Kathleen Rayburn and her team at Currey-Ingram Academy are among the many local administrators working to build their endowments. Matthew Williams/The City Paper

The old man’s money is still at work, 153 years after his death.

When Middle Tennessee ironmaster Montgomery Bell passed away at age 86 in 1855, he left $20,000 in his will to establish a school for boys “who are not able to support and educate themselves and whose parents are not able to do so.”

His executors socked the money away in Tennessee bonds, and by the time they felt that the time was right to start the school in 1867, the fund had more than doubled to $46,000 in value.

Across the Nashville area today, leaders of private schools are assuming the same role the stewards of Bell’s bequest played so long ago. They are seeking to replicate Montgomery Bell Academy’s success — then and now — in building endowment funds to support their educational missions.

Collectively, the endowments of 10 of Nashville’s best-known private schools had assets of $134 million in June of 2007, the latest publicly available data. That number is right in line with data from the National Association of Independent Schools that indicates its 106 member schools in the Southeast have an average endowment of $13.1 million. Nationally — counting numerous wealthy schools in New England and elsewhere — the average fund comes in at $20.1 million.

And even though all-boys MBA grew into a 20th-century institution populated almost entirely by white kids from well-off families, it and other local schools now seek to build endowments that will make it increasingly possible for less fortunate families across the social spectrum to give their youngsters a top-flight private education.

“That scholarship money is not being spent to recruit jocks,” said an insider at one local school. “From what I have seen at schools around town, it is usually going toward real efforts to bring in talented students who could not otherwise attend.”

Private equity, public appeals

Old Man Bell’s $20 grand is equivalent to something between $500,000 and $6.5 million in today’s dollars, as calculated by various measures. MBA’s endowment has grown from that starting point to a whopping $62.9 million, as of June 2007, the most recent date for which information is available.

While MBA’s fund is far larger than any other private-school endowment locally (see chart on page 10), other local schools have ramped up their efforts to build permanent and growing investment portfolios whose principal remains untouched over the decades, yielding a constant stream of revenue to support financial aid and other strategic priorities.

No local school is ever likely to rival prep-school endowments like the $1 billion held by Phillips Exeter Academy in New Hampshire or, closer to home, the $239 million of the Westminster Schools in Atlanta, which has been the beneficiary of a nice big gulp of Coca-Cola stock. But some Nashville academies are approaching their growth goals with a sophistication more often seen at institutions with much larger endowments.

Co-chairing the investment committee of MBA’s board are G. Thomas Curtis, managing principal of the Nashville office of Diversified Trust Co., and Bass Berry & Sims attorney James H. Cheek III. MBA and most or all local schools retain fund management firms to carry out the investment strategies set by their boards.

Curtis won’t reveal who manages MBA’s money, nor whether the manager is local or out of town, but he says the school has invested about half of its endowment in U.S. and foreign stocks, with about a fifth in “traditional fixed-income” bonds and a third in “special strategies and alternative assets.”

The latter category includes hedge funds and private equity. University endowments have utilized these investments for some time — at Vanderbilt, recently retired Treasurer William Spitz had notable success with them. But MBA appears to be alone among local prep schools in this regard, as the publicly available Internal Revenue Service filings of other schools generally reflect more plain-vanilla portfolios dominated by mutual funds and government bonds.

Curtis describes the investment committee as striving to find just the right mix.

“What you’re looking for are assets that have as little correlation to each other as possible, while still getting positive returns in the range you’re looking for,” he said.

The private equity component, he notes, serves as something of a stabilizer at a time of wild fluctuations in the prices of publicly traded securities.

The Ensworth School, which has set a goal of building its endowment to $20 million in coming years, has two equity managers. Its trustees made a conscious choice to retain firms from out of town. Although the school’s board includes a number of financial professionals, some of whom sit on its investment committee, those individuals do not themselves manage the money.

Avoiding any potential conflict of interest is “absolutely critical,” said Bedell James, director of development at Ensworth.

In recent years, Ensworth’s managers have each achieved average annual returns around 17 percent, besting the average S&P 500 return of just under 10 percent a year.

Mark McFerran, director of external affairs for Brentwood Academy, says his board has set a near-term goal for its endowment — “an aggressive one that we want to get after” — but is not ready to disclose it.

Nashville’s Catholic schools each raise some funding independently, but the Endowment for the Advancement of Catholic Schools exists as a common source of support for all of them.

“Frankly, it’s not nearly as large as we would like it to be,” diocese spokesman Rick Musacchio says — echoing a refrain heard from many of those interviewed for this article. When it comes to endowments, there is no such thing as “enough.”

The purposes of wealth

All of Nashville’s larger private schools employ development staffs to raise money for both their endowments and more immediate needs. Discussions with personnel at several schools suggest they face a constant struggle against “donor fatigue” in a city replete with good causes seeking support. Balancing that factor, though, is continuing economic growth that brings new people and new money to town.

The full cost of tuition and fees for a year at one of Nashville’s more elite or specialized schools can exceed $20,000. Few of the schools generate enough earnings from endowment to cover all the financial aid that they offer to families unable to cover such expenses — apart from MBA, whose endowment funded nearly $1 million in financial aid during the 2006-07 academic year, with 18 percent of the student body receiving tuition assistance.

Nearly all local schools, however, have made increasing financial aid a primary goal in their endowment-building efforts.

“We want to ensure the affordability of the services that we provide to as broad a section of the population as we can,” said Chad Handshy, director of finance and business at Currey Ingram Academy.

For one local school chief, endowment-building is a new part of a new job. Ricky Perry took over as president of Goodpasture Christian School on July 1, after the unexpected death last year of Gilbert A. Drake at the age of 47. He says Goodpasture’s board has asked him to begin the process of creating an endowment.

“We’ve got some assets we can use that way,” Perry said. Alumni and parents have given generously to the school over the years. Now, Goodpasture is looking to turn those assets into a permanent fund.

Accruing an endowment large enough to accomplish strategic goals for the school won’t be an easy process, for Goodpasture or anyone else starting from scratch. And it won’t be fast. MBA has a 150-year jump on Perry’s school. Philips Exeter had a seven-decade jump on MBA.

Officials at both Brentwood and Ensworth report feeling some effect from the financial market rough-and-tumble of the past year or so. Brentwood’s endowment dropped slightly since the summer of 2007 and one of Ensworth’s funds suffered from exposure to the subprime mortgage meltdown, though its returns have remained in positive territory.

But school officials say they must look past short-term market swings, despite the fact that the demands inherent in endowment creation don’t fit well with the episodic nature of school administrations, boards of trustees and, for that matter, human life spans. For instance, one key source of endowment funding, as Montgomery Bell demonstrated, is bequests.

When a greater or lesser business titan of Nashville passes away, odds are that some of his or her wealth will pass to one of the area’s private schools. Development officers persuade people of means to make such arrangements in their wills. But many years can pass between the moment the commitment to leave money to the school is made and the moment of death.

Handshy takes such challenges in stride at Currey Ingram.

“We have a long-term perspective,” he said. “This school’s going to be here 100 years from now, and more. You’re in it for the long haul.”

An interesting article on the topic can be read here.

Posted by David Gaffen

Annelena Lobb has this report on the prowess of big endowments.

What can retail investors borrow from the money-management strategies of high-flying foundations and university endowments? Not much, actually.

Laurance Hoagland, CIO of the William and Flora Hewlett Foundation, in a conversation earlier this week, discussed certain advantages large endowments have over smaller investors. The ability to meet high minimum investments and do in-depth research, and, in terms of not-for-profit organizations, their tax-exempt status, make endowments’ circumstances entirely different from those of retail investors, he said.

“Those of us in the not-for-profit or pension world easily forget what an advantage we have in being tax-exempt,” he said in an interview, shortly before co-hosting a workshop about endowments’ strategies at this year’s CFA Institute Annual Conference in Vancouver, Canada.

For quite a while, the largest endowments have seemed to make money hand over fist. At the very top of the list, Yale University’s endowment earned 28% in its most recent fiscal year.

But Mr. Hoagland says that he believes endowments will find it “dramatically more difficult” to earn the same returns in future that they do today. Colleges now have an average of 42% of their assets in alternative investments, about twice the percentage they had eight years ago, according to Commonfund, a nonprofit firm that manages money for colleges. Twenty years ago, most alternative-asset markets were still inefficient, and endowments were among the first to exploit them, Mr. Hoagland said.

Now, they compete against many other investors — including high-net-worth individuals, pension funds, and the “poster child of the moment,” sovereign-wealth funds, he said. Endowments compete for “a smaller piece of a less-attractive pie,” he said. As huge amounts of capital pour into alternative assets, returns on those assets should fall.

Under the belief that less is more, perhaps just debt guidelines are sufficient for most organizations, at least until a portfolio of perpetual debt becomes evident, and requires more formal orchestration. There are two compelling arguments for project-specific, fixed-rate debt, with a maturity approximating the useful life of the asset: 1) it is conservative, bears the lowest fees, and imposes no interest rate risk to the annual budget; and, 2) for the smaller borrower, this is all any lender will probably agree to anyway. Borrowing options will not meaningfully expand until an organization becomes large and wealthy enough to bear the risk and uncertainty of more sophisticated vehicles.

As a school matures, it becomes important to evaluate aggregate debt as a portfolio, lest unanticipated market or interest rate risk creep upon the school with a hodge podge of loans. As a debt policy develops, some of the questions to address are:

• The use of debt. There are two reasons to borrow: need or desire. Schools that have a choice, choose to borrow because tax-exempt debt is widely regarded as a more attractive source of funds than internal reserves. Few investment managers would project investment returns that would not surpass the borrowed cost of capital, or the return realized on a portfolio of fixed-income securities. There are also qualitative arguments to apportion the cost of an asset over the useful life, to both current and future beneficiaries.
• Lender constraints: The debt policy is not constructed in a vacuum. The credit markets are dynamic, and the matrix of lenders will impose their own criteria. An opportunistic mindset, similar to the approach of the private sector, can optimize both rate and covenant terms.
• Liquidity requirements. appropriate cash management will determine appropriate lines of credit, and cash versus debt decisions.
• Variable versus fixed rate debt. Variable rate debt is a tool, not a solution. Variable rate debt is essentially like an adjustable rate home mortgage. At any point in time, the variable rate will be lower than the fixed rate.  It is attractive to lenders because it is fee-laden, and passes the interest rate risk to the client. Clients too often use variable rate debt because their project will not pencil at the higher fixed rates. But, as many adjustable rate mortgaged home owners are now discovering, there is no free lunch. Long-term variable rate project financing, in my opinion, offers too much interest rate risk for most annual budgets to withstand.
• Swap, hedges, and other derivative products. For the past ten years or so, some form of synthetic bond financing has been the dominant recommendation for negotiated tax-exempt issues. And yet, in twenty-five years of edge-of-the-envelope advisory work, I have never found an appropriate application of any derivative product. Derivatives are risky, expensive, and inefficient. For all but the wealthiest schools, I am unaware of any reason to consider interest rate swaps and most derivative products.

Example II. The financially-challenged school serves a small, rural community. The overwhelming financial constraint is a small target market with limited financial means. This, of course, impacts enrollment, tuition, and fundraising expectations. The school must also refinance a balloon payment on a new facility, but has utterly no capacity to do so.

Many independent schools are founded by passionate educators anxious to serve a needy community. Start-up funds are often provided by some combination of loans, and perhaps an extraordinary burst of local support; but the annual expenses of running the school become simply unsustainable. To suggest that there are creative debt financing techniques to help such schools is disingenuous. In this example, absent a large and continuous increase in enrollment, tuition, AND fundraising, we recommended that the school seek out a wealthy benevolent benefactor (such as a foundation) to support the school, or consider conversion to a charter school.

Example III. A growing school is not unlike a growing corporation: little cash, a lot of debt, and the bulk of the assets in real property, as all available resources are poured into programs and facilities. Capital campaigns and annual gifts are generally very successful at this stage, as local enthusiasm is very high.

The challenge for a growing school is to grow fast enough to meet local demand (and justify that initial local support), but not so fast that the school becomes overextended if student and tuition growth fails to meet expectations. Leasing new facilities, instead of buying everything at the outset, allows flexibility in fixed cost control. Also, pushing all forms of fundraising while enthusiasm is high will build cash reserves to sustain through the inevitable slowdown.

Example IV. A church school has unique financial challenges. Typically, the sponsoring church will have title to all real property, preventing the school from pledging as collateral to a potential lender; and thus limiting debt options to some form of unsecured, revolving line of credit. Since the school is essentially unable to borrow for capital expenditures, tuition and fundraising become the predominant source of capital. As a church school, the church community is the natural source of support. If the church itself is a strong supporter, such schools can be very well-funded. However, some churches are concerned about cannibalizing their own fundraising efforts, and insist upon an entirely separate fundraising effort by the school. Cut off from their natural fundraising constituency, such schools tend to struggle financially, with no clear remedy.

• One page report limit. Less is more, unless a collectively-perceived problem requires further examination. One page will actually get read.
• Minimal demand analysis. Enrollment trends are a critical component in credit analysis, but are awkward to address in a financial assessment. Enrollment is not a readily manipulated variable. The market for any primary or secondary school has a natural geographic limit, with a given population density and socioeconomic characteristics. Successfully matriculating a critical mass of target students has many qualitative components, which will frankly show up in the numbers anyway.
• A strength and weakness assessment of five benchmark categories:
  • Balance sheet: There are a number of asset-to-debt calculations; the expendable assets to debt ratio measures balance sheet leverage. Expendable resources exceeding 100% of expenses indicates a strong liquidity position; below 50% indicates a more limited cushion.
  • Cash-flow analysis indicates degree of liquidity, efficiency of operations, and potential for incremental debt service. A debt burden above 10% is significant, unless the school can clearly demonstrate the operational capacity. Aggregate debt service coverage of 1.20% is a useful guideline. Debt service coverage from operating revenue is preferred; however, an endowment income supplement is fine, as long as it does not require a draw well in excess of 5%.
  • Revenue mix: The Moody’s rating guidelines are a useful reference to evaluate appropriate revenue mix:

    

    Most schools derive the bulk of their income from tuition, and have insignificant fundraising and endowment fund income. The Moody’s revenue mix chart offers an objective illustration of the need to diversify.

  • Annual gifts (as percentage of total income): A challenge for many schools is to develop the fundraising infrastructure to produce consistent annual gifts, apart from the infrequent enthusiastic burst of a capital campaign. Again, the Moody’s revenue mix chart offers industry benchmarks.
  • Aggregate endowment assets and income: Many schools set their endowment goals and expectations far too low. An appropriate (initial) goal for every school is to build endowment assets so that annual distribution can subsidize the annual budget by at least 25%. If we assume a 5% annual endowment distribution, then endowment assets should be about five times the annual budget. This may seem extravagant and unrealistic to many schools, but the endowment is the only true source of financial security, and indeed, viability. The Moody’s chart enforces the concept that such expectations have been clearly achieved for investment grade schools.

• Strategic Capital Allocation: This section addresses 1) incremental debt capacity (usually expressed as a range, depending on both anticipated debt service coverage, and the extent of lienable assets); and 2) Aggregate endowment and reserve funds. As most schools have little or no direct control over many aspects of their budget, growth in annual gifts and aggregate endowment funds are the single largest area for improvement.
• My Thoughts is a summary of observations and advice, including qualitative comments made evident by the numbers. Many smaller schools have a very lopsided capital structure – very high percentage of debt, or over-reliance on tuition and foundation grants. An objective assessment can help encourage a school to focus on a more diverse revenue stream, and an appropriate debt policy.

• A proper assessment will analyze a school’s existing financial condition as compared against industry benchmarks, evaluate capacity for additional leverage, offer commentary on the overall financial structure, and suggest changes or scenarios for improvements.
• It is a snapshot in time, and may not fully reflect dynamic change or direction. For example, growing enrollment may absolve a school of certain weaknesses (no endowment, low cash balances) and justify a more aggressive financial strategy, such as a more highly leveraged balance sheet for capital expenditures. Falling enrollment may argue against more debt, and signal a need for a larger endowment to help maintain annual cash flow.
• Assessments typically compare a school against investment grade criteria, without regard for operational considerations or the stage in the school’s life cycle. A young, growing school by definition should be relatively cash poor and leveraged as it develops programs and infrastructure; a mature school should have less debt, greater cash reserves, and an established endowment. An assessment is useless without perspective.
• Don’t put the financial cart before the horse. Schools are service providers. Finance is simply one of many tools, a means to accomplish educational goals. Don’t let the bankers torment you. They have their agenda, you have yours.

The balance of the couple’s assets does not include enough cash to pay the estate tax. Therefore the children will have to sell the house right away. A $9 million house does not sell quickly, even in California. It may take years to sell such a unique home. The children do not have years. They have nine months. And they face unknown economic conditions when their parents die. They may have to dump the house, sell to any bidder to pay the taxes. Their inheritance may be decimated. Not what the couple has in mind.

So the couple considered selling the house now, while the real estate market is still hot. As a married couple, they have a $500,000 principal residence exclusion. That is, the first $500,000 profit on the sale of their home is tax-free. However, this couple has an $8,950,000 profit. They’ll owe capital gains tax on $8,450,000 ($8,950,000 less the $500,000 exclusion). They will owe federal capital gains tax of 15%. Except when there is such a large capital gain. Then the alternative minimum tax (AMT) will probably apply, in which case the 15% capital gains rate is discarded and the federal tax rate is 28%. There is 9.3% California state income tax (no California state capital gains rate). And then, in the year of the sale, the couple will certainly lose all of their other deductions and exemptions due to that years’ enormous income. So the couple can easily expect an effective tax rate of almost 40% if they sell the house outright.

Quite an unbelievable tax problem for a couple that worked hard, invested wisely, and has all the best intentions.

What is the solutions to this couple’s tax dilema?
Planned gifts

The couple can fund a charitable remainder trust with their house. They can sell the house now, at the top of the real estate market cycle, while they can still receive top dollar. They will pay no taxes at all on the sale of the house. Receive an income for their rest of their lives. Receive a tax deduction today. After they pass on, the children can continue to receive an income for an additional twenty years. Or a lump sum tax-free insurance payment equal to or exceeding the inheritance their parents originally hoped to provide.

Application, then details

Once the donor understands the application of these tools, they will then want to learn more. A lot of technical information at the outset will simply overwhelm and alienate the donor. I have met many prospects who were not, initially, particularly charitably inclined. Once they understood that a charitable gift given after their death could avoid so many tax dollars today, their outlook changed considerably. They became greedy givers.

The coming tax crisis

The couple in Carmel is not an isolated example. Estate and capital gains taxes await many middle-class adults as they grow older and begin to redistribute their assets. Assets to be sold today may trigger capital gains tax., and suggest one type of charitable vehicle. Other assets will remain within the family, and will ultimately incur an estate tax. Another charitable tool can be helpful. Whatever the reason, these people will have tax problems that planned gifts can solve. Focus on the donor’s needs. The charitable intent will be there.

This piece was originally written four years ago, when the real estate market was hot and almost any property could be easily sold. In today’s market, some donors may attempt to contribute property that is illiquid or unreasonably priced under current conditions. Schools should remember that cash, not property, is the objective, and that a well-defined gift policies and procedures will avoid a lot of potential problems.

Even the most modest donation prompts some thought and deliberation. A planned gift is one the donor plans to make at some point in the future. Usually the gift is made upon the donor’s death, although sophisticated tax planning can create a charitable gift after only a term of years. The most common form of planned gift is a bequest, in which the donor leaves specified assets to a designated charity in their will.

Not so easy
Planned giving is the most frequent source of the largest charitable gifts, and is often the principle fundraising vehicle for building an endowment fund. As an independent school becomes serious about growing an endowment fund, it becomes serious about implementing a planned giving program. These schools network with area professionals, join planned giving associations, and include articles in their newsletters. Unfortunately, many are frustrated in their inability to attract a meaningful amount of planned gifts.

Planned giving is NOT like a capital campaign
Asking for a few hundred dollars in a capital campaign is far different than making a six or seven-figure planned giving solicitation. Working with the planned giving donor has a different pace and must address specific donor needs and goals. These goals are realized over a different timeframe, demand specific educational and marketing expertise, and make different resource demands on the organization.

Why planned giving?
There is a tremendous intergenerational transfer of wealth expected over the next thirty years, as baby boomers age and transfer their assets to family and favorite charities. Many will prefer to contribute more to charity rather than pay capital gains and estate taxes. In fact, most sophisticated estate planning involves the use of planned giving techniques. Many donors, now in their fifties and early sixties, will execute planned giving instruments today, in anticipation of tax law changes and in accordance with their ultimate estate disposition goals. A persistent myth is that planned giving is only for the very wealthy. In fact, the vast appreciation of real estate and stock market holdings in recent years has created a tax and estate problem for many middle-class Americans. Schools that target and educate these potential donors will capture the bulk of these assets.

Planned giving facts and observations

• Planned giving is not a panacea: Classes and lectures are packed with a growing number of charities hoping to tap into this source of funding. Planned giving is a long-range funding tool for established schools. It is useless to the school that needs operating funds NOW.
• Planned giving may not be for you. Planned giving is principally a tool to build and grow an endowment fund. Many schools do not want any restricted dollars associated with an endowment fund. They want program dollars to spend now. They want major gifts, not planned gifts.
• You may not be ready. Many schools interested in planned giving are not really big enough to dedicate the time, staff, or resources to effectively sustain the effort. A school should have a budget of at least $2 million, and realistically closer to $5 million, before seriously considering an in-house planned giving effort.
• Planned giving is sophisticated. The tools are a major part of estate and tax planning, and require tax and financial planning knowledge. Most advisors are not knowledgeable in planned giving. And even a sophisticated donor may take a long time to decide if a gift is appropriate.
• Planned giving can take a long time. The incubation period for a planned gift can take years. Donors must understand the tools, decide if a course of action is appropriate for them and their families, and discuss this action with children or other family members. And of course, once the gift is made, you often have to wait until the donor dies until you receive any funding.
• Growing your own. Many not-for-profit organizations rely heavily on their local community foundation for resources and expertise. Every school should be aware that the mission of the community foundation is to build assets for themselves. A smaller school, or one that lacks internal expertise, may choose to initially work with the community foundation. Ultimately, it is better to build your own donor base and manage your own gifts.
• Beware of advisors. Financial and legal advisors appear to be an excellent source of gift prospects. However, many are not sufficiently knowledgeable in the application of planned giving tools.

Marketing a planned giving program
Many not-for-profit organizations, and the planned giving community in general, approach the planned giving donor in a common fashion:

• School-centric solicitation. The school makes an emotional plea for their cause, based on an underlying assumption that the donor is motivated primarily by charitable intent. While this may be true for an annual gift, it is often one of many factors in the decision to make a major or planned gift.
• Passive marketing. Many schools distribute brochures and descriptive material throughout the community, and attempt to network with local financial planners, accountants, and tax attorneys. The school then hopes to be considered in an anonymous donor’s estate plan or bequest.
• Emphasis on the tool. Schools, and advisors in particular, who are knowledgeable in planned giving will often pride themselves on an encyclopedic knowledge of each tool. The interested donor is provided with exhaustive resource material to make a planned gift decision.

The failure of planned giving
Schools are often disappointed in the amount and frequency of realized planned gifts. This can be the result of one or several fatal mistakes.

• Too much emphasis is placed on charitable intent and the pure gift aspect of the planned giving tool. To be sure, charitable intent is essential. But schools too often focus on their own need, at the expense of the donor’s goals.

Charitable giving is perhaps the ultimate luxury item. A major or planned giving donor will not give generously until they feel certain that all future family needs (and wants) are met. They will then make a gift decision based on their own perceived discretionary income. As such, it is no surprise that bequests are the most common form of planned giving. A bequest is the easiest and most certain way for the donor to determine that final degree of discretionary income: “Whatever is left over after I am dead.”

• Marketing to a saturated audience. The very old and the very wealthy are the marketing target of every school. This group has often already established their estate plans. Altering these plans to accommodate a different organization can be a significant marketing hurtle.
• The marketing is far too passive. Every organization is competing for those planned giving dollars. An occasional referral will sometimes produce that surprise bequest, but it is a poor planning tool for the school with financial goals to meet.
• The marketing is far too “tool” oriented. Schools will overwhelm a prospective donor with technical information on planned giving tools, but then leave it up to the donor to connect the dots. The donor does not wish to become a tax attorney or financial planner. They want a solution to a tax problem.

A better approach
The successful fundraiser understands the complex decision-making process of a planned gift, as the donor contemplates their own financial situation, the inherent desire to provide for family, and the maze of tax consequences triggered by a redistribution of personal assets. Directly assisting the donor to accommodate those goals and financial priorities will result in more executed planned gifts.

• Active marketing. The most successful schools take responsibility to develop and grow their own donor base.
• Continuum of activity. Planned giving is not a single event, but a continuous marketing effort.
• Opportunistic. Target tax-burdened assets as economic conditions change – stock market investors during a bull market, or property owners during a real estate boom.
• Dynamic application of tools. Donors will only appreciate and execute planned giving tools when creatively applied to solve tax and estate problems. Dynamic application of charitable tools can divert tax dollars into charitable gifts.

Cultural and ethnic diversity may be socially admirable objectives, but to the lizard brain of an investment banker, diversity means only one thing: multiple, consistent sources of revenue.

Every school hopes to ultimately minimize it’s reliance on tuition revenue. It is statistically, if not intuitively, well-established that willingness to pay tuition is not inelastic, especially for primary and secondary school. Anecdotally, I know many fellow parents who, for years, have been making school payments from their home equity line of credit. Falling home prices and fear of a recession can only limit tuition revenue growth for the foreseeable future.

The chart from Moody’s Investors Service provides useful industry guidelines, relating income diversity and credit-worthiness. Endowment investment income is clearly the sine qua non of financial security. As shown, endowment income rises as a total percentage of income for the most credit-worthy schools.

We can infer from the chart an appropriate minimum endowment target size for any particular school. Approximately 4%-43% of an investment grade school’s annual budget is subsidized by endowment income. A 25% subsidy is probably a fair average. An endowment can sustainably distribute 5% of its assets every year. Therefore, a $10 million endowment is an appropriate goal for a school with a $2 million budget. Smaller schools often have much lower expectations.

Annual gifts are certainly a valuable income component. However, consistency of cashflow is often more attainable than sheer size. Less credit-worthy schools often have erratic gift income, depending on resources and enthusiasm in any particular year. More credit-worthy schools have a fund-raising infrastructure and thus more consistent results.