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Board Designated Reserve Fund: First Step to Endowment

In the world of nonprofits, or if you prefer, community benefit organizations, the challenge is to keep streams of revenue coming in the door in order to keep the mission delivery going out the door.  Dollars in. Mission out. It sounds very simple, but it’s not at all easy. Community benefit organizations are always working to get the story told, making new friends, building relationships, working to bring donors in.

When times are toughest during deep recessions like we’re now emerging from…new dollars are even harder to find. Wouldn’t it be nice of we had an endowment of significant size that could throw off earnings to help pay the bills?

Yes. Of course it would be nice. Today, I’m writing about ways to get a fund organized that can be invested and generate earnings that will help us keep pushing the mission out the door even in toughest times.

My recommendation?  Talk with the Board of Directors about starting a Board-designated reserve fund. Setting aside revenue that will help assure the long-term purposes of your nonprofit will be around for the long term.

I recommend that you start where the American Lung Association of New Hampshire started in the 1970’s.  That nonprofit adopted a Board policy that unrestricted bequests of $1,000 or more would be set aside for the long term. Over the years, bequests grew in number and amount to the point that the reserve fund approximated 100 – 125% of annual operations.  And at $800,000 in annual operating expense, the reserve produced income of about $40,000 a year. A tidy sum.  And along the way, the Finance Committee organized an Investment sub-committee that oversaw investment of the reserve fund.  Every three years, this sub-committee reviewed the performance of the bank trust department or investment company that managed the money and determined if returns on the fund were competitive.  The investment policies were pretty clear: no money invested in tobacco companies, or companies found guilty of polluting.  This added a whole level of complexity to making this nonprofit work effectively.  But for me as its executive (1979 – 1995) and for the Board of Directors, we were comfortable with these responsibilities. We liked the experience and skill level of board members we could attract in part because we had this fund.

Public benefit organizations may consider starting a campaign to build an endowment fund. It takes a certain pool of donors with the means to make significant contributions (usually of stocks or other investments) to such a donor-restricted fund. For those nonprofit leaders who are not quite at that point, consider a Board Designated Reserve Fund. Which may also mean, organizing a planned giving effort.

At the American Lung Association in the 1980’s through the 2000’s, we worked with The Sharpe Group.  I have no financial or other interest in this company. But I recall they worked with a high degree of ethical integrity, advised us well, and helped us grow our nationwide planned giving program. You can learn more about them at /resources. And, of course, you can use your search engine to find other professional companies and advisers who can help you move in this direction.

Discuss this with your development and finance committees.  Set a course that makes sense for you.

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