Why we don't fund charities with endowments
As donors, we expect our money to be spent on programs today, instead of being held for future use or to generate investment income via endowments.
Charities should spend their efforts, and their money, on the causes they work on. Every dollar not spent on programs is overhead. We see two primary categories of overhead:
Like administration, some savings are necessary: organizations do need some office staff, and they do need some reserves. But in either category, more isn’t necessarily better--at some point, more is worse. Organizations should minimize the diversion of program funds to savings in the same way that they minimize administrative overhead. Funds diverted to non-program expenses are funds not being spent on the primary mission of the charity.
Our definition of savings includes all unrestricted and temporarily restricted net assets, including fixed assets. While funds permanently restricted by donors are often outside the charity’s control, fixed assets are not. Unless it is related to the charity’s primary mission (such as land conservation), money spent on land and/or buildings is money that has been intentionally diverted from programs, and represents savings. Charities could choose to rent instead of own, or to finance out a building to recover liquid cash.
Additionally, many charities invest unrestricted “reserves” in illiquid, long-term investments that cannot be used as a “rainy day” fund in times of sudden revenue downturns (like 2008). Such voluntary endowments thus represent an especially concerning use of donor money since they don’t increase the charity’s ability to withstand revenues shocks, yet subtract from program impact. If the purpose of reserves isn’t to provide stability to revenue shocks, why have them?
We will focus our support on organizations that make the most efficient use of donations, as measured by practices and metrics that balance reasonable savings against the mandate to maximize program expenditures. Our criteria include the following:
We do not intend for these criteria to be prescriptive, rather we have set them for our own use in identifying organizations that we believe will make the most efficient use of our support. In our view, funding an organization that maintains excessive savings simply enables the organization to continue sidelining previous revenues even when our donation is fully spent. Our goal as donors is to have an impact, and thus we seek to fund organizations who maximize their impact by minimizing all sources of non-program overhead, be it savings overhead or general and administrative overhead.
As donors, we expect our money to be spent on programs today, instead of being held for future use or to generate investment income via endowments.
Charities should spend their efforts, and their money, on the causes they work on. Every dollar not spent on programs is overhead. We see two primary categories of overhead:
- General & Administrative Overhead. Most of the organizations we support are accustomed to being rated on their administrative expenses, and are already frugal with such expenses.
- Savings Overhead. Similarly, every dollar taken out of the donation stream for other non-program expenses is overhead. If, for example, 20% of an organization’s five-year revenue goes to savings (reserves, voluntary endowments, real estate purchases, etc.) then that 20% overhead has the same effect as a 20% administrative overhead--less money goes to programs.
Like administration, some savings are necessary: organizations do need some office staff, and they do need some reserves. But in either category, more isn’t necessarily better--at some point, more is worse. Organizations should minimize the diversion of program funds to savings in the same way that they minimize administrative overhead. Funds diverted to non-program expenses are funds not being spent on the primary mission of the charity.
Our definition of savings includes all unrestricted and temporarily restricted net assets, including fixed assets. While funds permanently restricted by donors are often outside the charity’s control, fixed assets are not. Unless it is related to the charity’s primary mission (such as land conservation), money spent on land and/or buildings is money that has been intentionally diverted from programs, and represents savings. Charities could choose to rent instead of own, or to finance out a building to recover liquid cash.
Additionally, many charities invest unrestricted “reserves” in illiquid, long-term investments that cannot be used as a “rainy day” fund in times of sudden revenue downturns (like 2008). Such voluntary endowments thus represent an especially concerning use of donor money since they don’t increase the charity’s ability to withstand revenues shocks, yet subtract from program impact. If the purpose of reserves isn’t to provide stability to revenue shocks, why have them?
We will focus our support on organizations that make the most efficient use of donations, as measured by practices and metrics that balance reasonable savings against the mandate to maximize program expenditures. Our criteria include the following:
- We measure total savings using a modified version of Guidestar’s Liquid Funds Indicator that includes includes all unrestricted and temporarily restricted assets, including fixed assets. We define this Savings Ratio as (Total Net Assets - Permanently Restricted Net Assets) / (Annual Expenses). We will support only groups that maintain a Savings Ratio below 1.25, with a prefered range of 0.75 to 1.0 (9 to 12 months expenses).
- We will also consider the liquidity of an organization’s savings, because illiquid assets such as buildings and long-term investments detract from the financial capacity of an organization to withstand a revenue shock. We will assess liquidity using a Liquidity Ratio, defined as (Cash-equivalent Funds) / (Total Net Assets - Permanently Restricted Assets). We will favor groups that maintain a Liquidity Ratio of at least 0.8, which allows for some illiquid assets such as office equipment but discourages the building of voluntary endowments invested in long-term securities.
We do not intend for these criteria to be prescriptive, rather we have set them for our own use in identifying organizations that we believe will make the most efficient use of our support. In our view, funding an organization that maintains excessive savings simply enables the organization to continue sidelining previous revenues even when our donation is fully spent. Our goal as donors is to have an impact, and thus we seek to fund organizations who maximize their impact by minimizing all sources of non-program overhead, be it savings overhead or general and administrative overhead.