Wait.  I thought endowment was permanent, but recently the New York Times reported:

Met Opera Taps Its Endowment Again to Weather Downturn

The company has withdrawn nearly $40 million in additional funds from its endowment to cover expenses, but sees signs it may be emerging from its post-pandemic woes.  [i]

Nonprofits typically seek endowment gifts and give assurance to donors that the gifts will be invested in perpetuity, and only a small percent (usually 4 or 5 percent) will be used each year.  Nevertheless, there are plenty of examples of a public charity using its endowment to pay operating expenses during extraordinary situations, such as the 2008 recession or the Covid pandemic.

So, are endowments permanent — that is, perpetually untouchable — or not?  This raises a lot of accounting and legal questions, which we won’t endeavor to answer.  Even so, an informed donor should be aware of a few issues: [ii]

  1. Donor-restricted endowment and Board-restricted endowment are quite different; the latter remains in the Board’s purview to allocate for operating expenses if necessary. Donor-restricted endowment is expected to be restricted permanently, never to be spent down.
  2. There are cases where donor-restricted endowment has been spent by a charity during dire circumstances. If this violates a donor restriction, is there any recourse or accountability?  A donor might sue, or the attorney general might investigate, but in practice this very rarely occurs.
  3. A savvy charity might clear the spending of perpetual endowment with any donors extant or the attorney general’s office before the expense.  And a savvy donor might consult with legal counsel before making a substantial endowment gift.
  4. Community foundations offer an interesting option for folks interested in supporting endowment. By creating or giving to an “agency endowment fund” at a community foundation, a donor can be assured that the fund will never be used for general expenses, even in the worst-case scenario of the charity going out of business.

In any event, donor-restricted endowment is designed to be permanent in theory, but there are times when this rule is violated.  Discerning donors interested in giving to endowment might ask a nonprofit about these issues.

[i] https://www.nytimes.com/2024/01/25/arts/music/met-opera-endowment-finances.html


[ii] Endowment defined:  The principal amount of gifts and bequests that are accepted subject to a requirement that the principal be maintained intact and invested to create a source of income for a foundation or public charity.  Donors may require that the principal remain intact in perpetuity, or for a defined period of time, or until sufficient assets have been accumulated to achieve a designated purpose.  (2019 Council on Foundations – Commonfund Study of Investment of Endowments for Private and Community Foundations.)