Financial Sustainability Task Force Question 3

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In preparation for a Board meeting a few weeks ago I did some background research on endowments and put together some questions and notes about endowments. I copied to http://strategy.wikimedia.org/wiki/Financial_sustainability/endowment_notes but here are the highlights.

  1. Will it be a net positive for long-term financial sustainability? Healthy community giving has worked pretty well for us so far, and given the scope of our audience and its geographical distribution is well diversified so comparatively low risk. An endowment could be valuable supplement but assuming a conservative 5% annual income rate would have to be huge ($150 or $200 million) to completely cover our costs. So the two would have to co-exist.
  2. WIll it negatively affect volunteer motivation? Will a significant endowment, or campaign to raise one, create an impression of boundless resources and therefore less need for volunteer help?
  3. Will it negatively affect existing donors? We currently cover our needs between community giving, major gifts, and institutional grants. Would an additional endowment alternative affect this?
  4. What is right legal structure and resulting risk profile? How much would having deeper pockets affect litigation against us?

Basic facts about an endowment

  • An endowment is a pool of money that is invested so that the income can be used to support the nonprofit. Often, donors restrict these funds so that the principal (the amount initially donated) cannot be used to cover day-to-day expenses.
  • frequently raised through a separate fundraising effort
  • on size, one approach is to decide baseline level of annual income to fund operations (say $2 million) and then calculate how much endowment is necessary to generate this level of income. Assuming say a 5% annual income rate, we'd need $40 million to generate $2 million a year.

Pro's

  • building a capital base and then living off the income can stabilize cash inflow and reduce risk of funding shortfalls
  • having a capital base can reassure donors about organization stability
  • provides donors alternative for a gift that provides ongoing funding instead of meeting a one-time need
  • we take advantage of capacity to raise more money

Con's

  • could discourage future donations by suggesting we are already well capitalized
  • could discourage volunteer work by sending signal the organization is wealthy
  • some donors want to fund current needs, not a warchest
  • could make us a bigger target for litigation
  • with the financial market volatility over past year, endowments don't necessarily represent the image of stability they once did

Key questions for a board resolution creating an endowment

  • What is the purpose of this endowment and how will it tie in with the mission?
  • Who will manage the endowment? Will we have an investment committee or will we hire an outside manager?
  • What is going to be our investment strategy? How can we ensure that the separate and detailed investment policies remain in accordance with this strategy?
  • What will our disbursement policy be? Will the board have the authority to transfer funds under special circumstances?

Other questions to answer:

  • what other like-minded organizations have an endowment?
  • how would we differentiate fundraising for operating needs v. endowment? Give all donors a choice? Focus the community campaign on operating needs while focusing major donors and institutional grants on endowment?
  • what is the impact on our legal risk by having an endowment? what legal structural steps could we take to protect it? should it be held by the WMF, or would it be more protected from litigation if in a separate entity? is the U.S. the right place for endowment to reside, or would another jurisdiction (e.g. Switzerland) be better?
  • would endowment significantly help our major gifts effort? e.g. is the endowment option something which could open new doors for us?
  • should we allow any kind of restrictions on endowment gifts? could become a significant administrative burden.
Stu18:51, 7 December 2009

Hi Mr. West, I read through your notes. I had a discussion on the issue and what seems to be one of the major arguments against endowment is somehow altering the current image of the foundation, that future benefactors might not be as generous if the foundation has a fund and a regular stream of income from it, I think that that effect is being blown out of proportions. Wikipedia is not some charity or benefit for far off places, any benefactor can see what there funds are being used for. the information about the fund doesn't even need to be mentioned in future fund raising events, if the foundation were to become well capitalized it doesnt necessarily make it inefficient or its cause any less effective, there are thousands of charities and Universities that raised in excess of billions of dollars and continue to do so year after year, they don't mention if they have a fund or how capitalized they are, people just have to believe and support their cause. I cant say anything about being a target for future litigation besides that it doesn't seem like a credible enough reason to not have a fund, maybe a little fearful attitude on our parts. As for the argument of current economic downturn, I think its more of a reason to be secured than ever, if a fund wont represent stability neither would an annual fund raising drive, donations are more likely to be affected and dry up in an economic downturn. The fund could be based anywhere thats one of the many benefits of having a project like Wikipedia, global presence and recognition. The exact comparison of available options could be conducted in different countries once a decision has been made about the fund, some countries offer higher interest rates 10-12%, some more flexibility and security.

In conclusion, I would just like to say that if I were a large benefactor to the foundation, I would more likely contribute to a one time solution for the funding issue and have my contribution be remembered and thanked indefinitely(or at least for decades) rather than flip the bill for the year and wait till next year when my contribution is forgotten to newer benefactors. Any contributions to the Fund would live on much longer than any donation, any benefactor would prefer to have his contribution make a long term difference.

Theo1001107:22, 8 December 2009