Let's move to real-time philanthropy

I want to present here a somewhat radical view of how large non-profit organizations like hospitals might more appropriately use the financial reserves they have accumulated through philanthropy.  In short, I want to suggest that virtually all gifts received by a non-profit of this scale should be considered spendable, to be used -- and used up -- for the strategic priorities for the organization over a short period of time, say five to ten years.*

I offer this thought not in any attempt to be critical of the current policies of hospitals, but in the hope of stimulating some discussion.  If this approach were to be adopted, it would require a different viewpoint by boards of trustees and a different approach with many prospective donors. 

Some background.  Virtually all large non-profit hospitals must engage in fundraising to support their clinical, research, and teaching activities because payments from the government and private insurers are inadequate to cover a portion of those costs.  The preponderance of funds received are from individuals and family foundations, from people who believe in the mission of the organization and want to contribute to its success.  Some gifts are offered for current use, but that is a small portion of those received.  A greater percentage of funds donated are placed in endowment-type accounts, against which the institution applies a payout policy.  That policy is usually very conservative, designed to support the perpetual existence and availability of the gift.

It is the word perpetual that concerns me.  In treating donated funds in this manner, the institution has decided that there is an overly important inter-generational aspect of its fiduciary responsibilities.  I want to question that, both as a matter of philanthropy and as a matter of sound business planning.

Let me first acknowledge that it is a good idea to have some "money in the bank" for untoward circumstances, dips in the economy, and such.  Also, of course, there is a need to accumulate some amounts before committing to specific large capital investments.  But let me suggest that the amount of money reserved by most places greatly exceeds the need to cover those contingencies and those projects.

As noted, I'd like us to think instead of a policy that directs virtually all gifts received by a non-profit to be considered spendable.  Instead of constituting a long-term holding account, the funds would be used -- and used up -- for the strategic priorities for the organization over a short period of time, say five to ten years.

Why?  First of all, I do not believe that most donors, were the question put to them in this way, would want their donations put in a decades-long holding account.  I think that most donors want to see their gifts put to use today and in the near future, to improve patient care now, to expand research now, and to enhance teaching now.

Second -- and this is the controversial part -- the establishment of large, slow-payout endowment funds reduces the accountability of a non-profit to the society it serves.  Non-profits are different in many ways from for-profits, which have to answer regularly to investors and thereby prove their strategic and tactical decisions.  The "shareholders" of non-profits are more diffuse, the citizens of the region served.  The success of the non-profit, too, is not measurable by a simple profit-and-loss calculation.  I think we can all agree that an important measure of the effectiveness and relevance of a non-profit is the degree to which it can persuade people to donate money.

A powerful test of an organization's relevance, therefore, is whether it is able to raise money from each generation.  In contrast, the kind of inter-generational transfer of funds represented by a slow-payout endowment accounts weakens the ability of an institution to assess its relevance to the current generation.

I realize that this approach would put non-profits at greater risk.  I am suggesting that this is a good thing.  It is too easy for the management and board of a hospital to get complacent and comfortable when they have a big bank account and use only a small portion for current expenditures and capital budgets.  It is also too easy for them to respond to a turn-down in revenue in a manner designed to preserve those financial assets rather than, for example, to preserve the jobs of people working in the facility.  How many times have we seen hospitals conduct major personnel lay-offs while their endowment accounts remains strong?  To be blunt, these are often instances of valuing money over people.  These kind of decisions can result from overly conservative boards being more focused on the long-run preservation of assets than on an equally important assertion in support of the organization's human capital.

So, let's cut through all that and decide that each generation should be responsible for the financial health of the hospitals in the community.  Sure, have a bit of money squirreled away for contingencies, but test the proposition of each non-profit's value to society by expecting those living today to provide support for today's programs and services.  If an organization cannot meet that test of relevance, let's not plan to keep it on life-support by using money from previous generations of donors.

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* This could apply to large colleges and universities, too.