Endowing the Arts

Do you know how to talk about endowments?

Here are a few facts to help you brush up your endowment IQ.

An endowment is not just a pot of money set aside for use however an organization chooses. Your total endowment number typically is made up of individual funds established by donors who, in some instances, restrict the use of the income for specific purposes. Those restrictions include named funds to support educational activities, artistic programs, or leadership positions in the organization. Our favorite endowed funds are the ones that are unrestricted, giving the management and board discretion to use the funds where needed most.

However, it’s important to understand that endowment funds come in threes. There are:

  1. True endowments where a donor has specified that the gift be held in perpetuity and invested with only a portion of the income available for expenditure.
  2. Term endowments are just like true endowments, except the donor establishes them for a term of years after which the fund is no longer endowed.
  3. Quasi-endowments where the board has decided that unrestricted gifts or surplus revenue be treated as endowment but has reserved the right to change that restriction. These are often funds from estate gifts or surplus funds at the end of a good year.

All three can be unrestricted or restricted.

Organizations have a responsibility to invest their endowments mindful of both the present and the future.

Generally, they invest in stocks, bonds, and other vehicles to seek a long-term return in the range of 7% to 8%. This will maintain the endowment’s purchasing power for the future while providing for current spending. Spending policies vary by institutions, but a common starting point is 4% to 5% based on the income received on endowment investments.

A conservative approach to endowment spending can be prudent in volatile markets. However, failing to draw funds from a healthy endowment can do a disservice to the people and programs who benefit from your mission.