Is there a “standard” or “industry” percentage ratio of our endowment funds—funds working to provide annual income—which can relate that corpus/principal amount to key financial statements such as the annual expense budget, operating deficit, annual fund campaign results, etc.?
I have been asked that question many times.
My response is that I am certain there is no exacting standard. However, an endowment funds-to- operating-expense ratio is the one such “benchmark” at times sought by non-profit organizations—though there is no real justification or worthiness for such a number in any event.
During the time I was at The Cleveland Orchestra, such a ratio was promoted—”suggested”—by the largest and most influential granting foundation in our area. The idea was that endowment funds, paid and working in the bank or otherwise invested, would total a three times the organization’s annual operating expense.
This was an unofficial “suggested standard” which was not imposed on organizations in any way for them to receive grant consideration, nor was there any kind of measuring rationale made by the foundation regarding that ratio. Why did they tout it then? Because, everyone recognizes that that there is a need to somehow, someway measure the efficiency of non-profit organizations. This was yet another attempt. I believe that no ratio of any kind between working endowment funds and what an organization spends each year has any real meaning.
The Foundation-inspired three-times rule/guideline/objective/standard—whatever one chooses to call it—could have others think that another percentage ratio might be arbitrarily determined just as well. It could be two times, four times, etc. of the annual operating expense amount.
It seems obvious that any number of various organizations’ spreadsheets, factored together in some way, could come up with a percentage ratio number to be then applied across the board. But such methods are greatly flawed, as organizations interpret and report their financials in many different ways. Some have little, or no, earned income, while others have a high rate of earned income—variables which fly in the face of a fixed “standard” of most anything when it comes to measuring non-profitsʼ performances in a on- size-fits-all way. How hard and fast, and how useful in measuring an organization’s sustainability in that way, is open to question because, from one organization to another, many variables could be at work. To cite but a few:
- Investment income yield is dramatically affected by where and how the funds are managed, and regarding types of securities, changing interest rates, etc.
- The use of all, some, or none of the income from the principal/corpus to pay for annual operating needs. Or the use of the income to fund only new projects.
- Invading some of the principal from time to time, then needing time to raise replacement money.
Thus, the formidable objective of having an endowment fund in an amount three times (or any number) that of the annual operating budget, or any attempt to set a standard, or even a benchmark, must be considered with many other factors than an organization thinking it had met—or was trying to meet—a truly meaningful goal.
So, how much endowment should/must we have in hand anyway? Simply put; as much as you can raise with an effort that in no way will interfere with, slow down, or be a substitute for the best annual fund campaign you can mount—year after year.
I hasten to add that all such attempts to make meaningful measurements and to set targets for sustainability and to forecast outcomes are good and necessary—until that is, they are arbitrarily made as standards and are imposed on non-profits, large or small, across the board, when the financials are faulty, unproved, and decidedly unfair.