OF REDLANDS, CALIFORNIA  - Founded 24 January 1895


4:00 P.M.

December 17, 2009

Foundations and Endowments:
A National and Local Perspective

By Neal A. Waner, CFP
Assembly Room, A.K. Smiley Public Library


This paper discusses endowments and foundations important role in supporting the non profit or civic sector.   It begins with a discussion about endowments creation, purpose, and influence on a national level, then shifts focuses to smaller or local endowments including defining our roles as volunteers or managers.  If finishes with the authors opinion of why these local endowments are important in preserving the unique assets that define Redlands going forward.   

Historical perspective, current scale  

When one thinks of foundations and endowments positive impact on American society, two names generally come to mind; Andrew Carnegie and John D. Rockefeller Sr.  Each of their gifts and foundations are significant, yet it was in June of 2006 that a single man, Warren Buffet, donated more in inflation adjusted dollars than both of those two men combined. Warren Buffet’s gift of $31 billion, all be it spread out of a period of several years, to the Bill and Melinda Gates Foundation created a new threshold of generosity.  His gift helped change his title from Oracle of Omaha to the worlds most admired dinvestor.  Interestingly enough, Warren Buffet did not create his own foundation in his own name, a stark change in this age of aggressive self promotion. Buffet instead decided to rely upon the framework and professionals within the Gates Foundation to carry out and support his work.

That gift back in June of 2006 for a moment brought to the forefront foundations and endowments and their influence on American society. Usually, foundations and endowments operate behind the scene, off the radar, away from people’s conscience. Foundations work is all around us, yet seldom highlighted. Ever made a 911 call? The first 911 emergency telephone system was set up in Alabama in 1968, by the 1970’s it had spread throughout the United States. The genesis of the 911 emergency response system was the Robert Wood Foundation.  Ever tuned into PBS?  Ever wondered when watching or listening how that came into being? Every year billions of dollars worth of financial assistance to college students are granted through the Pell Grant program.  PBS and Pell Grants were driven by blue ribbon commissions run by the Carnegie Foundation.  These are examples of foundations work. Foundations are some of our most powerful, least accountable, significantly tax benefited and often least understood institutions. Just as private investors and venture capitalist spark creation of new products and services in the for profit sector, foundations provide the capital that powers innovation and diverse experimentation in the non profit world or civic sector.  The multitude of non profits plays an influential role in the constant reinvention of American society, including the redistribution of power and wealth. 

Foundations are all around us.  There are 72,000 registered foundations in the United States, 70% of all Americans support some or many non-profits. Giving USA shows the total donations in 2007 were $306 billion of which $229 billion came from living donors, $23 billion from bequests, and $54 billion from corporations and foundations. Non profits, also known as the civic sector, employ one tenth of our labor force and its volunteers constitute 27% of our adult citizenry according to the Corporation for National and Community Service. The civic sector is a powerful third force distinct from both government and business. Through voluntary actions by millions of Americans, the civic sector is able to provide tangible public support but also apply social pressure. 

The civic sector is, in a word, enormous.  The aforementioned 72,000 registered foundations in the United States are actually dwarfed by the approximately 2 million formal non profit organizations. Of this 2 million, 1.6 million are certified by the Internal Revenue Service as a tax exempt organization, such as a 501c3 or 501c4. This figure does not include the approximately 300,000 religious organizations, churches, mosques, et cetera, which do not require IRS certification. Also not included are the informal associations such as neighborhood soccer leagues, book clubs and community service groups, possibly our own Redlands Fortnightly Club.  The Internal Revenue Service most recent report shows that cash revenues are some $13 trillion dollars spread out across our American economy.  Of this some $1.2 trillion is attributed to the civic sector or non profits. That means, nearly 10% of the United States GDP or Gross Domestic Product falls in the non profit sector.

It is often thought that the largest donations come from foundations, endowment and corporations, but actually that is not so.  While it is true some of the largest single gifts may come from these institutions, of the $306 billion dollars donated in 2007, 82% was given by individuals, 75% which were alive and 7% from there estates.  This leaves just 18% that came from large institutions; 13% from foundations and endowments and the remaining 5% from corporations.  If one believes actions speak louder than words, by our deeds we as a nation prove our support of donors, donations, and non profits, all backed by tax code.

Why is America’s non profit sector so large, established, and diverse? Our founding fathers perspective offers some clues.  In colonial times new immigrants from Europe arrived on our shores well before service providing governments had been established.  Today, we rely on the government or public sector to provide education, social services, public safety and other assistance. Back then, if the colonist needed these services they had to provide for it themselves. Since many of these original colonist fled religious oppression in Brittan and France, the very first institutions they established were self governing religious congregations which quickly became the primary providers of school, healthcare and other services. The pervasiveness and power of today’s non profits stem from the strength and importance of those early self governing private religious congregations.

The civic sector was also established with great freedoms, similar to the religious freedoms our founding fathers sought. Just as the founding fathers deliberately kept churches free from control of either hierarchy or government, they wanted the civic sector free from those same influences. These historical factors help explain why our civic sector is larger than other industrialized nations. If goods or services are needed, we as a nation are inbred to look first to the private sector, then to the civic sector and lastly to the government. This shift away from independence and self support to one that relies on government assistance first is a disturbing trend to many, this author included.

Back to the present, if 2006 marked a high point for foundation and endowments due to Warren Buffet’s $31 billion dollar gift, then just a couple years later in 2008 brought a low point.  2008 brought financial upheaval, market volatility, and tainted money management, especially hedge funds.  The majority of assets invested in endowments are securities, mostly stocks and bonds. The prices of stocks and bonds in 2008 showed volatility, downward volatility, not seen since the Great Depression. Even with prudent investing and diversification many endowments saw their portfolio values decline by 25% to 30% in 2008. The result of this decline was that endowments had less, hence they had less to give, as distributions and earnings are directly tied to portfolio values. This decrease spilled over into 2009 and will also likely have a negative impact on charitable distributions from foundations and endowments in 2010.

Just a side note on volatility in late 2008 and early 2009.  There is a volatility indictor know as the VIX, symbol VIX.  The VIX is the CBOE (Chicago Board of Options Exchange) Volatility Index, and as an index, trades as just one number similar to the Dow Jones Industrial Average or S&P 500 Index.  The VIX rises in times of financial stress.  When looking at a chart of the VIX going back 20 years, one sees the VIX is usually between 10 on the low side, 25 on the high side.  It is about 21 right now.  In times of financial stress, the VIX can exceed 30.  If the stress or volatility is excessive, the VIX can exceed 40, but usually for just a few days.  Prior to 2008 the VIX had only exceeded 40 three times; including 9-11 and the tail end of the three year bear market in late 2002.  Each of these times it was above 40 just for a few days and it’s peak was 43.  In late September of 2008 the VIX exceed 40, in October it peaked at 80, fell, but went back up to 81 in December, and finally fell below 40 in late April of 2009.  For a full seven months the VIX was over 40.  It was an unpredicted time financial assets.      

While market declines have had a negative impact on endowment distributions, it will be interesting to see just how much of an impact this recession will have going forward on charitable donations or receipts.  Normally, foundation receipts are not as dramatically impacted during market pull backs or recessions.  The Foundation Center for Research Advisory shows that in the recessions of 1975, 1980 -82, 1990-91 and in 2001 giving actually increased slightly when using inflation adjusted dollars. This recession however is much longer and deeper so likely will yield less in donations than in the years leading up to this recession.  Hopefully this decrease will be a much smaller percentage decline than those suffered in the decline of the value of the portfolios. This fact again gives testament to the place in our society placed on non profits, endowments and foundations.

In addition to other financial calamities and chaos of 2008, none was more high profile than the Bernard Madoff Ponzi scheme. Nearly $50 billion dollars of net worth was wiped out by this one man. The good news for most of us in this room is that we did not have direct access to Bernie Madoff.  Unfortunately that was not the case for many endowments and foundations. In the non profit world, the brunt of losses appear to have been suffered by Jewish charities, some of them among the most distinguished and admired in the U.S. and Israel. The Picower Foundation is reported to have lost all of its assets, nearly $1 billion worth. The Carl and Ruth Shapiro Family Foundation appears to have lost half its assets, about $178 million. Yeshiva University lost $14 million of its invested dollars. The American Jewish Congress $21 million of its $24 million dollar endowment.  One can only wonder what the ripple effect will be in both the Jewish community and those that supported human rights by the loss of these institutions.  The Foundation Center for Research Advisory states that four foundations, the Chais Family Foundation, the JEHT Foundation, the Robert I Lappin Charitable Foundation and the Picower Foundation all will close due to Bernie Madoff.  While we as individuals or our local endowments may not have been adversely affected by Bernie Madoff, the insecurity and instability created by this story scandal touched us all.

Not everyone loves foundations. For years, advocates for minorities and those less well off have criticized foundations for supporting their own. Donors generally support causes or agencies they believe in and so yes, sometimes it seems self serving. The whole point is that donors vote with their dollars what agencies they will support. It seems unconscionable that the federal government, or any government, would intervene in this process, yet unfortunately sometimes they do.  In 2008 this type of criticism was ratcheted up by the Greenlining Institute in Berkley California, which led to the introduction of California Legislation AB 624.  AB 624 would require large foundations and operating charities to assemble and disclose to the state information on the ethnic, racial, gender and sexual preference characteristics of their trustee’s, officers and staff. The clearly expressed intent was to pressure California foundations to increase the percentage of their grants awarded to minority controlled, minority serving organizations. If passed it would have allowed the government to use disclosure requirements to suggest that some philanthropic organizations are preferable to others.  It was dangerous precedent as it should not be the business of governments to tell foundations what their grant making priorities should be. That decision should be left to the foundations themselves. Former secretary of the Treasury, William Simon, wrote “Donors thrive when they specialize, when they focus their resources and develop an expertise in achieving a particular set of charitable objectives…”  Fortunately, in the turmoil of the fall of 2008, the bill died.  Philanthropic freedom is the backbone of our countries tradition of generous giving. All Americans who value the future of charitable institutions should resist these efforts by those who take voluntary out of volunteerism and try to control where Americans give their charitable dollars.  Our collective focus should be on encouraging gifts, gifts based on priorities unique to the donor, rather than restricting them. 


Structure and Strategies

When looking at the structure of foundations, there are two main kinds of organizations; those which exist primarily to benefit others and mutual benefit groups which serve mainly to support their own members and donors. United Way is a good example of civic organizations that exist to benefit others, the NAACP, a kind which supports their own. The common criticism of foundations is that they exist to support their own and they serve primarily the upper middle class or wealthy. The argument usually continues, why should tax payers subsidize such self serving spending? Those critics are missing the point. If a donor gives to the symphony or the art museum, they are doing it probably because the enjoy music or art. Doesn’t the existence of art or music benefit all? And by giving, doesn’t that insure these organizations will exist for future generations to enjoy that very same pursuit?  Taken to an extreme, if donors did not provide the financial backing for certain organizations that can’t support themselves, who would? How would they be economically viable?  By extending tax break to civic sector organizations they benefit society without becoming a financial burden on government. This also is fair because most government programs are designed to benefit the entire citizenry not just poor. National defense, public schools, libraries, parks, playgrounds, highways, water supplies; all these serve rich and poor alike. What would happen if all the benefits from the government were somehow restricted to only to the poor? In short, members of the middle and upper class would withdraw their political support. In the same way if tax breaks for non profits were restricted to certain programs, then broad based support would soon dry up. Government then should not be in the business of separating worthy non profits from unworthy non profits. Citizenry should be motivated by generosity and tax incentives to support the non profits of their choice. For the government to make that distinction places unfair pressure on a system which is nicely balanced by freedom of choice.

Back to statistics, in 2007, 72,000 registered foundations existed controlling some nearly $670 billion in assets. Total grants or distributions in 2007, according to the Foundation Center based in New York, were $42.9 billion which interestingly represents about 6.4% of assets.  While most foundations are small and un staffed, there are a few very large foundations. In 2006, 62 foundations had assets exceeding $1 billion while another 208 foundations had assets between $250 million and $1 billion. 71% of all foundation assets are controlled by just 2% of the foundations, according to the Foundation Yearbook. In addition to these private foundations, there are about 700 Community Foundations holding approximately $50 billion of assets. Here locally, the Community Foundation of Riverside and San Bernardino Counties has an asset base just over $50 million and in 2008 granted just over $4.6 million to recipients in these two counties.  Even more local we have the Redlands Community Foundation, which according to GuideStar has just over $1 million in assets.  There are more local non profits than you think.    GuideStar is an online provider of information about non profits.  When one queries the GuideStar database for foundations registered in either zip code 92373 or with the name Redlands included, 531 non profits show up. 

The grant making or decision process foundations engage in is as varied as the foundations themselves.  In smaller foundations the trustees take action on individual grants while in larger foundations such as the Ford Foundation, the trustees simply approves overall program budgets and leave the final decisions of individual grants to senior managers.  In some foundations grants are proposed by trustees while others use program staff take the initiative.  In most larger, formal foundations, grants proposed by staff are routinely approved by the trustees which does provide some consistency of purpose.  Consistency is important because in some smaller or family foundations, trustee decisions can be unpredictable and cases for support across the board.  Neither system is perfect and both methods have merit because in the end foundations contribute nicely to the diversity of needs in society.

What would the U.S. civic sector be like if foundations did not exist? Well, the civic sector would be significantly less dynamic, less responsive and much less proactive in promoting substantial changes in public policy. Program and service quality would suffer or be non existent. Public discourse on the government policy would be impoverished. Without long term funding the civic sector would be more short term in its concerns and much less diverse. Lastly, the lack of foundations would take away intellectual capital provided to civic sector organizations making them less well advised, less efficient and less strategically focused. Foundations are a powerful engine in America.

Why do people create a foundation? The answers are as diverse as the foundations themselves. Often times an individual is uncertain about how or where to give. Sometimes people want to avoid giving excessive wealth to children or heirs. Andrew Carnegie clearly believed this and one can infer that Warren Buffet and Bill and Melinda Gates feel the same. As Warren Buffet clearly stated “You should give your children enough money so they can do what they want, but not so much that they don’t do anything”. Tax considerations are also an important motivator.

For the largest foundations, the purpose of creation is generally a desire to promote large scale, lasting social change. Carnegie and Rockefeller were relentless in pursing this objective. The great age of philanthropy was born in the 1880’s.  In fact, Rockefeller wrote to Carnegie stating, “I wish that more men of wealth were doing as you are doing with your money, but be assured your example will bear fruits and the time will come when men of wealth will more generously be willing to use it for the good of others”. These two visionaries were able to see that they could use their great wealth for the public benefit to not ameliorate social ills, but rather try to change the system that produce to those ills in the first place. Carnegie hoped to equip the poor with skills needed to escape poverty. He built over 2,500 libraries, 1,681 in the United States, so that the illiterate could learn to read. Both Carnegie and Rockefeller founded Universities. While most small or modern foundations are more self serving or directed in their support, one can only hope that the largest foundations will continue to have a greater vision and purpose in effecting change. As John D. Rockefeller said “Instead of giving alms to beggars, if anything can be done to remove the causes which lead to the existence of beggars, than something deeper and broader and more worth while will have been accomplished”.    

The strategies that foundations employ also vary.  Often times the strategy is for the creation and dissemination of knowledge. Some fund an institution to support basic research, such as the Rockefeller Institute of Medical Research, founded in 1901, which has more Nobel Laureates on it’s faculty than any other university in the United States. Some foundations promote public policy awareness.  An example of this would be National Bureau of Economic Research. Some foundations promote specific reforms. The Police Foundation, originally created by the Ford Foundation, is widely credited with transforming the practices of local police departments. Some foundations create an institution to create or resolve a specific problem such as the Aaron Diamond AIDS Research Center in New York City. Some foundations are launched to create a new field of scholarly study or professional practice such as the Common Wealth Funds support for the creation of schools of social work, welfare and care. Some foundations sustain a traditional field of scholarly study such as the Andrew Mellon Foundation and its focus on the humanities.

Another strategy foundations employ is to build human capital. This may be in the form of undergraduate scholarships, or leadership development, or fellowships for graduate study, such as the Rhodes Scholarships at Oxford University. Some foundations create fellowships for post graduate research or create fellowships for adult leadership and creative expression.

Some foundations purpose is to advocate public policy. Sometimes it’s in existing issue but more narrowly defined, such as the Christopher Reed Paralysis Foundation or the Milliken Family Foundation and its spin off the Prostate Cancer Foundation.  A similar strategy is that of changing public attitudes. Here the goal is less on informing influential decision makers but more on educating the general public. An example of this is Ted Turner’s Foundation focused on the issue of U.N. dues owed by the U.S. government. The foundation orchestrated an effective campaign to garner a public support for paying the back dues as well as discreet efforts to lobby congress and the administration to the same end. Another example would be the Robert Wood Johnson Foundations Youth Anti Smoking Campaign, which is credited with reducing smoking in teenagers through public information and efforts to encourage tax increases on cigarettes. Some foundations exist to try to change the law. The Ford Foundation was particularly active in these areas such as their work with the Mexican American Legal Defense Fund. 

Sometimes these tactics can cross strategic lines.  These tactics can be used separately or collectively like tools in a toolbox all targeted at some specific outcome.   An example of this would be convening a conference, or meeting, or strategy session to encourage networking and spread mutual learning and promote cooperation. Creating a blue ribbon commission is a similar tool; recruit a group of experts with recognizable names to study a problem and come up with a number of proposed solutions. An excellent example of this is the Public Broadcasting System Commission which ran from 1966 to 1967 which created the public broadcasting system we know today. Sometimes offering a reward or prize will focus attention on a specific need or issue. Sometimes foundations will build a model through a pilot program. Foundations have been known to finance litigation, often times in areas of human rights and civil liberties. Sometimes foundations will even build an institution or a physical plant. While building physical assets is generally not their first choice, some foundations such as Kresge and Olin exist for that purpose. Our local YMCA presently has a grant application in to the Kresge Foundation in hopes they will support the Y’s capital building campaign.


The Future

So what does the future hold for foundations and their impact on the civic sector?  When looking into the future, one must again, take a quick glimpse back at the past. The large private foundations first took root around 1900 by individuals such as Carnegie, Rockefeller, Hartness and Sage. Just as an individual foundation or endowment grows due to its first initial contribution to over time bare fruit, the same can be said of the foundation movement over the past century.  From 1900 to 1980, foundations with $1 million or more, or those that were able to make grants greater than $100,000 grew in single digit increments.  Before the 1940’s, growth per decade, from the 1900’s to the 1930’s, was just 2% per decade.  During the 1940’s foundations that size grew by 3%.  Growth increased to 8% during the 1950’s and 1960s, and fell back to 5% growth in the 1970’s.   However, in the 1980’s momentum heated up.  In the 1980’s large foundations grew by 18%, followed by 37% growth in the 1990’s.  Some of this rapid growth can be credited to simple inflation, however the 1980’s and 1990’s also ushered in times of substantial growth for financial assets including stocks, bonds, and real estate.  Technology also played role as it simplified the complex and costly world of managing foundations and assets.  What was laborious, expensive and uneconomical to do on a small scale was simplified thanks to technology paving the way for smaller foundations to exist.  Today we have many more foundations, all be it with smaller asset pools, yet collectively there are more resources to draw from to enhance the civic sector.

Even the foundation model has changed from the traditional private foundation. The best example of this is the Community Foundation. In 1914, only 7 years after founding the Russell Sage Foundation, Fredrick Harris Goff in Cleveland created America’s first Community Foundation, which aggregated assets of less wealthy individuals with the income devoted exclusively to local and regional charitable purposes. By the end of the current century, there were more than 700 such foundations across the United States holding assets of $49.9 billion dollars and giving away annually about $3.6 billion dollars. This Community Foundation model has spread around the world. Much of this money contributed to Community Foundations is done by a vehicle called a Donor Advised Fund.  A Donor Advised Fund is sometimes called a poor mans private foundation, however it is about as complex as setting up a Roth IRA.  In the early 1990’s the IRS approved the request of commercial financial institutions, First Fidelity Funds, Vanguard Funds, and Charles Schwab, to offer Donor Advised Funds. A Donor Advised Fund is a wonderful tool that allows a donor to contribute as much money as they wish to what is in essence a pool of mutual funds, take the full charitable contribution in the year of the gift, but distribute it out to the charities of their choice in later years.  If the donor passes away they can name a successor owner to distribute the funds or a charity to receive the remainder benefit.  Donor Advised Funds are not intended to hold assets in perpetuity, but they are a wonderful tool for the common person to receive a tax deduction today but give the money away tomorrow.

Another permutation in private foundations has been the establishment of what the tax code calls “supporting organizations”. They are similar to Donor Advised Funds where they are set up to support a non profit organization, often times that host institution being a tax exempt non profit.
Another positive development is the trend of foundations created by for profit corporations. Starting in the mid 1900’s, the establishment of the General Electric Foundation, the IBM Foundation and the AT&T Foundation led the way for a publicly held, for profit institutions, to create a non profit entity to support public causes.

Public foundations in the future will also be more influenced by venture philanthropy and its cousin social entrepreneurship. Venture philanthropy is generally created by wealthy individuals to drive a very specific purpose such as creation of new technology or free enterprise, or at other times to target a specific need in a certain geographic area.  Its cousin, social entrepreneurship was pioneered by Andrew Carnegie, who counseled, “Don’t give a man a hand out, but a leg up on the ladder of life”. This is similar to the Chinese Proverb, “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime”. Social entrepreneurs are not content to give a man a fish or even teach him how to fish. They want to revolutionize the fishing industry. Social entrepreneurship takes social problem solving, uses strategies, analytic skills and decision tools that orient the for profit business to influence an outcome. An excellent example of this is our youth’s movement on the environment and greening of America. A first step would force polluters to clean the air, a second step would be to find better alternatives which produce less emissions, a third step would be funding the research to create industries or companies that have the economic advantage to both clean the air and provided jobs.  Then you get the younger generation excited about those jobs and their effect on the environment and global society.  That’s social entrepreneurship and you’ll see more of it in our society moving forward.  Another type of social entrepreneurship is when an individual has created wealth quickly, known as the “new rich”, identifies a specific cause to support, or sometimes just simply shelters money for future charitable purposes. Think of the number of private foundations that have been established by corporate CEO’s, entertainers, athletes and the like.  Sometimes their mission is clearly defined, sometimes not so clear cut which too often leads to the negative stories we see about private foundations self dealing and other abuses.  

In the future there will be more foundations smaller in size and more narrow in their support, so a natural byproduct will be the idea of a “spend down”. Some foundations have made the active decision to spend themselves out of existence over a specified period of time, the idea that they should “give while living”. There are two sides to this argument.  While I appreciate that a donor may want to personally see their gift at work during their lifetime, the whole notion of an endowment is to provide support on a long term basis, there fore it is perfectly acceptable to change the avenues of support as needs change.  There are institutions, profit and non profit, over 100 years old, right here in our own community.  While the core mission of the organization likely did not change over the past century, the delivery of their product or service has.  The same should be true of endowments; plan and provide support for the long run, adjust avenues of support in the short run.  However, if a foundation has lost its objectives or has no clear purpose then to distribute its remaining assets makes some sense, but that was a management problem.  In the end, even spending down has benefits as the final distribution infuses more capital into the system.

So the future is bright for America’s foundations and endowments.  The huge transfer of wealth over the next several decades may allow individuals to collectively do what the a few titans of industry did 100 years ago.  Indeed philanthropy will be different going forward with venture philanthropy and social entrepreneurship leading the way, but it is good that even some of the “young rich” have developed a social conscious about benefiting society in addition to simply wanting to avoid taxes.  The positive impact foundations will have on the civic sector, charity, and developing social agendas will be greater in the future than we have ever seen in the past, and that is a good thing.            


A Local Perspective

At this point I would like to shift the focus of our discussion on foundations and endowments away from the national scene to a more local level. Most of us in our lifetimes will not have a relationship with a significant foundation such as the Bill and Melinda Gates Foundation, the Ford Foundation or even more locally the Irvine Foundation. However, nearly all of us in this room are involved with, or donate to, some local foundation or endowment. Lets discuss these local foundations from a context of what we can learn from the larger foundations, how we can assist or manage these local endowments and lastly why their success is so critical to the success of many institutions here in our community.

Joel Fleishman is the author of the book,  The Foundation: A Great American Secret; How Private Wealth is Changing the World. His experience serving on, consulting, lecturing about and assisting foundations expands over 45 years. In his book he states, “I’ve never seen two foundations alike”.  I have found my observance both from a perspective of financial advisor or volunteer to be exactly that; no two foundations are alike. That’s an important point because as a volunteer, one often wonders how that particular foundation is doing relative to similar foundations.  It is hard to make that comparison because so few foundations are similar. So if achieving similar is not the primary goal, then how should one size up, support, or help manage a foundation or endowment?

The first questions an endowment or foundation must answer are; what are we here for? Who do we serve? Who are our constituents? Why do our donors support us?  Mission statements aside, if the trustees or board of an endowment cannot answer these basic questions then one wonders about their true motivation. In smaller endowments and foundations, often times the benefactor of support is right there in the name of the endowment. Donors know exactly why they are giving; board members or staff facilitates the gifts, support, or programs. As an endowment grows in size and its potential areas of support expand, being able to focus back on a core mission and purpose is critical. As a foundation or endowment deviates from its core mission, it runs the risk of losing donors and in time disappearing.

A second critical element for the survival and success of smaller endowments are guidelines and policies to direct board members and other volunteers. Sometimes these policies are found in the bylaws, but often times the bylaws are so old, out dated, brief or general that specific guidelines or policies can not be found. An organization without these basic guidelines runs the risk of not being able to direct current management, volunteers and staff or worse yet, being unable to attract sophisticated donors. Foundations and endowments, especially local ones, want credibility, influence and presence. Often times this is coupled with the profile of the volunteers which grace their board. How many sophisticated volunteers would agree to be part of an organization that not only lacks a specific business plan but is void of guidelines, policies and principals? It happens quite frequently sadly; well intentioned individual’s team up to support a worthy cause to find out the endowment has a pretty loose set of guidelines, if any at all. If you by chance are that well intentioned volunteer, encourage the group to go through a strategic planning process and document policies and guidelines as this will both help future volunteers as well as attract and retain key donors, which is the greater goal. The purpose of any endowment should be to attract a sophisticated high net worth donor. These types of individuals or institutions will want to see proper procedures and policies both for personnel management as well as financial management.

Let’s address financial management or investments.  As discussed before, no two foundations are alike, yet with over 72,000 registered non profits in the US, one can find similarities. From a portfolio stand point the first question is usually what should be the asset allocation or our blend of assets? Standard and Poor’s tracks this data and interestingly enough, the asset allocation employed by most endowments is similar to the blend of assets used by public pension plans and corporate pension plans.  That asset mix is approximately 60% directed to growth assets such as US and global stocks, 30% directed to income oriented assets such as bonds or cash, and the final 10% to alternative investments, often times represented by hedge funds or private placements. This means that most endowments, as well as public and corporate pension plans are invested approximately 2/3’s in growth assets and 1/3 in income producing or defensive assets. To take this generalization and force it upon every foundation would be entirely wrong. Endowments are unique, cash flow needs are unique, and boards may be more aggressive or conservative based on their collective experience.

Cash flow is very important especially when working with a smaller endowment.  One should ask how much income in the form of donations and interest are anticipated in the coming year.  What distributions are required or expected? If distributions are coming from the endowment, are those distributions supported by earnings such as dividends and interest or will it be from distributions of principal? Just as you have a checking or savings account, a non profit should have an operating account and an endowment. Will there be any money left over in the operating account to add to the endowment at year end? If so, how much? Will the endowment be making distributions to support the general account? If so, how much? These basic questions help answer the cash flow issue which help shape the asset allocation. Answers about cash flow are the first step towards the proper asset allocation.

Another issue for smaller foundations is asset concentration. Often times this is caused because a generous donor worked or works for some publicly traded company and gifts shares of that company to the local non profit. Often times the well intentioned donor would like the non profit to keep that asset because, after all, they worked there.  Sometimes unfortunately the non profit agrees. This is a recipe for disaster as no executive thinks that they may be employed by the next Enron, Calpine, AIG, General Motors, Washington Mutual or Lehman Brothers. It is critical the endowment have a discussion with the donor and at least get them to agree that if the security begins to fall in price, certain automatic stop losses are executed and the asset is sold. Larger organizations get around this by adopting and using a Gift Acceptance Policy, a document which defines what types of gift will be accepted, which ones will not, and how to treat non traditional gifts like closely held stock or non liquid assets.   

The Bernie Madoff scandal is a classic example of asset concentration run amuck. While it is sad that several foundations will cease to exist because of that scam, one can only wonder what their boards were thinking investing a substantial or all of their endowment with a single portfolio manager, irregardless of how good his returns might have been. The whole purpose of diversification is to spread out the risk and the risk should be diversified across many asset classes.  As the size of the endowment grows so to should it’s diversification including multiple managers. Diversification is not difficult to achieve. Mutual funds and EFT (Exchange Traded Funds) offer diversification via a basket of securities specific to that funds discipline or ETF.  If as a volunteer, you can not clearly see diversification, or you sense there may be an issue of asset concentration, it’s prudent to ask questions. 

Similar to the gift acceptance policy, another commonly used document is the Investment Policy Statement. This document offers in general terms how the endowment will be invested, its target asset allocation, what types of investments will be used, or excluded, and how the investment managers will report to the board.  A good Investment Policy Statement defines roles of responsibility for all involved with the endowment.  It also should include a paragraph addressing the Spending Rate which defines how the endowment will make distributions.  Again, these is no single solution for distributions as one must consider when they will be made, in what amounts, for what purposes, and then tie all that into to either earnings or overall performance of the endowment.  This topic can lead to spirited discussions, but is critical a board come to some agreement and future management sake, write it down.  The Investment Policy Statement should be reviewed annually to make sure that the endowment actually lines up with the directives set forth in that document.   



So far we have addressed endowments and foundations at a national level and our involvement and assistance at a local level. In my brief concluding comments I would like to discuss why I feel supporting our local endowments is critical in order to maintain the unique assets that define our community.

Giving is interesting. We all give money so that others can support their agenda. Income taxes are mandatory so we pay and don’t always agree with the agenda on how those dollars are spent. Philanthropy is different. We vote with our dollars or time directly which agencies, institutions or causes we feel are important. Here in Redlands there are many worthy causes, we each support our own.  From a community perspective however, we must also look past our own self interests to the causes that define our unique community and ask if there are other causes that are also worthy of our support. While one may not agree with every aspect of our century old institutions, without them, how would it forever change the landscape of our town? Helping the community identify and lift up these causes is important if one is to be a citizen here not just a resident. We must support our unique assets. Financial support is nice but money alone won’t complete the job. Sometimes it takes effort, commitment and wiliness to give of ones talents. Some responsibility also rests with the organizations themselves.  Just as a young worker learns you can’t always live hand to mouth and at some point decides to start a savings account, our local non profits need to accept that same responsibility.  Those that have made that decision to have and support and endowment need to need to manage it appropriately with the goal of being able to attract a sophisticated donor and estate gifts.

The reason this is important is that the majority of wealth held in Redlands a couple generations ago was concentrated by a few individuals, primarily land owners. Over time these real estate holdings have been converted to the assets that shape our landscape today. We’ve replaced a few individuals with greater wealth to many of us who are happy to live here yet unlikely are able to have the impact of our generous forefathers.  This very library which we enjoy is an excellent example.  It was seeded primarily by an individual donor, grown over the years through the support of many and also has developed an endowment. As assets transfer from generation to generation we must actively work to use that transfer as an opportunity to build our local endowments and therefore help insure their financial and viability and success going forward. If these unique assets over time go away, Redlands becomes just another faceless community along interstate 10.

From Carnegie and Rockefeller to the Smiley brothers, to you and me, we each can play a role in using foundations and endowments to move forward the social causes of our choice on a national basis, as well as preserve the uniqueness of our local community.


Neal A. Waner

Neal Waner is a Certified Financial Planner and partner in the Redlands based firm of Stout and Waner.  Neal was raised in Big Bear Lake, received his bachelors degree in finance from San Diego State University in 1985 and his MBA from the University of LaVerne in 1995.  A licensed CFP since 1987, 2010 will begin Neal’s 25th year in the securities business.  Neal has nine securities licenses and designations, Stout and Waner manages just over $150 million on behalf of its personal, corporate, pension and non profit clients. 

An avid community volunteer, Neal serves on the board and is past president of the YMCA of the East Valley, he also chairs the Y’s Heritage Club Committee whose purpose is to promote planned giving gifts.  He is immediate past president of the Rotary Club of Redlands.  He has volunteered with several other local non profits such as the AK Smiley Public Library, Family Services, the Boy Scouts and Redlands Baseball for Youth.  He also serves on the state board of the California Consortium of Education Foundations.   

Close to his family of public educators, Neal established the Steven G. Mihaylo Big Bear High School Education Foundation in 1998 and still serves as its chairman.  Established as an endowment, the SGM BBHS Foundation has distributed from its earnings over $430,000 since inception for scholarships and mini grants.  Here locally Neal chaired the successful Measure R school bond campaign in 2002 which provided $147 million of funds to build four new schools for the Redlands Unified School district as well as provide modernization money for 14 older schools.  In 2003 Neal was appointed to the school board, was elected in 2003 and reelected in 2008.   Neal served as president of the school board in 2006, and just last week was elected to serve again as president for the upcoming year.      

Neal’s outside interests include skiing, golf, and sailing, biking and flying.  He has coached several little league teams and currently teaches Sunday School for junior high students at the 1st Congregational Church.  Neal and his wife Joyce reside in Redlands with their three children; Jocelyn age 16, Tyler age 13 and Emily age 10. 


Works and Individuals Consulted

Fleishman, Joel L. - The Foundation, A Great American Secret, How Private Wealth is Changing the World, Public Affairs, 2007

Phoenix Equity Planning Corporation – Act Like an Institution, 2005

Susan Sweeney, Executive Director, California Consortium of Education Foundations

Joan Fauvre, Executive Director, Pasadena Education Foundation

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