June 30, 2009
Musings on charitable endowments and reserves
Not very long ago, Senator Chuck Grassley, IA, "put the screws" to big universities for hoarding money in what he believed were "excessive" endowments (see prior blog post here). But this article in the Washington Post should remind us all that charities are just as vulnerable to economic downturns as any for-profit business, and that having significant reserves to weather these downturns is prudent management. The article details a study of Washington D.C. area charities and found that a significant percentage had too little (or none at all) in reserves to help weather the current downturn. Interestingly, the study found that bigger charities were more likely to have insufficient reserves than smaller ones.
So charities clearly need to keep a prudent amount of reserves for weathering bad economic times. But the other side of this question is when, if ever, does a stash of cash become excessive? Truth is, I don't know. Squirreling away huge sums of money for the future, whether we call it a "reserve" or an "endowment" implicates the pros and cons of spending for the charitable needs of the current generation vs. future generations. Many prominent scholars (e.g., Evelyn Brody at Chicago-Kent; Henry Hansmann of Yale; Michael Klausner of Stanford) have written about this issue, with varying conclusions, though I'd say that the weight of opinion is that there is no really good reason for charities to skew their spending towards future generations and a few foundations have made courageous decisions to spend themselves out of existence rather than conserve resources in order to exist indefinitely. I'd say that Harvard's endowment is (or at least was) beyond the point of reasonable for the scope of its charitable enterprise, but I don't think there is any good consensus on when a prudent reserve crosses the line to Scrooge McDuck's money bin . . .
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