Arts managers ask us – why hold money in an endowment, where we only receive income and can never access the invested capital ? Investment returns have fallen and I’m not sure I can count on receiving income.
Capital Funds
Capital funds, whether endowed (income only and capital is invested in perpetuity), or a restricted fund (income and limited access to capital under certain conditions) offer an arts organization a stream of income, that through its constancy, helps protect the organization from swings naturally occurring in earned income or fund raising activities. Capital invested in this way is a source of income that recurs and is usually unrestricted – you determine how best to use it each year. You may add it straight into your operating budget, but we observe that thoughtful arts organizations use it to invest in the future – through arts education, youth programs or scholarships to support emerging talent, as well as supporting strategic investments in program/mission.
A long term fund can meet both your planning needs and the desires of your donors who want to create a personal legacy through a gift delivering a stream of income – one that sustains over time the arts they are passionate about. People of all means give time, and money to support an art form , an artist or arts organization important to them. That desire to support is usually lifelong and often is a process evolving from volunteer, to annual gifts and ultimately legacy gifts/bequests. The decision making process is unique to every person or family. Connecting to the values and interests of donors is essential to your financial stability and long term funds, endowed or restricted are a tool you should have in place to respond to different styles of giving. People of modest means can and do make meaningful financial contributions, often through a final gift or bequest.
Organizational Needs
When developing your mission, or implementing a strategic plan for the next five years, managers and board members will identify if the organization needs to think of capital in the short term – a board restricted fund that serves a ‘rainy day’ fund, or a plan to build capital funds that accumulate funds to create streams of future income – providing flexibility to invest in new, adapt to changing circumstances, invest in facilities or sustain the legacy of an artistic founder. Just as donors are unique, so are arts organizations. You need to ask yourself where your organization sits in its development – ask yourself:
- Do you have a firm grasp of your current liquidity needs – are all financial sources needed for today
- Is your organization able to create reserve funds for investment or to meet a short term funding gap
- Has your board thought about how long term gifts will help sustain your arts mission
- Can you direct long term income from gifts towards priorities of the organization such as outreach, education
- Does your organization have the capacity, or access to expertise to manage long term gifts
- Would a long term gift that is subject to restrictions offer any risk to your organization
- Will a focus on long term gifts take away resources that are required to meet current funding needs
The Evolution of an Endowment
Historically, endowment meant capital was to be preserved and invested, generating a source of annual income. That often meant in ‘perpetuity – forever’ – one way to think of this or explain to a donor is a gift that will last 100 years or longer. Fewer donors think this way, and appreciate solutions that are long term, but also allow them to ‘see’ their gift at work. Endowment in this sense translates into a capital restricted fund – income is generated, but the capital may potentially be accessed in special circumstances/needs, or a fund is designed to last for a stated period – 10 – 20 years.
Understanding the demographic profile of your donors and the values important to them is important when discussing the best structure for a long term gift of capital. It both strengthens the connection between your organization and arts program to the donor and helps create a planning result that meets your financial funding needs today and over a longer time frame.
For every person wanting to support your organization financially, there are many options to link their values and aspirations to your business needs – be they current year’s programs, or a income that supports strategic goals long term in nature. Making informed decisions, both on your part and with your donors and their advisors is most important – to ensure support sustains you today and sustains your mission for years to come – continuing to spin ‘straw into gold….”