MONEY IN THE BANK

posted by James Reel

The Minnesota Orchestra musicians are in lockout as contract negotiations have stalled; the issue that's getting the most press is that the musicians want a raise, but management says it can't afford it, considering the current deficit--a deficit that has only recently been admitted after the board spent the past few years doing some questionable accounting to hide earlier budget shortfalls. A recent article in the Minneapolis Star Tribune attempts to see if management could really afford to increase salaries, given the size of the orchestra's endowments and the success of its ongoing capital campaign, but what it doesn't make completely clear is that such moneys have almost nothing to do with paying the day-to-day bills--in Minnesota, in Tucson, or anywhere.

Let's start with capital campaigns. Just because an organization has undertaken a special project to bring in a huge amount of money in a short time doesn't mean that all that money can actually be spent. First, What counts as "raised" funds includes pledges--promises to pay a certain total over a certain number of years. A $1 million pledge can be merely theoretical money in the bank until every installment check has been cashed, and those can be spread out over two, three, 10 years. And What is the campaign raising money for? If it's general operating funds, fine--spend, spend, spend! But such campaigns are rare, because major donors aren't really interested in giving money that will evaporate within a year, unless they're underwriting a specific program or position.

If it's a campaign to raise money specifically for a new building or wing, that can't be poured into the pot from which salaries are poured. The budget for constructing and maintaining a building is completely separate from the budget for everything else, and besides, the donors have been told they'd be giving money toward a building (possibly with their names being appended to parts of it); diverting their donations to another use is dishonest, and could lead them to try to rescind their donations.

What about endowment campaigns, and the endowments themselves? Millions of dollars can be sitting there on the balance sheets, untouched, seemingly begging to be spent. But usually, they can't be--or at least shouldn't be. There's a big difference between a cash reserve and an endowment. A cash reserve is like your checking account: Spend it as you need it, and replenish it regularly by earning money one way or another. An endowment is a pot of money invested with the strategy of producing a certain return each year; in effect, you can spend the return on the investment, but you don't touch the investment itself. It's like putting $100 into a savings account and allowing yourself to spend whatever paltry interest you earn on that $100, but never withdrawing any part of that base sum of $100.

Frankly, endowments have been an uncertain source of income for some time. It's been several years since an organization could confidently expect to be able to move a five-percent return on its endowment into its operating funds. (Endowments can even lose money just sitting there as stocks and bonds, which is why it's necessary to make regular reviews of the investment strategy.)

Many endowments are set up so that it's quite simply illegal to transfer the endowment's capital investment to the general operating funds; others are not, but it's usually a sign of trouble when an organization starts slicing away at the meat of the endowment in order to make up its budget deficits.

So if orchestra musicians or museum acquisition officers eye the endowment as an immediate source of money to increase salaries or programs, they need to blink a few times and refocus on the return on that investment. And as the past few years have shown, that can be too volatile a number on which to base a long-term financial plan.

If all this is fairly new to you but you'd like to get wonky on the subject, here's a good introduction to all the issues relating to endowment management for nonprofit organizations.