0.13 Chapter ten: the complexities of nonprofit financing  (Page 6/10)

Technically, there is nothing wrong with representing the gift in this way; however, this characterization of the Society's financial activity can have undesirable consequences. From an internal perspective, the additional income can relieve the pressure on Society staff, thereby lessening their resolve to control expenditures and maximize other revenue sources. From the standpoint of an uninitiated out­side observer, such a representation could lead to the erroneous conclusion that the Society had finally brought its recurring expenditures in line with revenues. As soon as the Peck bequest had been spent, the Society was running large deficits once again.

The decision about the proper way to treat large one-time gifts comes down to a question of timing. By spending the Peck bequest in its entirety, the Society chose to emphasize current spending over future revenue-generating potential. A similar question of timing must be faced by a board as it contemplates how best to manage its endowment, an important issue to be addressed later in this chapter.

Although investment income and unrestricted contributions both come from essentially the same source (private benefactors), maximizing the value and growth of these revenue streams involves distinctly different management processes and depends on different factors for success. For example, once an endowment has been established, the revenue stream derived from that financial base should be relatively predictable. If the endowment is invested and managed wisely, it has a good chance of growing at a rate exceeding inflation. Unrestricted contributions, by contrast, are a far more volatile revenue source. If an institution somehow falls out of favor, contributions can decline precipitously. Moreover, increasing these contributions on an annual basis requires extraordinarily loyal supporters, perseverance, and fundraising skill.

Obviously, other things being equal, all nonprofit managers would like to have a large endowment base to support their operations. This is rarely possible. Moreover, looked at from the broad perspective of the well-being of the nonprofit sector, it may not be desirable. For some institutions, their characteristics and the nature of their missions make having an endowment important; in other situa­tions, this is less appropriate. It is in the best interest of society to concentrate the limited capital resources available in those institutions that need endow­ments the most.

Compare, for example, The New-York Historical Society and a dance com­pany run by its founding choreographer. The dance company's principal asset is the creative gift of its founder. Though it is possible that the founder can institu­tionalize his or her talent through training young dancers and choreographers, in many cases, this does not happen. The "product" is more ephemeral and is vali­dated by the contributed support it receives on an annual basis, as well as through ticket sales and other forms of earned income. By contrast, the Society's library and museum collections are not ephemeral; they are material objects that con­stitute an irreplaceable resource. Although few people question the cultural value of the millions of manuscripts, books, prints, and other historical documents and artifacts held by the Society, they are not the kinds of assets that inspire and ex­cite contributors. The effort of the Society to generate private contributions, especially over the past five or six years, illustrates that fact. An institution like the Society needs a source of support that both matches the inert nature of its col­lections and has the potential to grow at least as fast as its expenditures. It must have an endowment.