Making donor dollars stretch and perform miracles

The other day I received an email alert from the Philanthropy News Digest, which mentioned that a theater company had announced a $7 million endowment challenge grant. When matched, the 3:1 challenge grant (which requires the theater to raise $2.5 million) will boost its endowment from $500,000 to $10 million. Putting aside for a moment debates over the pros and cons of endowments for performing arts organizations, I was struck by the following quote by theater’s artistic director in the press:

When reached, this unprecedented offer will enable the theatre to continue growing far into the future. […] It will ensure the theatre’s ability to continue producing classic musicals and dramatic works, develop visionary new work, maintain state-of-the-art facilities for our theatre and conservatory, and remain a cultural treasure in the community.

My first (rather cheeky) thought was, “They understand they only get to spend the interest, right?” Of course, I know the theater has a smart staff and smart board and that it has accurately projected the annual income from a $10 million endowment. I do not doubt that the endowment will prove useful; and any midsized organization that can raise $10 million in this economy is to be commended. However, unless there is a crucial part of this equation I am failing to understand, a $10 million endowment cannot deliver all that is promised in that press statement.

According to Guidestar the theater mentioned in the article has an operating budget of approximately $4.5 million. Depending on how long the theater waits to begin drawing income from the endowment, and how its investments perform, it seems that the endowment will basically give the theater a boost of about 10% on its operating budget. When I glanced back through a few 990s I noted that total expenses were $4.9 million on its 2008 filing, $4.3 million for 2009, and $4.5 million for 2010. I also noted in its 2010 filing that the organization had interest payments of $271,336 related, one presumes, to the approximately $6 million debt that appears on the balance sheet (some or all of which may be for the state-of-the-art-facility).

And actually, an endowment to cover facility-related costs could be a smart strategy – though this doesn’t appear to be the primary purpose of the endowment in this case.

I recognize that the reason arts organizations put statements like the one above in materials and press announcements for endowment, ‘advancement’ and other capital campaigns is often because they feel they must do so to attract donors. But do donors believe such statements? For that matter, do the staffs and boards of organizations believe them? If so, is everyone confused five or ten years later when another capital campaign is required just to sustain current programs and put the organization on even footing again? If not, is there any reason to continue the charade?

While it may make everyone feel better in the short term is it possible this tendency to make it appear that donor gifts (large and small) can accomplish far more than is realistic has long term negative impacts on the organization and its relationship with its donors and the community-at-large? Is it possible we avoid telling the real truth because we don’t want to confront or invite others to look to closely at the total cost of ownership of our buildings, or the real costs of running our institutions and particular programs, or how much and how little (relatively speaking) is spent on various areas of operation and resources?

And on the other side of the table, it’s been more than a year since the lengthy discourse emerging out of GIA on under- and mis-capitalization of arts organizations. As we head into 2012, I’m curious whether the climate is changing and funders or individual donors (two different animals, I know) are more willing to support costs like debt service, deficits, cash reserves, sinking funds, or general operating?

If not, I’d be curious to know why not?

Image of hands stretching dollar by Sergej Khakimullin licensed from Shutterstock.

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  1. says

    The obvious question to me was “why aren’t they raising $10 million to pay off their debt and have a strong cash reserve?” No interest and $4 million in the bank, a strong financial management and artistic team who understands that we don’t need to spend more than we can make… could preserve the organization for years into the future. Maybe even in a more financially stabilizing way than a $10 million (yes, you can only spend the interest) endowment.

    Grantmakers in the Arts’ Conversations on Capitalization and Community continues its exploration into financial health of grantees with workshops in seven cities in 2012. These are day-long conversations with funders to discuss the local economies of their communities, the financial health of their grantees and continue our discussion of how funders can change their behaviors to help nonprofit arts groups be better capitalized. Workshops are in Philadelphia, Seattle, Menlo Park, Oakland, Lansing, MI, Houston and Minneapolis. This is a long discussion that needs lots of attention, patience and better understanding by all of us.

  2. says

    Thank you for this smart post on an always timely topic! Janet Brown is right that paying off debt and establishing a reserve fund likely make better sense in terms of serving the mission, but perhaps the attraction to endowment is more emotional than logical, for both donor and nonprofit. For a donor, it’s a chance to feel like your impact is FOREVER (even if it’s minimal, and not). For a nonprofit manager, it feels like a mark of lasting legitimacy, or a financial chastity belt–if we’ve got $10 million in the bank, we can’t go under (even if we can, and in a blaze of irony).

    In answer to Diane’s questions, McKnight has not opened the door to directly funding cash reserves. The vast majority of our arts grants are for general operations, however, and there are examples of grantees who channel gen op funds to a reserve. A lot of other ducks have to line up just right for that to happen. In the cases where we make project, program, or capital grants, we are trying to be much more aware of what the true costs of those projects are, and not encourage organizations to skimp on overhead. It is sobering.

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