Promises Part I

One planned giving director once said that his university has a policy that no ground is broken until all the money is in the bank. When I tell this to other fundraisers, I often hear the lament that they don't have that kind of luxury. They feel it's a luxury because the need for the building is pressing, and there is often no other choice but to rely on promises of future gifts even those that will materialize only after the lifetime of the donor. Let me address this issue in two parts: this month, the economics of a new building and its connection to philanthropy; next month, the ethical considerations of accepting current and deferred gifts that don't cover the costs of the project.

An important component of ethical decision-making is professional competence, so understanding the economics here is important. Put aside for a moment that the construction price at the beginning of a project is almost never equal to its final cost; that is, assume we're talking about the need to raise $25 million to build the building. But what does the building really cost? After it is completed, it must be maintained. It has everyday operating costs. In addition, it will eventually have deferred maintenance costs. The building will not actually have a $25 million price tag, but one that's much higher, which is rationale to insist on much more than for what most organizations sell their naming rights. It's a little like trying to raise money for administrative costs - no one, it seems, wants to include maintenance when approaching donors for something much more appealing.

A quick calculation: Assume the operating costs equal two percent of the construction costs. That means the organization must have an additional $500,000 per year into the indefinite future. Unfortunately, that, as a concept, is not always taken into account. Receiving even less attention is deferred maintenance. Again, assume two percent of the original building's cost - another $500,000 for that. Even though that amount is not needed right now, it will be eventually and it must be figured into the equation. That amount is an estimate based on the future value of the deferred maintenance costs. It doesn't matter if, based on its budgeting, an organization uses different numbers, but they need to be considered.

Ideally, the organization will set aside enough to generate an additional $1 million every year. To endow that - say, at a four percent spending rate an additional $25 million is needed. All of a sudden, the building costs twice as much as everybody thought $25 million to build it and another $25 million to properly endow it - and that's not taking into account the inevitable increase in construction costs.

This is not a luxury. Whether an organization actually raises this amount and puts the funds where they should go is, of course, up to the trustees, but eventually the costs will be what they will be. The ethical question is, after they go through this process (although most boards don't), whether they decide to push off the costs - and decisions on how to address them - to future generations. How many serious donors, do you imagine, would be pleased to hear that?