Fundraising planning should focus on solving nonprofit’s problems

Published in the June 20, 2008 edition of Columbus Business First

I recently received an email from a nonprofit board member asking for advice on designing a fundraising program.  She noted the organization’s funding was too dependent on weather-related events and asked whether it should focus on its endowment and planned giving.

This is a common question and nonprofits are encouraged to develop endowment and planned giving campaigns.  The first step is to identify the problem they are intended to solve.  

A nonprofit board’s first duty is to be a reliable provider of a service that fulfills its mission.  Fulfilling that duty has a clear prioritization:  Assuring sustainability over the next year must come before sustainability over the next five years, which must be assured before tackling sustainability over the next 50 years.  The key question is how endowments and planned giving fit into these priorities?

Dealing with endowments

Raising an endowment is a decision to tap today’s donors to provide resources for the distant future.  The first rule of an endowment is  that the original gift, the corpus, can never be spent.  The second rule is that sufficient income must be set aside each year to maintain the inflation-adjusted value of the corpus.  Only the income that is left over is eligible to be used to support current operations of the organization.  As a general rule, that support is about 5 percent of the endowment and it usually cannot begin much before the third year after the gift is made. 

Consider this math:  A donor who could give $10,000 to be used today is asked to give $10,000 that can never be spent, which will not produce spendable income for the next three years, and thereafter may be able to provide $500 per year to offset the effects of poor weather on event revenue.  When dependency on revenue from weather-related events is a problem, its best funding solutions will enhance its ability to maintain services through a month, or a year, of weather-foiled events. 

The endowment strategy does not solve this problem.  Even if that donor were persuaded to make an extraordinary $30,000 endowment gift, the organization can expect future annual income of only $1,500.  And in order to make that extraordinary gift, that donor may need to reduce annual giving below his customary $10,000.  A potential reduction in near-term annual giving in exchange for endowment income of zero for up to three years and $1,500 thereafter? 

Diverting an annual gift of $10,000 to a large endowment gift can be beneficial only if this organization can afford big fluctuations in weather and in annual giving.  Since apparently it cannot, the nonprofit should instead be raising money that can be used immediately.  An extraordinary gift of $30,000 could be highly beneficial, however, if it is placed in a board-designated reserve that can be tapped whenever an event is foiled by weather. 

Dilemma of planned giving

Planned giving is an excellent program to provide for the very distant future.  The bequests that come from these programs are uncertain in the timing and amount of monies that are eventually received. 

One client of mine received its money 70 years after the bequest was established.  Wills and bequests are easily changed over the years, and it is difficult for an organization to ever know how many wills provide for the organization, the gift in the original will, and whether changes have subsequently been made to the will. 

It is best for an organization never to plan to receive a bequest so it can be pleasantly surprised when one arrives.  From this perspective, planned giving is irrelevant to the organization’s problem with its vulnerability to weather-dependent events. 

Planned giving campaigns do not happen on their own, and they have the potential to divert effort from annual fundraising. 

The potential for a very large gift decades from now is difficult to evaluate against the need for continued modest gifts today. 

If a nonprofit has enough staff, focusing on a planned giving program can make sense.  But if it is struggling to balance annual budgets and maintain stable annual revenue, it must devote all available fundraising capacity to annual giving. 

A nonprofit that needs to stabilize its funding and protect itself from the vicissitudes of weather-dependent events must focus its fundraising on programs that address this problem.  Building working capital and accumulating a board designated rainy day reserve may be the best solutions to this problem.  A fundraising campaign that solves these near-term problems can then move on to the problems that endowments and planned giving can solve.

Allen J. Proctor was formerly chief financial officer of Harvard University and is the author of Linking Mission to Money(R) Finance for Nonprofit Board Members. Subscribe to his free newsletter at www.proctorconsulting.org.

Copyright 2008. Reprinted with permission, Business First of Columbus Inc.