Our museum has been offered a donation to create an endowment for our restoration program...

Has anyone out there managed an endowment, and if so, are there resources either on line or off that explain the management of such a fund, and issues related to the management.

This is a good starting point. The Foundation Center is in the business of spreading information about non-profits, grants and grant makers. Lots of information.

http://foundationcenter.org/getstarted/ ... /what.html

There are lots of sources...

I am going to assume that you are talking about an amount of money which is large enough that the interest earned over the course of a year would be considered a major donation in its own right, but not so much that it is sensible to hire a first rate firm to manage it full time. That means a good lawyer who handles charitable trusts as a significant portion of his business to set up the paperwork, a good bank trust department to handle the cash, and at least two people on your board who actually read everything.

My first suggestion would be to call the development / fund raising/ annual giving (whatever they may choose to call it, it still translates as "We want your money") office wherever you went to school. If they cannot point you in the right direction wander across the bridge to Leland Stanford, Jr. University and ask there. (Sidenote: Somewhere I still may have some snapshots taken with a pre-WWII Agfa 120 size camera of the SP branch from Palo Alto onto the campus.)

Endowment management has become a legal and MBA specialty in its own right. There are regular college courses and continuing education programs available in the discipline. The larger institutions have offices that are devoted to just that and I am willing to bet that with the number of major schools and other charitable institutions within a twenty-five mile radius of your barn there is at least one expert who will be willing to give you a little time in exchange for a ride.

GME

If you are not in touch with a CPA, get one who regularly deals with non-profits, specifically one with endowment and restricted fund experience. Based upon what you are saying, its possible that you will have to adjust your financial reporting to comply with FASB statement 124. A little about this:

http://www.bkd.com/docs/news/Impactof%20FASB124.pdf

By the way, even if you don't have to deal with FASB 124, the IRS is redesigning the 990, that in itself should be enough to get you to the accountant's office.

An endowment can be a very simple situation, especially as it is started. Your board can set aside the donation in a restricted or otherwise protected account. That is an internal designation, by Board motion, or in some cases by by-law. You can invest it and manage it yourself with simple instruments such as a CD, to assure the money is protected by FDIC. YOU set up the usage and other restrictions, keeping in mind the donor's wishes.

It might go to general operating expenses, or to maintain and expand buildings, for example. There might be special circumstances where the capital can be used, or perhaps the organization may be allowed to borrow against that. But it is shortsighted and self destructive to spend that golden egg.

Typically, at the beginning, the money cannot be touched and earnings are plowed back in. At some point it makes sense that the endowment begins paying out, back to the organization, as some or all of the annual earnings.

With a significant fund balance, it may make sense to have somebody manage that investment, but you should determine the parameters, amount of risk you can live with, and/or the rate of return you must have. A fund manager likely will demand a predetermined annual fee, or a percentage; and NOT guarantee their results. I would guess less than a million dollar balance would not attract such a service.

Bob Kutella

This is the type of problem every non profit in the world would like to have!

It's not the board that determines whether a donation is restricted or not, it's what the donor said (in writing) when you received the donation. FASB 116/117 come into play here.

FASB 124 deals with determining the year end value of any assets that are invested in things like stocks, bonds and even CDs. It requires you to record as income (or expense) any unrealized gains (losses) on your investments.

The board should approve an investment policy and there probably are as many ways this policy can say the funds could be invested as there are members of a board.

You'll also have to open an investment account at a brokerage firm such as Merrill Lynch or UBS. Note that when you have such an account, your can receive donations in the form of securities (e.g. shares of stock) directly from the donor and there may be some tax advantages to the donor.

Bob H

A good idea is re-deposit an amount of income into the endowment fund equal to inflation for the past year. That way the endowment value stays constant in spite of inflation.

I think its time to clear up some confusion here. First, I hope Randy gives us a little more information about the nature of the offer in the original post, to the extent that he can, it would be useful in offering some direction. (size, composition, the nature and duration of donor intent, etc.)

First of all the term endowment can mean a variety of things. The term “endowment” is used by the National Endowment for the Arts, which is a quasi-governmental organization created in the 1960's.

An “endowment” would also be a payment made to a person for attaining a specified age (alone, it’s a “pure endowment” and illegal as contrary to the public good, since it would place someone in the position of speculating on human life), however whole life insurance policies do reach a point where if the insured person receives the value of the policy (usually 95 or older).

The term can also refer to a wholly separate entity, either a charity or a private foundation as described in IRC Sec 509(a).

Finally, it can also refer to assets segregated by a not for (individual) profit -(NFP) dedicated either temporarily or permanently to furthering a specific purpose. I am assuming Randy means endowment in this sense.

With regard to the first paragraph above that’s true. However, I think I understand the confusion, expressed in the prior post that discussed board imposed restrictions. When FASB 116/117 came out in 1993 it explicitly recognized in authoritative literature the unique nature of NFPs and the fact that although often organized as corporate entities, exist to further objectives very different from traditional businesses. To that end, it was deemed important to incorporate information about donor intent in the accounting by NFP’s.

Specifically, in para. 13-16 of FASB 117 (link below), the classifications of unrestricted, temporarily restricted (by the donor) and permanently restricted (by the donor) funds were created.

Unrestricted funds are just that- money without conditions available for any allowable use by the donee.

Temporarily restricted funds are those where all or a part of the money is to be used for a specific purpose for a specific time. An example would be a donation to a museum where funds are to be retained for, say, the restoration of a specific locomotive, which when completed would be available for any allowable use.

Permanently restricted funds are those that have conditions on their use that don’t expire. An example would be the donation of a portfolio of appreciated stock where the principle is to be retained with income generated used to pay an organization’s advertising expense.

However, FASB 117 specifically recognizes the following: “Similarly, information about self-imposed limits that may be useful, including information about voluntary resolutions by the governing board of an organization to designate a portion of its unrestricted net assets to function as an endowment (sometimes called a board-designated endowment), may be provided in notes to or on the face of financial statements.”

I think in the prior post, the postermay be thinking about these "board-designated endowments". In reality, such restrictions can be revoked at any time, so are little statements of public dedication or budgeting devices.

Hi Randy:

I'd get first hand knowledge and experience on how to manage endowments by talking with someone from the Museums that I understand have enough $$ in their endowment to make it a management issue. These Museums are:
- Seashore Trolley Museum in Kennebunkport, Maine
- Western Railway Museum in Suisun, Calif.
- Orange Empire Railway Museum in Perris, Calif.

No offense to the ones who have responded to your questions so far, but if I were you I'd talk directly to someone from one or more of the above organizations and play "twenty questions" with the person or persons who actually do the work and manage their programs.

The website for each of these groups has a phone number that you can call to make initial contact and find out who the person(s) is/are that you need to talk to.

Thanks!

Other than "making a statement",perhaps because you expect such a statement to enhance donations this is not a good idea. I could see where establishing a fund to restore ol' 99 will make the project seem viable to the public, but its really a fiction.

First, a donor can only restrict their own donation. "Redepositing" additional funds means establishing a "board designated" endowment-which can be amended or revoked at any time, so why bother.

Second, if you were to take general assets and commingle them with a restricted donation, its going to make accounting more difficult.

Third, the rate of inflation is an estimate and a rather meaningless number based upon a hypothetical basket of goods. In reality-museum/heritage/tourist operations face radically different increases than any variation of the consumer price index. In recent times, liability insurance and fuel have exploded.

Fourth, accepting restricted funds reduces your operational flexibility-you accept the restrictions knowing your overall position is increased-but at the cost of operational flexibility and additional accounting effort.

I have a membership with Grantstation, and there is a series of articles on their site now about endowments. Its on the public side of the site so you should be able to read the series.
http://www.grantstation.com/Public/tracks_to_success/EndowmentBuilding/main.asp

Here in Youngstown we have a Community foundation of the Mahoning valley that will oversee endowment funds. When we get enough extra cash to set aside we will probably go that route and have CFMV oversee the fund.
http://www.cfmv.org/agency.htm

You may have something similar in your area.

Randy,

We manage just over $1 million in endowments. We have 3 and will be adding a fourth next Monday. We have a policy regarding initiation and management and a negotiation document for discussions with donors. We have been doing it since 2001. If you are interested in our paperwork and experience, contact me off-line via PM. I am OERMs endowments committee chairman. Our situation has worked very well, even through the dot com bust.

Corey

Jim & Randy
Add the Pennsylvania Trolley Museum to your list. Scott Becker can furnish more information about endowment management. He can be reached at the Museum phone number, 724-228-9256.

Thanks to all. This forum has once again shown its worth. I will be in touch with some of the museums listed if this thing pans out.

To answer some of the questions, one of our members/benefactors would like to emphasize the significance of our volunteer based restoration program, has the resources to start a small endowment (we are targeting $100,000 at the end of 10 years, he is proposing donating $60,000 over three years (he also expects to make other targeted donations along the way.) We plan on gaining another $32,000 from other sources. We would like to see it generate about $5,000 per year (adjusted for inflation), which is what our basic volunteer restoration crew consumes. (we restore 19th century wooden cars, they are small (8-15 ton capacity) technically simple (hand brakes and link and pin couplers) and as a result are more affordable than a mainline 4-8-4. The endowment won’t pay for a set of trucks or other “heavy” work, but we do expect to use the endowment to and the progress it will generate as a hammer to generate or leverage other community grants.

This is a significant moment for our group. We are waiting on the building permit for our car house, and expect to break ground this winter. For the last several years the restoration program has been on hold while all efforts go to the building. Now, with the building on the horizon we want to restart the restoration efforts.

Randy,

The American Association for State and Local History
has information that can help with endowments.

They are at 1717 Church Street, Nashville, TN 37203

E-mail to www.aaslh.org

Glad to hear that the barn is finially going to happen! Your cars deserve indoor housing just as much as your horses do!

Ted Miles