Stanford Social Innovation Review is offering “Endowment for a Rainy Day,” an excellent article from their latest issue, online in its entirety for non-subscribers. This article, by Burton A. Weisbrod and Evelyn D. Asch, both of the Institute for Policy Research at Northwestern University, makes several excellent points:
- The main goal for an endowment should be to sustain the central programs of a nonprofit. However, “it should not be the goal of the programs to protect the endowment, cutting them back to sustain or rebuild the endowment.”
- Nonprofits have a great deal of control over their endowments, and “contrary to common belief, there is no legal minimum or maximum amount that nonprofits must withdraw (payout rate) from their endowment each year.”
- Nonprofits that hold money in reserve for “a rainy day” — circumstances beyond their control that adversely affect programs — should be better able to weather a rainy day than nonprofits without money in reserve.
- While there is “no simple definition of what constitutes a rainy day, an overall drop of 10 percent of annual revenues” should count as a rainy day. The current recession has caused a rainy day for many nonprofits, making this an appropriate time for spending down endowments to protect programs.
- “Squeezing today’s students, patients, and museumgoers [and congregants] to save money for future generations of users is misguided. But building endowment is not misguided if it is used as rainy day insurance, to preserve stability and long term development of programs central to a nonprofit’s mission.”
This is the best thing I’ve read in a long time on the principles that should guide endowments. I urge you to read the whole article yourself.