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GuideStar Blog

From the President's Office, September 2008

Dear Friend:

Issues around the management of endowments are an area of growing interest in the nonprofit sector.

For some time now, we've been seeing articles on the eye-popping size of some university endowments. Topping the list is Harvard, whose endowment as of June 30, 2007 (the latest figure available at this writing), was more than $34 billion, larger than the budgets of many countries. Other universities, such as Yale and Stanford, are not far behind, and 76 universities have endowments over $1 billion.

Concurrently, we've been reading about the amazing financial management performance of these endowments. According to the Chronicle of Philanthropy, university endowments had a median growth of nearly 22 percent last year, with Yale leading the pack at 28 percent. I wish my TIAA-CREF account had done the same!

With college costs continuing to rise well above inflation and with the college loan system mired in the credit squeeze affecting many parts of our economy, it's not surprising that the size of these endowments is attracting legislative attention as well. Senator Charles Grassley (R-IA) and Representative Peter Welch (D-VT) have scheduled a roundtable discussion next week on rising college costs and the potential impact of mandatory payouts from university endowments. This should be interesting.

We've already seen some of the largest universities voluntarily increase scholarship amounts. Will this action be enough to deter more Congressional scrutiny? I doubt it. The endowments are so large, and the need so great, that I think we'll see more action over the next year reviewing the obligations of university endowments.

It would be a mistake to think this issue affects only universities. Some national large nonprofits also enjoy enormous endowments. The Shriners Hospitals for Children, the Nature Conservancy, and the Museum of Fine Arts, Houston, to name just a few, all have endowments in the billions. How large an endowment is appropriate? How large does an endowment have to be to give an organization the financial support it needs to be a reliable and secure provider of nonprofit services?

And, while we're on the subject of endowments, let me return to one of my favorite topics: leveraging the power of foundation endowments. We all know that currently almost all foundations adhere strictly to the 5 percent payout required by the IRS. Yes, there are exceptions, and we applaud those with the courage and mission determination to move over the 5 percent line.

We applaud even more foundations that invest small portions of their endowments in PRIs (program-related investments) and MRIs (mission-related investments). PRIs and MRIs are not grants; instead, they are loans extended at below market rates to organizations that have solid business plans and are capable and committed to repaying the loans. Although there is much talk in the sector, the numbers of such loans are still quite low.

PRIs and MRIs could also be the key for providing nonprofits with the desperately needed capital necessary to become scalable and sustainable. At GuideStar, we think they are a logical and appropriate way to make foundation endowments more responsive and a great way to leverage the impact of foundations.

What do you think?

Sincerely,

Bob Ottenhoff
President and CEO
Topics: Management