Rotary Club of Tucson President, Phil Gutt, on Charitable Reserves
Gordon Bartlett recently sent an article he thought our club members might find interesting. The article was written written by Rotary Club of Tucson President, Phil Gutt, to share from his old club's Newsletter, The Tuscotarian:There exists a fundamental difference pertaining to organizations that give away money. At one extreme is the practice of disbursing all money collected during a period before (or as) the period ends. Quite different is the system of retaining some funds for use in future periods. There are justifications, and strong advocates, for each method.
What are reasons to carry a balance into next year, or, more decisively, to endow funds so that the principal can never be spent? It is the uncertainty of maintaining donation levels that is most-often cited. Endowments and reserves enable charitable organizations to weather swings in income from year to year. Many groups survived the 2008 recession only by virtue of having held reserves.
If you don’t have the funds to continue a solution you implemented last year, you risk losing all you have gained to date. College education is a multi-year process. If the student has two years of scholarship, but then has the third year need unmet, what are the chances that education picks up without a hitch one, or two, or three years later when funds are again available? Can research on disease treatment drastically expand and contract each year to match annual grant fund supply? If you don’t have sustainable income, you can hardly make reliable multi-year commitments.
Building a new children’s clinic could require $100,000 in year one, $1,000,000 in year two, and $5,000,000 in year three as concept proceeds through construction. Are you certain you can pull in those second and third year amounts after bringing in, and spending, “only” the $100,000 needed in year one? If you fail in fundraising, the project stalls and very likely flops. Wouldn’t it be more prudent to raise $1.2 million in year one, $1.8 million in year two, and $3.1 million in year three? That means you bank some of what you take in for as long as two years, even though there are other, very worthy, community causes.
In contrast to the assertion [last column] that donors are less generous when money is not entirely spent each year, there is a concept that some donors will not give unless there is a known level of substantial, baseline support. No one wants their relatively small gift to go to waste due to being just too tiny to have an effect. But a substantial sum can be amassed from a multitude of small-gift-givers whose confidence in the effectiveness of their action originates from a large, guaranteed grant. That grant can be funded from endowment earnings.
It helps the discussion to concede that all the holdings in endowments and reserves in all the world’s foundations and governments (duh, ‘government reserves’ is an oxymoron) could be spent this year and we would still not address all needs. And even if they did, next year will bring more needs, with every typhoon, famine, drought, and new disease. Obviously, holding reserves is necessary to generate investment income (if that is a goal).
“Save some” vs “save none” - We should all be able to agree on the exceptions to a universal rule. Cutting off polio immunization for six months so we can “save” some money for next year’s immunizations is foolish – gains are entirely reversible if we don’t keep up a full-court press. Similarly, perishables such as fresh food and blood must be distributed contemporaneously. Even freezing foodstuffs for a year from now might be unacceptable if starvation will eliminate an entire population before then.
Our Rotary Club of Tucson Foundation and the RI Foundation both follow the endowment/reserves model. Grants are based upon investment earnings, current donations, past promises, and future expectations.