September 25, 2022
When most development leaders think of an endowment, large universities with robust development departments come to mind. This may be true, but endowments are not reserved solely for universities.
Schools are often reluctant to solicit funds specifically targeted for endowment. This may result from a lack of understanding. Schools, like other nonprofits, avoid accumulating “apparent wealth.” But endowments ensure your long-term stability, provide an added layer of support in the event your school experiences an unusual financial situation, and funding for specific programs or initiatives.
In fact, over the past two years, schools with endowments were better able to circumvent the effects of the pandemic versus those that did not.
While private-independent schools face a multitude of overlapping challenges as their university counterparts—stagnant enrollment, tuition pressures, increasing operational costs—endowments are a valuable tool in providing long-term financial support.
Here’s how developing an endowment can benefit your school.
Endowments are funded through donations. Those donations are unrestricted or restricted—only donors can permanently restrict monies. Unrestricted donations come from donors who give the school the discretion to apply the endowment income to whatever the school deems appropriate.
A restricted endowment indicates that funds from the donor’s principal donation are restricted to whatever the donor and the school agreed upon. Some commonly restricted endowment areas include the arts, athletics, and financial aid.
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Fixed Income and Equities
When establishing an endowment, schools should develop an investment policy that seeks to preserve principal (the initial donation) while providing for reasonable growth of the investments.
A financial advisor can help you understand your many investment options like fixed income—corporate or government bonds, money market funds, and CDs—equities, and stocks.
As an endowment grows, the share of the principal invested in fixed income and equities generally declines and a greater share is directed to alternative investments. An endowment’s goal is to generate enough real returns annually to cover funding obligations or target areas while preserving the principal.
As endowments grow, alternative investments such as real estate, private debt, private equity, and venture capital may be an option as the returns are generally higher.
Communicating With Stakeholders
School leaders face common challenges regarding endowments and stakeholder communication. Endowments are very long-term vehicles to grow a school’s financial base. They are not designed to fund areas or items in their entirety in the short term. For smaller endowments, it can be difficult for school leaders and Board members to navigate this concept.
Overcoming these challenges requires education.
Inform prospective donors of an endowment’s benefit. If a donor is interested in funding the arts right now, discuss the possibility of an immediate restricted gift that is aligned with the school’s identified needs. When discussing endowments, providing this context as a choice to the donor generally works well. They can fund items or areas in the present or help to build a financial base that provides funds (via the endowment’s annual returns) in perpetuity to specific areas.
Another important message to convey is a donation to the endowment fund is for stakeholders who want to remain connected to the institution for the foreseeable future. It is also for those who want to leave an enduring legacy by ensuring the school or an area always has funding moving forward.
A successful endowment reduces the school’s financial burden and generates consistent income over the long term. If the Development Department is equipped with compelling cases for support and the Finance Committee is committed to transparent, easy-to-digest reporting, most school stakeholders will be the biggest champions of the endowment’s growth.