endowment

An endowment is a fund established by a donation to a nonprofit organization or public institution, in which the principal is invested to generate income for the organization's ongoing mission. The principal is typically intended to be preserved in perpetuity, with the investment earnings used to support programs, scholarships, research, or operations.

Endowments commonly consist of a corpus and, in some cases, donor restrictions on how earnings may be used. When the principal must remain intact, the endowment is called a true or permanent endowment; when the organization can spend the principal, it is often called a quasi-endowment or board-designated fund.

How it works: After gifts are received, funds are pooled and invested in diversified portfolios. A spending policy determines how much of the fund's value is distributed each year, frequently tied to a moving average of market value and commonly around 4-5 percent, subject to donor restrictions and financial conditions.

Management: Endowments are overseen by governing bodies, with investment committees, chief investment officers, and external managers as needed. Performance is tracked against benchmarks and spending needs, and policies address liquidity, risk, and inflation protection.

Legal and social context: Endowment gifts are typically tax-deductible in many jurisdictions, and earnings may be exempt from unrelated business income tax for some organizations. Endowments are most common among universities, museums, hospitals, and religious or charitable organizations.

Impact and issues: They provide long-term financial stability but expose organizations to market risk. Debates focus on payout rates, transparency, governance, and whether endowments enable mission-related spending or mask fundraising shortfalls.