Grants to create or increase nonprofit endowments represent only a small portion of foundation giving, and the most likely recipients are arts organizations or direct services charities, according to a study released Tuesday.
Nonprofits love endowments because of their ability to churn out investment returns each year for charitable use, which can help a nonprofit last long into the future.
In a survey conducted in September and November of last year, 283 foundations that each make more than $5 million in grants annually, the Center for Effective Philanthropy found 31 percent supported nonprofit endowments. Most foundations offered such grants to organizations with which they had an existing relationship.
Endowment giving, defined as “funds to be kept permanently and invested to provide continued support to the nonprofit organization or support for a designated purpose” amounts to a small part of total grant making for those foundations. Of the foundations that make endowment grants, 86 percent said less than one-quarter of the grants they make are steered toward endowments.
More than half of the foundations that provide endowment grants give to museums and arts organizations. The majority of those grant makers also give to nonprofits that provide direct support to people, such as food pantries. Less than a quarter of the foundations making endowment grants give to grassroots organizations.
Elisha Smith Arrillaga, vice president of research at the Center for Effective Philanthropy and one of the authors of the report, called endowments a “key tool if organizations and foundations are really interested in investing in the longevity and flexibility of an organization.”
An Investment Win-Win
Placing a grant in an endowment allows a nonprofit to use investment proceeds on an annual basis to support operations and programs, while any remaining market increases help grow the fund long into the future, as long as investment returns outstrip inflation and the money is used for charitable purposes.
For instance, if an endowment is created with $5 million, it can dedicate 5 percent of that — $250,000 — annually to charitable work and still grow in perpetuity if investment returns regularly top 5 percent.
Following the 2020 push for racial justice, a growing number of foundations said they would provide unrestricted or multiple year grants, particularly to organizations led by people of color. But interest in endowment grants, another way to provide flexible funding, hasn’t seemed to spark as much interest.
Of the foundations that currently do not provide support for endowments, less than 5 percent said they are considering the approach.
In a set of anonymous interviews with the Center for Effective Philanthropy, foundation leaders discussed the challenges involved. One foundation leader whose organization does not make endowment gifts suggested that doing so would not allow it to monitor the use of the funds it manages.
“We received a considerable gift from a family estate, and there is a sense of duty and obligation to steward those resources, as was the wish of the donor,” the leader said.
Another foundation leader, whose organization does support endowments, acknowledged that there are challenges involved.
“When you’re dealing with attorneys, accountants, and financial advisers, there can be a mismatch between the level of sophistication of their planning techniques and that of our foundation or beneficiary charities,” they said. “It’s required us to invest in some additional training.”
Others, however, say endowments can allow nonprofits to “shoot a little higher, go a little higher” because they are not worried as much about revenue, said another foundation leader.
“One example is a free clinic,” the leader said. “Several years ago, they provided primary care; now they provide primary care, oral health care, women’s care, mental health care, and have expanded to be a medical home for the population.”
Becoming ‘Endowment Ready’
The Center for Effective Philanthropy report was supported in part by the Robert Wood Johnson Foundation and released in conjunction with a case study on the foundation’s approach to endowment giving presented by the Bridgespan Group, a philanthropy research and consulting organization.
In 2020, during the fallout from the police murder of George Floyd, the NAACP found itself at a “crossroads,” the study said. The civil rights organization wanted to combat racism and provide access to health care, Yumeka Rushing, the NAACP’s chief strategy officer, told Bridgespan, but it also wanted to be ready to address future challenges related to racial equity and inclusion.
“To do that, we’ve got to be thinking beyond the programmatic grant or even beyond the fantastic multimillion-dollar donation,” she said. “We’ve got to think about something that would be residual and that would feed the organization over time.”
The NAACP made itself “endowment ready” by naming an investment manager and setting investment and spending policies. It then approached its long-term partner, the Robert Wood Johnson Foundation, about making a grant to start an endowment. Robert Wood Johnson had made endowment gifts before, but they were mostly to universities to honor people who were retiring or who had died.
In 2022, the health-care grant maker changed its strategy by giving endowment grants of $5 million each to Faith in Action, the NAACP, and UnidosUS, three racial justice organizations led by people of color.
By doing so, Robert Wood Johnson Foundation President Richard Besser told Bridgespan, the foundation was able to support nonprofits well beyond the short-term window of a grant budget cycle.
“If we truly believe in racial equity,” said Besser, “why would we not want to ensure the long-term financial stability of organizations that are so directly committed to racial equity and racial justice?”
