Endowments are Great — But Sustainability and Autonomy are the Greater Good

As a foundation leader and fan of nonprofit endowments, I wasn’t surprised to read CEP’s recent findings that less than a third of foundations grant to endowments.

The CEP report, an examination of the prevalence of and approach to endowment funding, includes ardent and compelling voices calling for a philosophical shift in philanthropy to embrace endowments as an approach to greater power sharing with communities. In theory I like the idea. But in practice I think there’s a more productive path forward that better positions both foundations and nonprofits to promote power through sustainability and autonomy.

This perspective is informed by a decade at a grant-funded, non-endowed nonprofit, followed by a decade at an endowed community foundation where we helped other groups grow endowments, and most recently at an endowed foundation that does not support other endowments. Before I apply these accumulated perspectives to CEP’s findings, I’d like to add to ongoing myth-busting conversations concerning nonprofits and endowment:

• Complexity and scale shouldn’t deter endowment fundraising. This is a challenge that already has a solution: Community foundations’ service regions cover most of America, and they exist to aggregate multiple community endowments to achieve investing scale and centrally manage investing complexity.
• Small nonprofits can handle big gifts. While this concept has failed the commonsense test for years, CEP’s recent examinations of Mackenzie Scott’s giving hopefully puts this myth to bed once and for all.

When it comes to the specific question of foundation support for endowments, it’s important that we set the right expectations:

• Endowments are power… sometimes: I can affirm first-hand that unrestricted endowments do confer power to community organizations. However, restricted use endowments are common and sometimes represent a permanent imposition of donor control, rather than an act of liberation. I have encountered many restricted-use endowed funds that were established with the best intentions decades ago, but in the present day represent a constraint on organizational autonomy. Certain scholarship funds and programmatic endowments are the two most common examples. If our goal is equity and power-sharing, we need to narrow our conversation to unrestricted or minimally restricted permanent endowments.
• Donor intent matters: Love it or hate it, donor intent is a bedrock legal and ethical principle in U.S. philanthropy. The donor intent behind the establishment of some foundations can limit or prohibit giving to permanent endowments (as it does with my institution, the Michigan Health Endowment Fund). Whether or not one agrees with this outcome, it’s prevalent enough to narrow the potential pool of grant funding for endowments.
• Scale is essential: As observed in the CEP report’s supporting articles, endowment giving requires scale — every $100,000 in gifts produces roughly $5,000 of recurring annual income. Put another way, even a million-dollar endowment gift is in most cases insufficient to sustain a single full-time staff position. A majority of foundations lack the six-figure grantmaking scale needed to catalyze significant endowment growth.
• Time value of money is debatable: There is a fair and ongoing debate over weighing the present value of a grant vs. its future value through permanent endowment. While I believe that the total value of an endowed gift eventually exceeds the impact that gift could make if spent immediately, it’s a perfectly legitimate and arguably equitable philosophy for foundations to value present-day impact over future distributions.

Do these limiting factors excuse foundations from the conversation? Not at all. If we broaden the conversation from endowments to examining sustainability, the path toward more empowering practices becomes clearer and more pressing.

Sustainability is Power

Foundations should incorporate considerations of endowment support into the broader issue of supporting sustainability. We know that sustainable organizations are much more likely to demonstrate bold leadership in service of equitable outcomes. Foundation support of sustainability can come in many forms, all of which leverage one another (I view these approaches as a collection rather than a progression — the more the better). At the Michigan Health Endowment Fund, we’ve pursued this through grantmaking practices and non-grant activities including:

• Reevaluating indirect cost reimbursements for program grants (after a CEP-led survey of grantseekers, we recently established a 30 percent indirect rate for small and medium-sized community organizations).
• Capacity building support to bolster nonprofits’ fundraising capacity.
• Purchasing fundraising consulting services and other infrastructure supports in bulk to share with community organizations.
• Continually refining our grant application and post-grant reporting processes to reduce time burdens on nonprofits to increase the net value of each grant.
• Investing grant dollars, technical assistance, and reputational equity in work that can be sustained or scaled through alternate funding sources — and committing to working alongside grantees to make it happen.

Foundations can also bolster nonprofit sustainability by funding cash reserves, funding capital projects (at a previous organization our debt-free building served as an endowment of sorts), and the most important sustainability tool of all, unrestricted giving (operating support). Which brings us to the opportunity to empower organizations through choice.

Choice is Power

The general rule of thumb for achieving equity is that foundations should develop mutual trust with nonprofit leaders to maximize the equitable impact of grants. With that in mind, I believe that operating support is a critical tool for conferring power to community organizations. I’d prefer for nonprofit leaders to decide how to allocate a grant between current needs and endowment rather than make that choice for them. The CEP report notes that this rationale is one of the top reasons cited for why foundations choose to not support endowments — they want to promote grantee autonomy.

There’s another role for foundations’ support for endowments, and that is to help nonprofits tap into a much larger funding source for endowment growth.

Go Where the Money Is

My belief is that foundations often get more attention than we deserve because of our concentrated wealth, prominent voices, and marketing capacity — in that respect, endowments are indeed power. However, this fixation comes with an opportunity cost: foundations only represent 22 percent of U.S. giving and, as discussed above, a lot of that giving can’t or won’t be re-directed to endowments.

On the other hand, individual donors drive nearly three quarters of total annual U.S. philanthropy — they are the proverbial 800-pound philanthropic gorilla. Beyond their massive annual giving, the ongoing intergenerational transfer of wealth ($84 trillion expected to transfer by 2045) has potential to drive investment in nonprofit endowments at a scale that makes foundation outputs seem miniscule.

In fact, if the social sector could re-direct just one percent more of individual estate transfers to nonprofit endowments over the next two decades, that output would vastly exceed the total potential for foundations to increase their support for endowments. Tying this to sustainability, foundations should be enabling nonprofits — whether through direct grant support, capacity building tools, or access to new platforms — to establish the staffing, tools, and networks they need to engage in major gifts and (most important for endowment growth) planned giving.

Foundations can and should do more to confer autonomy and power to grantees. However, rather than encouraging nonprofits to seek incremental growth through foundation grants to endowments, a much more productive (and potentially transformational) path forward is for foundations to double-down on commitments to sustainability, trust, and enabling access to major and planned giving. These inter-connected approaches are the highest potential avenues to increase nonprofit power through sustainability and the greater equitable outcomes that would follow.

Neel Hajra is chief executive officer of the Michigan Health Endowment Fund. Find him on LinkedIn.

Editor’s Note: CEP publishes a range of perspectives. The views expressed here are those of the authors, not necessarily those of CEP.