An Endowment
What it is and how it works
- What is it?
- How does it work?
- What are the benefits?
- How do endowments grow?
- How is the money invested?
- How is it managed?
- An example
This is a brief explanation of what an endowment is and how it works.
An endowment is a fund of money where a portion is used on an annual basis to cover some of the operating costs of the school. The money is invested so that it will increase its value over time.
Each year a small percentage of the endowment is taken out and put towards the annual budget. A simple formula might be that 5% of the endowment is used each year towards the annual budget of the school. If the endowment returns higher than 5% then the extra income is simply reinvested in the endowment causing it to grow.
- The primary benefit is it produces a consistent income for the school on an annual basis that is not subject to fluctuations.
- The second benefit is it allows people to give to the school in a way that supports the school for a long time, rather than just giving to cover this year's budget.
The increased cash coming into the budget allows SCS to do things such as
- Increase financial aid
- Increase spending on the classroom instruction
- Increase staff salaries
- Increase staff benefits
- Insulate us from difficult financial years.
Potentially all this without having to raise the tuition.
The primary way an endowment grows is through new gifts given directly to the endowment. Tuition and fees do not go into the endowment, but are used to meet the annual expenses of the school. In years when the things the endowment is invested in do well it may grow from appreciation.
Initially due to the expected small size of the endowment we would probably invest in a few mutual funds. As the fund continues to grow and the options expand, we would consider placing the fund with an investment manager or group to manage the money. Much like a mutual fund these groups typically take a small annual charge in the neighborhood of 1%.
The board of directors would be responsible for an annual assessment of the endowment. This would include an analysis of the investments for the year and those that are responsible for that investment. If there are issues with those hired to manage the fund, then it would be up to the board to deal with those issues. It would also be the board's responsibility to lay out some policies about what kinds of companies and investments are acceptable to the school. For instance we may choose not to invest in anything tobacco related.
Let us assume we had an endowment with $100,000 dollars in it at the end of this year. Let us also assume that we take 5% of the endowment annually and put it towards the budget for the following year. 5% of $100,000 would be $5,000 dollars. This money would be moved from the endowment to the regular fund at the start of the budget year which would be July 1st.
Further assume that the endowment grew due to interest, dividends and appreciation at a rate of 7.5% for that year. 7.5% of $100,000 would be $7,500. With $5,000 coming out of the endowment and an investment increase of $7,500 there would be a net gain of $2,500. Finally we will assume that $17,500 was donated towards the endowment in that year. At the end of the year the endowment would then be valued at $120,000.
| What | Amount |
| Starting Amount | $100,000 |
| Amount to operating budget | ($5,000) |
| Interest and growth | $7,500 |
| Donations | $17,500 |
| --------------- | ---------- |
| Total | $120,000 |
This would mean that the following year the endowment would provide 5% of $120,000 or $6,000.
Clearly the amounts that an endowment generates at the beginning seem to be too small to be worth the effort. But the longest journey begins with a single step and so it is time to start the process of building an endowment for SCS. Add a single 0 on to each of the figures above and you can begin to see where we are hoping the Lord leads us.
Our prayer is that over time God would allow the endowment to grow to a significant amount of money in order to further His purposes here at Shoreline.