You can’t make payroll: Is your endowment the answer?
In June 2017 Sheela Nimishakavi, writing in the Nonprofit Quarterly, said: “A nonprofit with stable grants or contracts does not need to save as much as an organization that’s dependent on fundraising events and individual giving to stay afloat.”
As a human services provider, The Children’s Village (CV) is almost 90 percent dependent on government contracts. But contrary to Nimishakavi’s assertion, we find that, rather than providing stability, our large government contracts increase fiscal uncertainty. We have seen this happen many times over our history. Just last year, a large federal contract which we believed to be stable, was cut by 40 percent with very little notice. While we were able to cut the associated program costs, we were left with a large deficit in administrative costs. This reduction came at the same time that we were facing a $3.6 million loss from a city contract. The first question that came up was, should we invade the endowment?
At CV, the endowment is almost a religious entity. It is meant to be a perpetual source of support to ensure the long-term mission of the organization. At its current size, it can’t yet meet that goal for us, but we are continually working to increase it. We see the endowment’s role as twofold: To provide a consistent revenue source to the organization, allowing it to innovate and, when necessary, weather difficult fiscal times; and to provide a doomsday fund in the event of an existential threat to the organization.
The endowment should not be a rainy day fund. It’s truly dangerous to think of it that way. So, no, when you can’t make your payroll, invading the endowment is not a good solution. To meet those kinds of emergencies, we set up an internal reserve several years ago. This reserve acts as a financial cushion for those times when expenses exceed revenue. We don’t dip into that easily, and in good years we strive to increase it.
Nonprofits that contract with government should be fully aware that underfunded government payment rates are the primary driver of financial distress. Most of us exercise the greatest possible discipline in the management of our programs and are constantly engaged in fundraising to supplement contract underfunding. But, despite all these efforts, maintaining quality services on a government budget will inevitably lead to program deficits. It’s not easy to build a reserve when you’re struggling every year to provide good programs with less than adequate funding. But hopefully there will be good years, or at least less-bad years. Take advantage of them. Seize on any windfall. Look for every opportunity to build a cash reserve for the bad times.
If you ever find yourself in a circumstance where you are thinking about taking funds out of your endowment, consider these five points:
- Management and board must both be willing to understand the crisis and be made completely aware of the events that led to it. It is never easy to question a trusted, long-serving or popular executive director or CEO, but boards must ask difficult questions and understand the details of what is driving the crisis. Both the CEO and the board have the nonnegotiable responsibility to steward the organization.
- When will money borrowed from the endowment be paid back, if ever? If possible, set a date and work towards it. Task the board with reviewing progress at predetermined points. Without this, it is too easy to let it slide.
- If the crisis requires the sale of real estate, how will those funds be used? Any time real estate assets are monetized, there is a risk of temporary deficit fixes that only benefit current management and current boards. Make sure there is a long-term strategy in place that supports and protects a future management team and a future board.
- Anticipate the next crisis. It will happen.
- Advocate. The idea that nonprofits and their committed volunteers should subsidize government – and its essential government services – is unacceptable. We need to work together to push back against this troublesome relationship.
Nimishakavi’s assertion that stable grants make for fiscal stability in a nonprofit might be true in some nonprofit sectors, but we certainly haven’t found it to be true in human services - so manage your endowment wisely.
Jeremy Kohomban is the president of The Children’s Village. He is also president of Harlem Dowling, the chair of the Human Services Council, and the national co-chair of the Children Need Amazing Parents campaign. Paul Jenkel is chair of the board of trustees at The Children's Village.