Starting from scratch: Building of meaningful endowments by public charities

• Date: 01 September 2020
• Author: Todd L. Ely,Thad D. Calabrese,Juniper Katz
• DOI: http://doi.org/10.1002/nml.21410
• Published date: 01 September 2020

RESEARCH ARTICLE

Starting from scratch: Building of meaningful

endowments by public charities

Todd L. Ely

1

| Juniper Katz

2

| Thad D. Calabrese

3

1

School of Public Affairs, University of

Colorado Denver, Denver, Colorado

2

University of Massachusetts Amherst,

Amherst, Massachusetts

3

Robert F. Wagner School of Public

Service, New York University, New York

City, New York

Correspondence

Todd L. Ely, School of Public Affairs,

University of Colorado Denver, Denver,

CO.

Email: todd.ely@ucdenver.edu

Abstract

Most nonprofits lack a true endowment and endow-

ment wealth is concentrated in a relatively small num-

ber of organizations and subsectors. This study

supports an operational definition of material endow-

ment, equal to or greater than annual expenses, and

investigates how common it is for a nonprofit to estab-

lish a meaningful endowment over time. Specifically,

we address whether the sector's enthusiasm over the

potential of endowment building is reflected in charita-

ble organizations' experiences. Using financial data, we

find that building a meaningful permanent endowment

is a rare achievement among public charities over a

period of two decades. Meaningful endowment crea-

tion, achieved by less than 2% of the sample, is more

common for organizations with donor attachments, the

need for subsidization of mission services, those with

more fundraising costs, and those with more donative

revenue portfolios.

KEYWORDS

endowment, fundraising, nonprofit finance

1|INTRODUCTION

Many managers and board members presume a priori that endowment is desirable for charita-

ble organizations. Support from national, regional, and community foundations increasingly

targets improving organizations' capacities to establish and raise endowment. Some states have

adopted tax credit programs in an attempt to stimulate private contributions to endowments. A

small practitioner-oriented literature even exists to help guide and assist nonprofit professionals

Received: 29 October 2019 Revised: 22 February 2020 Accepted: 3 March 2020

DOI: 10.1002/nml.21410

Nonprofit Management and Leadership. 2020;31:33–55. wileyonlinelibrary.com/journal/nml © 2020 Wiley Periodicals, Inc. 33

in the creation of endowment (Beaird, 1999; Moerschbaecher, 2001; Newman, 2005;

Schumacher & Seiler, 2003), highlighting the revealed importance of endowment building to

nonprofit managers. Despite scholars arguing that “a consensus is emerging that endowed non-

profits behave differently from other nonprofits”(Bowman, Tuckman, & Young, 2012, p. 566),

we continue to have a limited understanding of endowment, and most notably about its crea-

tion in organizations.

Recent research confirms that most nonprofits lack an endowment and such wealth is con-

centrated in a relatively small number of organizations and subsectors (Calabrese & Ely, 2017).

This paper investigates how common it is for a nonprofit to establish a material endowment.

Specifically, is the sector's enthusiasm for endowment building reflected in the history of orga-

nizations actually building endowment? And, if so, what subsectors and organizational charac-

teristics are associated with the creation of meaningful endowments?

To answer these questions, we first operationalize the establishment of a meaningful

endowment. Next, using snapshots of nonprofit organizations over an extended period, we iden-

tify organizations that built a material endowment. Third, we describe the frequency with

which nonprofits establish meaningful endowment over time and consider the characteristics

of those organizations.

This study has theoretical and practical implications. Existing literature on endowment

focuses on either asset allocation and return, or how endowments influence management and

organizational behavior. This research extends the literature to cover endowment building and

theoretical expectations around which charitable organizations might accomplish material

endowment building. A fundamental look at the origins of endowment also informs the field's

perspective on the appropriate and intended functions of such funds (Bowman, 2007; Bowman,

Keating, & Hager, 2007). In addition, the creation and management of endowments is an inter-

national concern; managers in Asia, Africa, Latin America, Canada, and Europe increasingly

have contact with endowments (Gonzales, 2003). Therefore, while the legal and accounting

requirements described here come from the United States, the management implications are

global.

1

From a practical perspective, the paper provides much needed evidence on whether endow-

ment building is a valid management strategy. Establishing an endowment takes nontrivial

resources and can distract nonprofit managers and donors from current fundraising and service

provision. The research also builds on existing work (Hager, 2006) by advancing a formal opera-

tional definition of a material true endowment based on the literature (Bowman et al., 2012).

2|WHAT IS ENDOWMENT?

Endowment refers to assets invested with the intent of generating a steady income stream for

an organization (Bowman, 2007). Endowment can be composed of both donor-restricted and

unrestricted funds, and may support general operating expenses, specific programs, or capital

investments. Our focus here is on “true endowment”—which are donations made to an organi-

zation with restrictions attached to the contributions in perpetuity by the donor. For true

endowment, the earnings of the fund can be spent while the “corpus,”or body, of the endow-

ment cannot. An endowment may also hold assets that are only temporarily restricted.

Referred to as “term endowment,”the funds can be spent once donor-imposed conditions are

met. Finally, nonprofit boards of directors can designate a portion of unrestricted net

assets as “quasi-endowment.”Unlike true and term endowment funds, board-designated

34 ELY ET AL.