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ORGANIZATIONAL (AGENCY) FUNDS |
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Establishing Organizational (Agency) Funds
If you are a school, church or a charitable organization with a 501©(3) tax status and you are committed to providing services over a long period of time, you may want to consider establishing an organizational endowment fund. While an expendable organizational fund is an appropriate vehicle for a capital campaign, such as raising money for a new building, income from an organizational endowment fund will provide a steady stream of funding for your nonprofit that can be used at the discretion of your Board,
- for special projects to be determined annually, or
- for operational support, plain and simple.
By establishing an agency endowment fund, you are sending an important
message to your public. You are demonstrating that your organization is
both stable and visionary. You are planning for a future in which your
nonprofit will be a larger, stronger institution, even more capable of
carrying out your mission. By having an endowment fund in place, you
will be able to attract larger planned gifts from donors, some of whom
you may not even know!
Northcoast Environmental Center
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Humboldt Community Breast Health Project
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What is an endowment fund?
Most of the funds managed by the Foundation are endowment funds,
meaning that the initial gift and future contributions are invested for
perpetual growth. The principal is never spent. A portion of the earned
income and appreciation is distributed to meet the donor’s chosen
charitable purposes and the rest is reinvested. As the fund increases,
the amount of the distribution can be increased proportionally.
What is an agency endowment fund?
Like other endowment funds, an agency endowment fund, also known
sometimes as an organizational endowment fund, is also established for
perpetual growth. It is established by a nonprofit agency for the
benefit of the nonprofit agency and has the following characteristics:
- The nonprofit agency is both the donor and the beneficiary of the fund.
- The fund has been established by the nonprofit agency with its own funds.
This includes funds that the nonprofit has raised and elected to place
at a community foundation. According to the IRS, agency funds are
different from all other endowment funds in that the community
foundation can transfer the assets, the return on the assets or both
back to the agency upon request. Nevertheless, while the fund is with
the community foundation, the community foundation is the legal owner
of the fund.
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Should all organizations have an endowment fund?
No. Organizations that are formed in support of short-term causes or
particular events do not need endowments. Similarly, organizations that
may be experiencing financial difficulty, lack a strong donor base, or
do not have a significant track record should probably not consider
creating an endowment.
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Is an agency endowment fund an operating reserve?
No. Every agency should have a reserve fund to cover operational costs
for the short term in case of an emergency. Such a fund is generally
managed and invested by the agency’s own board of directors. The income
earned and the principal itself may be spent in an emergency. An
endowment fund, however, should be considered a permanent fund in which
the principal is never spent. The very word “endowment” encourages
donors to believe that the fund is intended to exist forever.
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Is an endowment fund the same as a planned giving program?
Planned giving generally refers to gifts given through legal structures, such as wills and trusts. An endowment fund is built over time and many gifts, including planned gifts, can be used to build it.
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Will having an endowment fund conflict with current donors’ giving?
Developing an endowment is very different from fundraising for current
operating support. The addition of an endowment fund effort presented
to your current donors can encourage them to provide additional long
term support since it shows your foresight as an organization planning
to stabilize its financial resources.
However, an organization hoping to begin raising funds for an endowment
should have a well-developed base of diverse and dedicated donors. An
endowment campaign that is launched without careful planning, without
communication with current donors, and without outreach to new donors,
can have a negative impact on regular giving.
Will the Community Foundation help us raise funds for our endowment?
The Foundation will not directly ask donors to contribute to your fund.
However, we do provide services and support that can help you
indirectly. These include:
- Assistance with arrangements for a press conference and/or a press release at the fund’s inception;
- Presentation of the fund’s description in HAF’s Yearbook, with a circulation of 8,000;
- Advice on grant making procedures and guidelines;
- Access to the grant and nonprofit management resource library
- Professional charitable estate planning assistance for potential donors to the agency fund.
- We are also able to accept gifts of stock and other appreciated assets.
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What happens if we have an emergency and need the endowment money?
As stated above, according to law, the Foundation can transfer the
assets, the return on the assets or both back to the agency upon
request. However, if the fund was originally established purely as an
endowment fund, the nonprofit has a moral obligation to maintain it as
such because that was the expectation for all previous donors to the
fund. To avoid this problem, the Foundation recommends thoughtful
planning and careful wording in the original fund agreement to allow
for potential difficulties in the future.
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What happens to our endowment fund if our organization goes out of business?
Technically, the Foundation has by law what is known as “variance
power,” the authority to redirect the use of assets transferred to them
by donors. However, if your nonprofit goes out of business or ceases to
be a qualified charitable organization, rather than use this “variance
power,” the Foundation would consider the advice of your board of
directors and request assistance from the California Attorney General
to assure continued use of your fund for the purposes for which it was
originally intended.
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Couldn't we just manage the endowment ourselves?
That is certainly an option. In fact, if and when an organization has grown sufficiently in size, sophistication and technical expertise so that it can manage its own investments well, the Foundation may recommend the return of its assets. However, because we are in the investment business, we can be an asset to most local nonprofits; earning for them a good rate of return, saving them time, protecting them from conflict of interest issues, and providing their donors with a sense of security.
Thank you for your interest in organizational funds. If HAF staff can help in any way with next steps, please get in touch with
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, Director of Donor Services at 707 442-2993 ext 302
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