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Endowments and quasi-endowments help organizations establish long-term financial stability. This guide explains the basics; provides links to resources that address creating, managing, and fundraising for these funds; and describes the practices of 10 land trusts.
Endowments (National Council of Nonprofits)
Should Your Nonprofit Create an Endowment? (Nonprofit Quarterly)
Five Steps to Starting an Endowment: Even Smaller Nonprofits Can (Guidestar)
Endowments: Long-Term Funding for Nonprofits (Wagenmaker & Oberly)
What It Takes to Manage an Endowment (GT Reilly & Co.)
Managing an Endowment: Three Key Principles (Laird Norton)
A Simple Approach to the Management of Endowments (AllAboutAlpha)
Best Practices for Managing Your Organization’s Endowment Funds (CBIZ)
The Best Way to Raise Endowment Funds (FiredUp Fundraising)
Endowment Funds Go on Forever, but an Endowment Campaign Should Not (Raise-Funds)
Tips for Successful Endowment Fundraising (The Fundraising Authority)
An endowment, roughly speaking, is a gift donated to a charitable organization to provide a permanent source of income to the organization. The donor makes the gift with the requirement that only the income from the investment of the gift may be spent by the organization; the gift itself—the principal—must remain intact to ensure that income from it can benefit the organization in perpetuity.
In addition to the prohibition on spending the principal, a donor may or may not choose to place restrictions on use of the endowment’s income (e.g., it may only be used for stewardship of the organization’s conservation holdings or to fund scholarships).
The law pertaining to endowments varies by state and changes over time. All states except Pennsylvania have adopted the Uniform Law Commission’s Prudent Management of Institutional Funds Act in some form, but there can be substantial variation in what exactly was enacted. There is complexity, and legal counsel should be sought to ensure that a planned endowment will operate as intended.
Many land trust boards earmark funds to “stewardship endowment funds” or like-named financial accounts with the intention that these funds be treated by the organization in the same way as true endowments. These earmarked funds are often known as “quasi-endowments.”
While endowments are permanently restricted by the donor(s) to ensure their continued operation, the board restrictions and earmarks governing quasi-endowments are not permanent—they can easily be undone, usually by a simple majority vote.
If an organization wants a level of permanence for its earmarked funds that is akin to an endowment’s, it can achieve this by entrusting the funds—forever ceding control of them—to an outside entity such as a community foundation or trust. While this can ensure the principal of the fund will remain untouched and a perpetual flow of income to the organization, it also means there is no going back: the principal is forever off-limits to the organization.
Another factor to consider is control over investment decisions. When an outside entity holds a fund, it makes all the decisions about how to invest the money; with board-restricted funds, the organization makes the decisions (either directly or by hiring and overseeing an investment firm).
Ultimately, when deciding between board-restricted funds and endowments held by outside entities, organizations must weigh the value of permanence and hands-free maintenance against the value of long-term financial flexibility and control over investment decisions.
This section reports in brief on the endowment practices of 10 Pennsylvania-based land trusts. It addresses funds permanently restricted by donors, those restricted by boards, and those entrusted to an outside entity. Below is a list of key takeaways from the land trusts surveyed:
Held by a community foundation:
The land trust’s finance committee develops policy re-garding finances and borrowing. The land trust recently moved all permanently restricted funds to a community foundation.
From President Kim Murphy
“Have a fund agreement for every fund you create. Understand and be able to answer if the fund is board designated or donor designated. This is important because at one point we had to borrow from our board- restricted endowment (for about two months) and I was able to tell the board exactly what we had available in board-designated funds vs. donor-designated funds that we couldn’t borrow from.”
Held by the land trust:
The fund is managed by an investment firm (hired through a vigorous RFP process) which is overseen by the land trust’s investment committee in accordance with the board-adopted investment policy.
Held by a community foundation:
Held by the land trust:
The land trust’s first fund is held by a community foundation; all funds established since are held by the land trust. The land trust currently has an RFP out for an investment-management firm, which will report to the land trust’s finance and investment committee and invest the money based on the board-adopted investment policy.
Held by the land trust:
Both funds are managed by an investment firm which was selected through an RFP process. The land trust has a finance committee that oversees the investment manager in accordance with the board-adopted investment policy.
From Executive Director Sean Kenny
“It’s important to have qualified people as volunteers who understand investments, investment policies, and the need to continually change them.”
The timber value of the forests that the Foundation for Sustainable Forests holds is its version of an endowment. To date, FSF has conserved over 2,000 acres of forested land in northwestern PA. Some of these forests are in a restorative state and are decades away from being able to support the organization's operations. Others are richly diverse in species composition, age, structure, and habitat, while simultaneously subsidizing FSF's operations through “worst-first,” ecological forestry. The net proceeds of FSF’s forestry become the “interest” that is drawn from the diverse, resilient forests, FSF’s “principal.” Every step taken to grow this forest endowment is simultaneously another forest conserved in perpetuity.
The management of FSF’s “forest endowment” is entwined with the ecological forestry that FSF practices. Its forest managers make decisions based on what the forest needs, not based on the budget. With a land base that is sufficient in size to accommodate fluctuations in timber value, FSF does not anticipate having to choose. Through this model, FSF is committed to enhancing the overall health of the forests of northwestern Pennsylvania.
From Executive Director Annie Maloney, PhD
“As an organization, we understand that fluctuations in timber markets and new conservation-minded opportunities, such as carbon, will affect how our land base supports the organization’s base operations. Our goal is to continue to conserve forested land for all of the community and ecological benefits it holds, while simultaneously building a modest “forest endowment” to ensure our organization's own sustainable future.”
Held by the land trust:
The land trust’s board of directors is in charge of administering and investing the money, following the advice of the finance committee and in accordance with the board-adopted investment policy. Several members of the board have financial expertise, so the land trust has gotten by so far without hiring an investment manager. The land trust has not yet spent any of the investment income from the fund, instead choosing to let the fund grow so that it will produce more income when it is needed at a later date.
Held by a community foundation:
The funds held by the land trust are managed by outside investment managers under oversight of the board of directors. Each fund has its own guidelines (based on decades-old agreements with partners such as DCNR, utility companies, and county governments) with the board providing oversight.
From Chief Executive Officer Phil Wenger
“For fee lands, set aside money from every purchase for stewardship. Don’t take easements without an endowed fund to monitor and enforce those easements in perpetuity.”
Held by a trust fund:
The land trust uses an outside investment manager, which is overseen by the board’s investment committee. The investment committee follows an investment policy and a spending distribution policy. Like with a community foundation, the money in the trust fund (25% of the land trust’s total endowment sum) is held in a separate account and managed by an outside trustee—the land trust has no control over it.
From VP of Finance and Administration David D’Antonio
“No matter how big or small, whenever an organization receives funds that have no obligations tied to them, those funds should be considered for a quasi-endowment.
Distribution from the endowment should be set at a reasonable rate so that the endowment maintains its purchasing power.”
Held by a community foundation:
Held by the land trust:
The funds held by the land trust are managed by the trust department of a local bank. The board of directors oversees these funds in accordance with the board-adopted investment policies that address risk tolerance and spending policy; there are separate policies for the organizational fund and stewardship fund, but the text is very similar. The donor who established the board-restricted organizational fund allowed for the land trust to spend principal under certain circumstances with a super-majority of the board (hence the “board-restricted” label). These are outlined in the documentation establishing the fund.
From Executive Director Reneé Carey
“We thought the community foundation would do more to ‘sell’ our organization and our endowment to potential donors, but we haven’t seen that.
A true endowment doesn’t allow for the principal to be used. You’re only taking the interest or a percentage of the interest. I think it’s important for people to understand that and to make sure all the parties involved have the same understanding of what the money is to be used for and how to use it.”
Held by the land trust:
The board of directors approves investment policies and selects members of the finance committee; an outside investment consulting firm advises the finance committee on investment matters and prepares comprehensive investment reports for the committee and board of directors.
The finance committee is charged with:
Land trust staff is responsible for day-to-day investment-related activities, including:
The board-adopted investment policy:
From Chief Financial Officer Connie Eads (at the time of the 2018 edition)
“Some nonprofits may be investing their individual endowed gifts in separate investment accounts because it’s the easiest way to track each separate endowed gift. This can become cumbersome to manage from an investment perspective and can negatively impact performance. Once a nonprofit has more than a handful of individually endowed gifts, it should look for ways to pool investments to take advantage of lower fee structures, enhanced asset allocation opportunities, and easier monitoring and management. Accounting for separate endowments can then be achieved through in-house software (newer accounting software or subscription services in the cloud) or through services provided by outside financial services providers.
Having an outside investment consultant selected through an RFP process, whether they are hired just to provide advice or to actually manage the funds, eliminates the possibility of a board member saying, ‘Let’s invest it all in Bitcoin!’; tempers the tendency of some boards to invest endowed funds too conservatively (given the long-term nature of endowments), enhances the quality and depth of investment reporting, and eliminates the need for board members and staff to stay on top of the markets instead of pursuing their nonprofit’s mission.”
