The Windfall Gift
IT'S AN ELECTION YEAR, SO we're hearing a lot about income and wealth inequality in the United States. The rich seem to be getting richer, in part because a few sectors of the economy are creating incredible wealth for those who participate in them. These people want their wealth to have an impact on charities that they support. While the various candidates sort out whether and how this affects the country at large, college and university development officers know that this creates the potential for fewer, but larger, gifts.
The Council for Aid to Education's most recent Voluntary Support of Education survey seems to show a similar concentration of givers. It reported that in 2007, total contributions to higher ed institutions were $29.8 billion, a 6.3 percent increase from 2006. But those donations are concentrated. The 20 most successful fundraising IHEs brought in a total of $7.7 billion, or 25.8 percent of all contributions from the 1,000 campuses surveyed. Capital contributions were up and represented 45 percent of donations, or $13.7 billion. Participation was down too, to 11.7 percent from 11.9 percent, which would indicate that fewer donors are giving more money.
When large gifts are made to a college or university, they're typically "once in a lifetime, for both sides," says Barlow Mann, chief operating officer of the Sharpe Group, a planned-gift consulting firm in Memphis, Tenn. A gift agreement has to be in place, but a standard agreement might not fit. "I don't think either the institution or the donor is savvy to the ramifications of those institution-changing gifts," he says.
Instead, agreements need to be negotiated and should include language covering how any problems will be resolved in order to avoid litigation or hurt feelings in future years. Whether or not the gift is received during the donor's lifetime, Mann adds, ongoing cultivation of the donor and the donor's family is more important than contractual language in minimizing conflicts. And it may lead to a second generation of support for the institution.
Still, when a large gift comes in, every stakeholder wants a piece of the money. That's just human nature. If a donor has entrusted an institution with megamillions, it's not in hopes of spending on the institutional equivalent of convertibles, mansions, and handouts to ne'er-do-well relatives.
For the endowment manager, assuming the gift has no restrictions on the rate of spending, a large donation is nothing more than money to be put to work. But sometimes the gift comes with its own spending rule.
In 1997, the <b>University of Oregon</b> received a $100 million donation from Phil Knight, the founder of Nike, and his wife. It established a new fund for the athletic department, invested alongside the rest of the endowment. However, the principal of the Knight gift can be spent if the athletic department has a revenue shortfall.
The university foundation was involved in the negotiation of the gift agreement, explains Allan Price, vice president of University Advancement. "We're explicit about our gift agreements, and we work hard at making it transparent to our faculty and staff," he says. To craft the agreement for another large gift received last year-$74.5 million from friend Lorry Lokey to support science teaching and research-Price had university scientists spend two days with Lokey to explain what they were working on and what they needed.
In June 2007, <b>Washington and Lee University</b> (Va.) announced its own gift of $100 million for financial aid, professorships, and symposium and leadership programs. The donor, Rupert Johnson, is an alumnus who wanted to create more financial aid for low-income students without supplanting aid that the university already offered.
The university had already done extensive strategic planning, says Dennis Cross, vice president of University Advancement, so it was easy to match the donor's interests with the priorities of the faculty and administration. "It did not create unrealistic expectations, because it was a strategic priority," he says, adding that every one in the institution was grateful that the donor understood what they wanted in order to make the university stronger.
One IHE that has had to navigate the politics of an institution-changing gift with its own spending rule is <b>Yeshiva University</b> in New York City.
In 2005, Yeshiva received $100 million from Ronald P. Stanton, a longtime supporter of the institution who ran a successful chemical company. It was its largest donation ever. As a youth, Stanton had been offered a scholarship to Yeshiva to study for the rabbinate, but he turned it down to pursue business. Still, he maintained his affinity for Yeshiva by serving on the board of trustees for 30 years, including a stint as chairman.
Because Stanton knew Yeshiva and its mission, he had some creative ideas for using his money to help the campus grow. Instead of a straightforward endowment contribution or named building, Stanton suggested an endowment gift set up as a short-term revolving fund, allowing the campus to start up research, professorship, and building projects before other donors were identified for them.
"It's a creative, nontraditional form of an endowed gift," says Daniel T. Forman, the university's vice president for institutional advancement.
The Stanton gift can be spent faster than Yeshiva's endowment as a whole as long as the replacement gifts materialize, and Forman says that other donors have stepped up because they are excited about what Stanton's donation means for the future of Yeshiva. "We're beginning to see the effect of Ron's magnificent gift," Forman says.
To head off foolish spending, Yeshiva's president, Richard Joel, appointed an internal academic committee chaired by the provost to screen proposals from Yeshiva's different schools, reducing the bureaucracy that might stifle the proposers' creativity.
At the same time, Yeshiva's development staff gives Stanton a customized annual report to show him how his gift is being used. Stanton does not have any authority to approve the spending, though. "It's a vote of confidence," Forman says.
Yeshiva's experience is a good model for other colleges and universities that may find themselves facing a potential windfall. Having a donor who has spent years working with the campus as a volunteer can lead to creative, responsible gifts that pay off for generations to come. They involve effort for all involved, but that work leads to better advancement, endowment, and spending decisions.
One alternative to having endowment funds with a separate spending rule is to direct large donors toward capital projects. This April, <b>New York University</b> received a $100 million unrestricted capital contribution from Kenneth Langone, a longtime member of the board of trustees of the medical school, to launch a major construction program for what is now known as the Langone New York University Medical Center. The plan is to spend it all to make up for years of underinvestment in facilities.
"The gift, essentially, was a gift to transform the medical center," says Harold S. Koplewicz, MD, vice dean for external affairs at the medical center. To help the university community understand both the power and the limits of the donation, the development staff distributes a regular philanthropy report explaining the purpose of these types of gifts, the goals, and the progress.
"People see that we're putting together a systematic plan," Koplewicz says. They also understand that everyone has a job to do to create the major changes that the gift enables.
<em>Ann C. Logue is a Chicago-based freelance writer who specializes in covering finance.</em>
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