Cons Of Starting An Endowment

Recently there have been some conversations around my organization and town in general about whether it is worthwhile to try to bolster an existing endowment. People have mentioned that there has been a trend away from establishing endowments in recent years. I started wondering what the thinking behind that was and what the alternatives might be.

It just so happens Non Profit Quarterly reprinted a piece that talks about the pros and cons of establishing and endowment.  On the con side is the issue is the idea that you are locking up money the organization could use now and disbursing it in the future when the same dollars don’t buy as much. Thirty years ago it may have seemed really attractive to learn that the organization would be receiving $25,000 a year from the endowment. In 1989 that could cover the salary for a position, but that money doesn’t go as far today. (Though there are plenty of places offering $25,000 as a salary.)

Current needs is the one that at least one of your board members will bring up, and is very possibly the reason why your board will vote not to have an endowment. “Why should we put a million dollars in a bank account when we can use that to serve a million more lunches?” Or buy a hundred thousand more books. Or facilitate a thousand more adoptions. Or renovate the façade of the theater. Many nonprofits are in dire need of more money, and most can at least think of an immediate way to use more….Some people go so far as to say it’s not ethical to lock money in the bank when there are so many necessary ways to spend it now. Before you know it, you have bad press and declining donations—and you wish you’d never thought of raising an endowment.

You may look jealously upon organizations receiving large payouts from their endowments, especially universities, but by and large these groups have a staff that is actively managing an endowment. A staff is required to grow an endowment to the size it yields enough to support your activities. But you need to have started with a large enough endowment to support a staff in the first place.

Why Do I Have To Call Dun & Bradstreet To Apply For A State Arts Grant?

As we move further into the new year, many grant deadlines are starting to creep up en masse upon arts organizations. As you are filling out all the mandatory fields in your grant application, you may be wondering why you have to have a DUNS (Data Universal Numbering System) number in addition to your Employer Id Number (EIN), especially since they are both the same number of digits.

You may also be wondering why a commercial data firm like Dun and Bradstreet gets to dole out these numbers, instead of a governmental entity. Well, I don’t have all the answers, but I did provide a good number of them in an ArtsHacker post on the subject a couple weeks ago.

As I write in that post,

The simple answer is that your EIN is associated with your IRS tax records and the DUNS number is associated with your business credit score.

[…]

One reason the DUNS numbers are separate from EIN is that a DUNS number is tied to a physical address. This makes sense in the commercial for-profit realm since a branch of a company in California may have better credit than one in Florida, but there aren’t many non-profits that are so large that they have a single EIN but require different DUNS numbers.

Learning that your DUNS number is associated with your credit score may be cause for concern—how many non-profits are going to have a great credit score after all?

Given that overhead ratio has been used as a measure of effectiveness for non-profits, it isn’t out of the realm of possibility that someone is going to get the bright idea that credit score is a good shorthand for deciding whether a non-profit is being run well. This would be a really bad idea since the standards used to assess credit worthiness of a for-profit entity are inappropriate for non-profits.

But you know, non-profits should be run more like a business right?

In any case, if you would like to know a little more about DUNS numbers and how to get one for your organization, (or see if you already have one), check out my ArtsHacker post.

What Is A DUNS Number And Why Do I Need It?

Non Profits & Buying Locally – Good For The Community vs Bad For Overhead Ratio

Back in September, Non-Profit Quarterly (NPQ) pointed to a new research study which has found overheard ratio is not a valid measure of organizational effectiveness. In fact, it there is a slight negative correlation between overheard ratio and commonly used measures of efficiency.

“…but our work is the first to approach it using efficiency theory—and we were able to demonstrate the problem using real-world data.”

….“In short,” Coupet says, “this demonstrates that not only is the overhead ratio bad at assessing efficiency, but also that using it to assess efficiency may actively mislead donors. We argue that nonprofit scholars, managers, and donors should move away from concepts and measures of efficiency based on financial ratios, and toward ones that embrace maximizing what nonprofits are able to make and do.”

NPQ says according to the study, overhead ratio is a poor measure of effectiveness because it doesn’t reflect what organizations are doing with their resources or what they “are accomplishing with their non-overhead spending.”

In other words, like I have written so often before, the value of what a non-profit does is not reflected by transactional data, economic impact numbers or test scores.

This being said, another part of the article raises the intriguing idea that if a non-profit is supposed to be working for the benefit of their community, shouldn’t they be focusing on buying locally rather at chain stores or wholesale warehouses? If so, the higher cost of buying locally would raise their costs a bit and impact their overhead ratio. But it may be worthwhile to do so.

Should we stop looking for cost savings that benefit our bottom line but lead to purchasing that harms the greater community? In other words, should nonprofits be considering (and be supported to pursue) their own “buy local” policies?

‘Nonprofits should be shouting about how much of their spending happens at locally owned, minority-owned, women-owned, veteran-owned or disabled-owned businesses. There is a multiplier effect in spending locally that shows that for every $100 spent at a locally owned business, $45 of that is re-spent locally, while national chains only spend $14 of that sale locally.’

This is an intriguing idea that has this author (a nonprofit executive who manages purchasing) feeling the financial pinch of a cogent ethical argument: If buying local supports healthy communities, and the mission and values of my organizations are tied to relevant healthy community outcomes, why am I doing my shopping at big box (including online) retailers?

This broadens the scope of what it means to be a non-profit in service to the community. Touting how much is being spent at locally owned business won’t necessarily smother the use of overhead ratio as a standard, but it has the potential to blunt the ratio’s use in an argument of a non-profit’s worthiness.

Play More Poker If You Love The Arts?

Earlier this week I wrote about the negative impact casino construction can have on the viability of performing arts entities in a region. I mentioned the steps a coalition of performing arts organizations took to mitigate those effects in NY State.

Even as I was mentioning this model at the meeting I attended to those discussing the casino related lobbying efforts, I was thinking that a model similar to the one in New York might be attractive to state legislators if they thought they could have gambling revenue replace state funding for arts and culture.

This could be a problem for a number of reasons. For a long time state lotteries have been sold as a way to provide funding for education, but the results have often been mixed with some believing the lottery funding has allowed state governments to shift funding elsewhere leaving education funding generally flat.

According to the Brookings Institute,

“Some scholars have argued that lottery earmarks provide a net positive impact, despite some fungibility. One study, for example, estimated that a dollar of lottery earmark funds for K-12 education increased per pupil spending by 50 to 70 cents, with the rest of the money being diverted for other purposes. Others have argued that lottery earmarks lead state lawmakers to supplant education funding so much that states invest less in education over the long run.

This is because budget decisions are made in context of scarcity, in which allocating resources to one arena of state policy limits the ability to fund other programs. Therefore, when lottery earmark revenue emerges, state lawmakers may use lottery earmark revenue to supplant instead of supplement education funding so that they can free up general fund money for other purposes that matter to their constituents and avoid raising taxes in the process.

What also should be considered is social dissonance in this form of funding as recently suggested by James Doeser in The Art Newspaper, regarding the use of lottery proceeds to fund the Arts Council of England.

Since its introduction in the mid-1990s, the UK National Lottery has made a lot of poor people slightly poorer while equipping Arts Councils to enrich an arts sector that disproportionately serves the better-off. It is not hard to picture an old woman applying coin edge to scratch card, with no more chance of winning the jackpot than of stepping inside the gallery she has helped to build

[…]

Arguing for public funding for the arts would be much easier if our tax regime were more progressive, and those engaging with the arts more reflective of society as whole…. Thanks to an austerity-induced accounting trick, the replacement of tax by lottery funding means that the least well-off increasingly shoulder the cost of rich people’s pursuits. A lot of well-meaning and progressive people continue to benefit from this arrangement, but it is not fair and needs to be questioned.

Which is more preferable when it comes to seeking an increase in public funding, making yet another appeal to supporters to contact their representative about bolstering arts funding or encouraging supporters to play more blackjack?

(Yes, that is a huge false dichotomy)

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