What Is a Permanent Endowment?
A permanent endowment generally refers to a particular class of property owned by a charity or other non-profit institution which cannot be converted into funds for operating or other purposes. Whether in the form of cash and similar assets, or functional assets like buildings and real estate, endowments are generally large gifts to non-profits. The giver of an endowment often specifies the uses to which the gift may be put, and documents governing the endowment are usually drawn up for that purpose. A permanent endowment is given to an institution with the proviso that it cannot be sold or otherwise liquidated, and the institution only has access to some or all of the income it generates. In many cases, the documents establishing a permanent endowment will also regulate how any income produced by the endowment may be used.
One of the most typical kinds of permanent endowment is an investment, where an amount of capital is invested and the income it produces is to be used for the charity’s purpose, sometimes further restricted by the establishing document. Many schools have permanent endowments whose income can be used only for providing scholarships, for example, or for making capital improvements. Medical schools and hospitals may be endowed with gifts that specify that the income generated be used to promote only certain kinds of research. Some investment permanent endowments also specify that a portion of the earnings be reinvested and made permanent, as a safeguard against future financial uncertainty.
Another type of permanent endowment is called a functional permanent endowment. When the asset involved is real estate, it cannot be converted to cash or other assets, but any income it generates may be used by the charity, again within the limits of the establishing document. For example, a charity may be endowed with an apartment complex or a meeting hall. If the endowment is intended to be permanent, neither the structure nor the land it sits on may be sold, but the rental income generated may be used by the charity, again in accordance with any further instructions in the establishing documents.
There are conditions under which permanent endowments may lose their permanence. The least difficult way for this to happen is when the establishing document itself specifies those conditions. For instance, the documents governing the use of a permanent endowment established to fund research into a cure for a disease might stipulate that the endowment’s assets could be sold once that cure has been discovered. If the endowment is a building, the establishing document may permit its liquidation if it becomes functionally obsolete, such as a stable in an urban setting.
Endowments whose principal is left untouched and permitted to grow by virtue of the institution’s policy are not technically permanent endowments, although they’re treated as if they are. Strictly speaking, a permanent endowment prohibits the institution’s governing authority from selling or otherwise disposing of the assets that make up the endowment’s principal.
@Logicfest -- We've learned those "safe" investments aren't always, well, safe. During a tough recession, even those modest returns could drop to near nothing.
My business decided to take out a money market at a time when interest rates were less than one percent. You don't get much of a return on your investment that way, but there is no question that the money market is safe.
@Melonlity -- Yet another reason why investments of this kind should be made in safe but sure vehicles (bonds, money markets and etc.) No, you will never have the potential to realize huge gains like you would with riskier investments, but you also don't run the risk of getting addicted to a huge return and having your institution suffer should that return decrease due to a bad economy.
Remember -- slow and steady wins the race.
A major problem is when the economy is down and the return on investments isn't what people hoped it was. Of course, I am talking about what happens when you have an endowment that is essentially an investment in which interest earned off the principal is used for a charitable purpose.
Take college scholarships, for example. When the economy tanks, an endowed investment for scholarships might not pay off like it once did. That means fewer kids will get scholarships and college enrollment could be down.
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