, or 25-25-25-25 split would be the ideal.

I’ve known of social service agencies so dependent on government contracts that they changed their missions and names. We’ve all seen performing arts organizations and cultural attractions so dependent on earned income that they invest in marketing and delivering programs unrelated to their mission. Even within the categories, things can get out of balance to the detriment of the organization: development departments that rely too heavily on grants from a few large foundations that give 12% of the charitable “pie” instead of cultivating the individuals who give 83%; institutions where facility rentals become such a big part of earned income that program spaces are converted to banquet halls.

But has anyone ever said, “Wait … our endowment has grown to the point that we’re too reliant on it”?

When a generation of good stewardship generates so many bequests that your endowment grows to more than ten times your operating budget; and the interest that it produces grows from 20% to 35% to 55% of your total income – how do you achieve balance?

How does a museum or symphony with a $20 million budget that (in a normal year) gets half of its income from earnings on a $200 million endowment, achieve greater balance? Does it have to become a $30 million organization, doubling its earned and contributed income to keep up with interest earnings?

It almost sounds like sarcasm or a parody, but I don’t mean it that way. I do think this economic environment is going to cause us, as an industry and a society, to reassess some very basic premises about wealth and income; maybe, in many cases, for the better.

I attend a church that is, in my opinion, out of balance in its reliance on an endowment (or benefaction, as we call it), and is therefore now facing the same kinds of challenges about dealing with a sudden decline in revenue. It has been very interesting to see how this congregation is responding – and the number of individuals who are suggesting, and volunteering, increased giving rather than scaling back on the church’s mission.

Maybe it won’t be an entirely bad outcome if, for the rest of our careers at least, it no longer is seen as desirable to have an endowment so large that we don’t have to sweat so much over our annual fund donors, members, subscribers, customers, and clients …