As reported in issue 235 of the IRM newsletter , The Rail & Wire, (June 2013, page 42), the Illinois Railway Museum was given a check for $1,000,000 from the estate of longtime member Mary G. Ramsay (1925-2012). Mary was the daughter of a former CB&Q brakeman, and the gift was in honor of her father, Myerl C. Gouchanour.

My question to you is, what would you and your group do with a sudden windfall like this?

A) Start or enlarge an endowment fund, to help insure your organizations future.

B) Pay off the mortgage(s) on your property.

C) Buy more land, to help keep urban sprawl from engulfing your campus.

D) Build that big dream project you never had funds for.

E) Some combination of A, B, C & D

F) Something else entirely.

Jeff

My personal reaction would be to invest the funds as an endowment, let it build up over a few years without withdrawing one red cent, and then start withdrawing funds at a rate not to exceed 25% of the proceeds, so that the majority of the proceeds of the investment, are always being reinvested, providing a hedge against inflation in the future.

When a portion of the proceeds is distributed, it should be earmarked for paying off debt first.

Jeff

Congratulations, IRM! While it's a wonderful gift, it is very sad that Mary won't be able to see how much she has helped the museum.

From the viewpoint of a far smaller museum which still desperately needs indoor facilities, my preference would be to earmark half to serve as seed money for a major campaign to build our display hall, while locking in the other half for several years to partially regenerate the funds as an endowment.

Then, I would want no more than half of the earnings to be withdrawn per year, and they should go toward special projects rather than to pay the utilities...

Steve Hunter

Endowment then pay off their debt. That would be my plan.

With some operations (including at least three with which I work), B and C are not applicable/options.

And what works or may apply to IRM won't necessarily apply to, just as examples, the Cumbres & Toltec, the Wilmington & Western/Historic Red Clay Valley, the South Carolina RR Museum, etc.

Unfortunately with interest rates near zero, there's not much in the way of earnings, at least not with non-speculative investments. Artificially low interest rates are in effect a tax on those who bothered to save. Use some to buy more buffer land.

Steve

I'd pay off the mortgages and any other debts, then put the rest in the bank or an endowment for a rainy day. Oh, and I'd use some of it for a major plaque for Myerl and Mary. And name a prominent building after him, not only as a tribute but as an incentive for others who might be looking for something to do with their legacy.

WOW!!!!!! Congratulations!!! This is literally the biggest financial news in all-volunteer railway preservation in ... pretty much... ever. And that's me talking as a past board member of WRM*, and as a donor and structurer of assets at the Southern Michigan Railroad, with lessons learned from WRM. This is just huge. I mean tears are rolling down my eyes, not because of the zeroes but because of the possibilities.

Railroad, Land, Carbarns: I have long said that endowments don't happen at railroad museums because using endowment income to perpetually undo weather damage is not nearly as efficient as using the endowment's capital to buy railroad, land and carbarns. And it builds a much more respectable facility too, which pays more dividends in public support. Part of me is screaming "easy, 5 more carbarns, whole collection is under cover, bada-bing." I walk my talk in this area.

The snag is: the big-money, NON-railfan donors don't grasp this idea of "a carbarn is the best endowment". You take a big credibility hit by not having an endowment. It's one reason railway preservation has such trouble attracting money. (mind you they don't want to give to endowments, they want to give to projects. But the endowment reflects competence in the field, and a cash reserve.)

Donor Priorities: Not every cause at your railroad has equal appeal. Would Julie Johnson have dug very deep into her pockets simply to add money to IRM's general fund? No. Endowment? No. But for the CA&E cars, you betcha! The fact is, donors are motivated by different things, and you have to be strategic about that. Living people don't support endowments, they support projects. Don't use possible endowment money for projects that you could have fundraised for.

Museum X gets $500,000, puts it into endowment, fundraises for a $500,000 carbarn and gets it because it's an urgent and worthy project.
Museum Y gets $500,000, puts it into a carbarn, they've shot their wad. They try to "make up the difference" and fundraise $500,000 for an endowment and it doesn't work because endowments are a hard sell.

Generally, endowments attract planned giving. You approach people and ask them to consider the organization in their will. While you always prefer general-fund money, a donor would be foolish to let you have it: they want to see that their gift will endure, not be consumed in boardroom foolishness. Nobody's going to put "carhouse 4" in their will, because they want to see it done, and it might be built anyway before they die. The endowment is the best product you can offer when you are soliciting for planned giving.

Nearby land: is itself an endowment-style investment because you usually get investment income off that land, e.g. rents from the farmer. Real estate is a healthy part of a balanced endowment portfolio, WRM's endowment is partially invested in REIT's. Farmland is probably not the best possible financial return (if it was, Harvard's endowment would own half of Iowa), but you are trading less return for the security of controlling strategic land.

Cost of Money: The other thing about farmland is once you have an endowment, it's easier to get a mortgage -- and we have a freak market condition right now, where mortgage rates are actually lower than the reliable earnings of an endowment. It actually is financially reasonable to have both the endowment and the mortgage, even if both of them would seem to cancel each other out. This also has a couple of other satellite effects: #1 it makes the endowment a great deal more prestigious, which attracts money to it; and #2 it helps establish your credit rating.

I know conventional wisdom is that mortgages are bad. That is a message intended for ordinary middle class consumers like you and I, and ignoring asset-protection strategies because plain folk don't get sued in theory. When you get into a bigger commercial game, things get a lot more complicated, just as one example: asset protection. So open your mind a bit on the mortgage question. Not necessarily bad.


Summary: Despite what I say about the urgency of carbarns, I think IRM is pretty much where WRM was in 2006. Their carbarn campaign was well along, more than half the collection was under cover, and "the end is in sight". It made a worthy and impressive goal for fundraising. WRM did not use endowment money, they made a huge fundraising campaign to get across the finish line. The campaign was a stretch for the organization, but it also brought about $1.5 million of new money that wouldn't have come otherwise. That allowed the endowment to stay whole and keep growing.

So if it were MY call... speaking again as past WRM board member, and builder of such thing elsewhere...

- All of it to the endowment.
- Learn endowment management: What would Harvard do?
- With this new credibility, run a planned-giving campaign, making a serious ask of every member over 40, and as many community members as possible. This won't pay off for years but it will build momentum.
- Mortgage out the buffer land at the most favorable rates, up to the amount of the endowment.
- I don't know if there are any mortgages on the museum site proper, but if so, use the buffer-land mortgage proceeds to wipe them out.
- Do a full-court press on a fundraising campaign for the next car-house, and aim higher and wider at institutions that have turned you down before, and keep using the words...

say it with me...

Million dollar endowment!

I am fairly sure that there is quite a list of potential uses for that bequest, but in consideration of what IRM requires, I think they need a reasonable agreement amongst themselves what their priorities are, as they know best. It's a matter of pragmatism and utility, and I would think storage is one of them ( if I had to guess) to keep up with their rate of acquisitions, and another would be upgrading their steam facilities but neither one is cheap, and while this lump some donation seems like a lot of money, if it is spent on facilities, or other new material assets, every dollar will have to be stretched by either utilising donated services or volunteer labor. Like any museum, substantial challenges remain.

One more thing.

Each of us has our beliefs and experiences about money that we have accumulated over a lifetime. Folks are usually very attached to these, and will get reactive, even combative, if their beliefs are challenged. That's going to make this a difficult discussion, because...

Endowment money is different. I was shocked by just how useless and wrong my past financial experience was for dealing with WRM's endowment. Nothing prepares you for it, unless you're under 30 and investing an IRA really well.



Let's start at the start. The idea of an endowment is to keep the principal (called the "corpus") forever, and make it off the interest, dividends and capital gains (investment income). You're concerned about loss. Loss and gain are two sides of the same coin: volatility. All investment types grow over the very long term (20-30 years). But the better their long-term growth, the worse their short-term volatility. Always. That's why a 20 year old puts his IRA in the stock market, because by age 60 he will definitely do very well, regardless of short term ups and downs. But a 70 year old should not, becuase he means to use it soon.

Endowments are invested in the longest term. Their goal is to get maximum long-term gains, by accepting short-term volatility.

Donors don't like loss. So early endowments secured the concept of the Corpus, the amount originally donated. The donor was promised that his Corpus would never be spent. Everything above that was fair game. The Corpus is a stupid idea, by the way, I'm just going into it because it seems like a good idea. In some versions you could always spend interest and dividends even if the endowment was underwater.

First there were no laws, then a mishmash of state laws, then a standardized law called UMIFA, written by a lawyer's association and passed in all 50 states. It made the Corpus concept into law.

And in really good stock years, organizations were feasting on 20, 30% gains. And then there was a downturn and BOOM - their endowment was underwater, just when they needed it most, when other sources of funding were drying up, and if they served the public, just when their constituents needed the most help.

And good or bad, the Corpus lost value every year due to inflation. It really was a stupid idea.

So the group of lawyers reconvened and created a new law called UPMIFA. This abolished the Corpus as a legal concept - the endowment is what it is right now, there is no "underwater". It forces you to reinvest ALL gains back into the endowment proper. And then you can take a limited amount out every year*, even in bad times. No more of this "30%, then 0%" feast and famine. That means boomtime profits are automatically reinvested to hedge against inflation, and the endowment is useful in down times.

(in old UMIFA, there was a back-door where all interest and dividend income could be taken out, even if the endowment was underwater. This caused really bad investment decisions, as managers stacked their portfolio with stocks that paid the best dividends rather than the best overall value. UPMIFA eliminates this by treating all gains the same.)

UPMIFA set very specific goals for (in general) how you must invest given the particular purpose and goals of the endowment. There are enough very large institutions managing permanent endowments that it's pretty clear and well-understood (within that field) what proper endowment investment is. And that's what you have to do, more or less. Yes, it does involve the stock market, but this stuff really does work.

* Generally, in the endowment world, withdrawing 4-5% a year is considered prudent and sustainable, and will keep up with inflation with proper investing. UPMIFA says above 7% a year (averaged), you are presumed to be breaking the law unless you can prove a special situation.

Bottom line, endowment investing is nothing like what you're familiar with... but there's no huge secret to it, and the law is reasonable and well established. And yes, it can reliably produce 4-5% a year and also grow with inflation. For sure.

(and by the way, to those who are experts in endowments, you may see errata and over-simplifications in the above, but my goal is to get in the ballpark, to explain the 101 to people who think endowments can't function in this market. WRM's endowment has nearly doubled in the last 4 years, is now 20-30% above its pre-crash high, on growth alone. And it is very conservatively invested relative to most endowments.)

How about if they hire a consultant or expert in finance to assist them?

With all respect, their board may not have the expertise.

There is an alternative to this and I wonder if it gets magnified if you are a non profit in particular. That is where you buy high dividend paying stocks, and hold them and only spend your dividends. My father-in-law who was a postal worker had one job on the NYSE as a runner delivering orders to the stock brokers, on the floor prior to working for the post office. Well that turned out to really be the best job he ever had in terms of income as at age 18 the brokers on the floor taught him to buy the big dividend payers. Now almost 45 years later those stocks pay him a nice little income in just dividends. During 2009 his portfolio had lost over 50% of its value, but actual dividend payouts were down maybe 15-20% which wasn't bad for him. Spending dividends keeps you from destroying principal.

Now the next question becomes how does the non profit status help? My basic amateur understanding is that there are 3 basic types of stock. Common, REITs, and MLP's. Common stocks get income, pay corporate income tax on the income (35% rate) then when they pay dividends the share holder pays 15% more on top of the 35% tax. On the other hand REITs and MLPs from what I understand pay no corporate tax, rather the shareholder pays the taxes at their own rate, and by law these must pay out 90% or so of their income in the form of dividends (MLP's I believe are more complicated) but the end result is if you have an REIT stock yielding say 9% if you are a non profit does that mean you get to keep all 9% and pay no tax on it? If so that sounds like quite a deal for the NFP as they can get their 1million to generate about $90,000 per year in revenue. Or if they don't spend it they can turn their $1million into $2million in roughly 7years. This is pretty good considering if a taxed person paying ordinary income tax owned these stocks and was paying a combined state and local rate of 40% the true yield would be closer to 5%

Does anyone know if this is the case if REIT's and or MLPs are owned by non profits or do they still have to pay some tax on them due to their tax preferred nature? I would think there should be good accountants who specialize in this who can give some advice.

Ye Gads! I thought I wrote long posts.....

By the way, the bequest was from a woman. More below.



This is why you have a Board of Directors. In the non-profit and for-profit world, the BOD sets the policy.

From what I understand, this woman called IRM a number of years ago, talked on the phone with the Executive Director, Nick. She asked about the Nebraska Zephyr, and Nick sent her a brochure. Presumably she visited one weekend when the Zephyr ran, was impressed and left the bequest.

This whole point underscores how your organization can unknowingly make a positive impression that pays off in the future. Treat every visitor with respect and kindness. It's good policy by itself, but may pay dividends in the future. Also, this story underscores on how keeping your property in good shape and doing a lot to enhance the visitor experience. IRM is pretty impressive in this regard, paved streets, multiple bathrooms, manicured grounds. Combined with the equipment, volunteers and other infrastructure, the place looks like it has reasonably used donor money in the past. It, by it's appearance instills donor confidence.

You never get a second chance to make a first impression.

One group I am with received a major bequest--money, house, and collections--because, as I am to understand it, several relevant potential homes for the stuff (other rail museums, local or state historical societies, etc.) had, in the past, had members or officials that treated him at times with hostility or disdain, while the "lucky" one, though maybe less on target with the mission, had members that treated him respectfully.

I've also been told, discretely and quietly by another somewhat elderly gentleman, that his will is set up to bequeath money and his stuff to this same place, and that they were not, under any circumstances, to hand off any surplus to either of two other places where the "stuff" might very well be relevant--that he would take it out into his back yard and burn it in a bonfire before letting those other two places have any of it. Yep, you guessed it. Those other places had folks that had bad-mouthed or insulted him in the past. (He confided in me because he knew that I would probably be called in to facilitate any surplus transfers or liquidation, should that happen. And he gleefully buys the surplus from that place to give to other places or people of his choosing--and he says "it's all coming back to you eventually; I'm just renting it!")

The "crew office" of this unnamed place had, at one point, a sign on the bulletin board that said, and I paraphrase, "Thou Shalt NOT talk ill of other rail preservation projects where the public could possibly hear you!!"

Maybe that had something to do with it.

I don't think anyone here will argue the fact that the there is a certain level of etiquette that needs to be executed around the public that goes over and beyond that which is executed in the back room.

Edit: Because if you can't say sumthin nice, don't say nuthin at all, right?