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Thanks to the foresight of members or supporters--whether past or present--some organizations have endowments.
That's a good thing.
If such organizations manage such endowments properly, the corpus should forever grow with inflation, as should the annual--or whatever the time frame is--distribution.
What does "manage such endowments properly" mean?
Investment advisors may tell you that includes investing the corpus well and taking no more than 4 percent--perhaps 5 percent--annually. Taking more annually means--to borrow a phrase--devouring the seed corn. The corpus won't forever grow with inflation. Neither will the annual distribution.
For the long term, it's essential--not preferable, but essential--that both the corpus and annual distribution grow with inflation. Otherwise, the buying power of the annual distribution will diminish over time.
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Please do the math: If the corpus is $100,000, 4 percent is $4,000. At $1 million, 4 percent is $40,000. At $10 million, 4 percent is $400,000.
Not more.
Not more.
Here's some more math. To see whether the corpus of any given endowment has grown with inflation, use the inflation calculator at https://www.bls.gov/data/inflation_calculator.htm.
As of this column, the calculator has inflation data for the 110 years from 1913 through 2023. For example, according to the calculator:
● $1 at the end of 2013 has the buying power of $1.32 at the end of 2023.
● $1 at the end of 2003 has the buying power of $1.66 at the end of 2023.
The corresponding numbers, according to the calculator, are:
● 1993, $2.10.
● 1983, $3.03.
● 1973, $6.64.
● 1963, $9.93.
● 1953, $11.40.
● 1943, $17.63.
● 1933, $23.24.
● 1923, $17.73.
● 1913, $30.67.
Has the corpus, and therefore the buying power, of any given endowment kept pace with inflation?
Let's take an example from a half century ago: The number for 1973 is $6.64.
So for an endowment established in 1973 with a corpus of $100,000 to have kept pace with inflation, the corpus must have been at least $664,000 at the end of 2023.
For an endowment established in 1973 with a corpus of $1 million to have kept pace with inflation, the corpus must have been at least $6.64 million at the end of 2023.
To put it in more general terms:
● To have kept pace with inflation, an endowment established in 1973 must have had at the end of 2023 a corpus upwards of seven times--in nominal dollars--the original corpus.
● An endowment established in 1963 must have had at the end of 2023 a corpus almost 10 times--in nominal dollars--the original corpus.
● Even an endowment established in 1983 must have had at the end of 2023 a corpus just over triple--in nominal dollars--the original corpus.
● And even an endowment established in 1993 must have had at the end of 2023 a corpus just over double--in nominal dollars--the original corpus.
All of these amounts assume no additions to the corpus since the endowment's inception. With any additions, the corpus must be correspondingly higher for the corpus, and the buying power, to have kept pace with inflation.
To whatever extent the current corpus is below the inflation-adjusted threshold, the seed corn has been devoured.
Which is not a good thing.
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It's not hard for one set of leaders, or multiple sets of leaders over time, to diminish--even decimate--an endowment, including by taking greater annual distributions than they should.
Particularly vulnerable to this are organizations with a disproportionate number of members, supporters, or whatever who are disinclined to make waves.
One way to prevent an organization's current and future leaders from devouring the seed corn is to turn the endowment over to a good community foundation.
Such a foundation may, for example, set the maximum annual distribution at a percent of the corpus. This should allow the corpus, and thereby the annual distribution, forever to grow with inflation.
Furthermore, the maximum annual distribution is just that: The maximum. Those establishing community-foundation funds may further restrict annual distributions. This facilitates the corpus's growing at a greater rate.
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Yet there's more.
Conserving endowments may well mean spending less than some will want to spend.
Can that be hard? Yes. It's much easier--and way more fun--to spend money than to conserve it. However, conserving it is better than devouring seed corn.
Randy Elf joins those who urge keeping a watchful eye on the seed corn in any organization.
COPYRIGHT © 2024 BY RANDY ELF