To suggest that a theological school should have an endowment seems as commonsensical as the concept of savings accounts and retirement funds for individuals and families. And yet only a handful of theological schools has endowments in excess of $100 million. In fact, the majority of ATS member schools have less than $10 million tucked away in endowment funds.
While the idea of laying up endowment may not mesh with some schools' theological underpinnings, endowment is a welcome idea for the majority of boards -- and for good reasons.
Inside the institution, an endowment is a source of security and stability. To the world beyond the campus, it trumpets the message that 'this seminary is here for the long haul,' ready and able to educate leaders for the church for many years to come. Additionally, financial rating companies such as Moody's Investors Service place considerable weight on the size of a seminary's endowment. And once established, endowment gives a seminary a measure of flexibility in the budgeting process and lessens dependence on tuition, fees, and annual fundraising efforts.
Beginning Steps in Endowment Building
As with any fundraising activity, the quest for endowment gifts will only succeed if board and staff are ready, willing, and able to commit the time and energy needed to turn things hoped for into reality. The following steps point the way for schools just getting started in endowment building.
Step One: Determine a target amount for endowment and begin working toward the goal. Keep in mind that Rome wasn't built in a day, and neither are $100 million endowments. To determine what is realistic for a particular school, board members and presidents are advised to look at the endowment experience of peer institutions. The annual Institutional Peer Profile Report (IPPR), provided by ATS to member schools, is a great place to start in evaluating the effectiveness of board policies on asset-allocation and endowment growth.
In setting a goal for endowment, some financial advisors encourage boards to shoot for an amount equal to two or three years of the institution's operating budget. Others suggest working toward an endowment that would, within a realistic time, produce between 25 percent and 30 percent of a school's annual budget.
Step Two: Form a sub-committee of the board's finance committee to study the legal and financial policies that the seminary needs in order to build the endowment and ensure its longstanding viability. This group should then educate the entire board about fundraising for the endowment, prudent investment strategies, and what policies should be set concerning use of endowment earnings.
Consider developing policies that distinguish between your general operating endowment and separate, donor-specified endowments for purposes such as scholarships and faculty chairs. The board should also determine minimum funding levels for endowment funds and allowable restrictions on the use of endowment funds. Some donors may wish to attach restrictions to the use of their funds that are impractical, illegal, or impossible to fulfill.
Step Three: Establish benchmarks that allow the board to assess the performance of the investments. Asset allocations can and should be varied: stock, mutual funds, bonds, real estate, and hedge funds. Make sure your mix of assets can produce the returns you really need without ever diminishing your portfolio's true value.
In a bull market, endowment returns can be heady indeed, providing institutions with a steady stream of money into the operating budget. But as recent history has taught, bull markets come and go, and prudent seminary boards will use a three-year moving market-value approach to spending. This means that the spending rate is established by averaging market values from the past three years.
Prudence also teaches boards to avoid locking in to commitments that may be hard to maintain in the face of ups and downs in the market. And remember, the word is CAUTION when tempted to dip into principal.
Seek and Find
The most likely place to begin the search for endowment donors is within the school's existing donor base (including those donors sitting around the board table). Persons who have been faithful in their annual support of the seminary and who care deeply about the future of the Christian ministry are the most likely to do something permanent for the school.
Planned gifts (bequests, annuities, charitable remainder trusts, etc.) are an ideal way to build the size of the endowment and are attractive to persons with longstanding ties to the seminary who would like to think that their gift to the seminary is maintained in perpetuity.
Funding for the endowment can be one of many items on your 'needs list' in a capital campaign. Let potential donors know that in addition to cash, real estate, art, or insurance policies are welcome. However, you need to recognize that liquidating such gifts takes time and can have legal implications.
Increasingly, endowment donors want to be consulted and informed on a regular basis about investment performance and distribution of earnings. They welcome news about the value their gift adds to a seminary's services and programs. When the endowment is the result of a bequest, reports to family members help build long-term relationships and sometimes lead to additional gifts to the fund.
A word to the wise: Be aware that many foundations are wary of giving toward endowments, citing their belief that they can make money grow better than the institution seeking their money. Many foundations prefer to respond to requests that will help a seminary's changing needs as reflected in their strategic planning and look for immediate results from their donations. That said, seminary staff should not overlook foundations as a possible source for endowment funds, especially family-oriented or church-oriented foundations that might have special ties to the seminary and have a stake in the institution's longevity.
A Banded Endowment Spending Policy
When the market is strong, seminary communities can be tempted to spend down endowment earnings at rates that are not in the long term best interest of the school. As a safeguard against overspending in the good times and as a safeguard against suffering dramatic cuts in budgeted endowment revenue in bad times, Tony Ruger, senior research fellow for institutional resources at Auburn Theological Seminary's Center for the Study of Theological Education, advises board investment committees to adopt a 'banded' or 'snake-in-the-tunnel' spending policy. Drawing from a 1988 article* about endowment spending rates, Ruger goes one percentage point more conservative than its authors when shaping his comments for seminary communities.
Any good spending policy balances the tensions between current needs and future financial vitality of the institution. Spending too much from earnings reduces growth potential of the endowment. Spending too little deprives current programs and personnel of much-needed resources. The ideal spending plan is somewhere in-between. The snake-in-the-tunnel policy balances those needs and provides greater stability in budgeted revenue than other spending formulae.
Here's how it works. The board should instruct the administration to spend the same as last year, adjusted for inflation and new gifts, but spend no more than 5.5 percent of a three-year average endowment market value and spend no less than 3.5 percent of a three-year average endowment market value.
As the chart illustrates [download PDF], the goal is to hold the payout rate (the snake) safely between the walls of the endowment 'tunnel.' By actively managing the institution's spending policies and taking a conservative approach to endowment spending, institutional leaders and investment committees may be able to increase both spending distribution and endowment market value.
Read the other articles in the New Year 2005 fundraising series:
Make this the year
More than a lovely dream
The power of peer learning: Summary report from an eight-school study