Promises Part II
(Added 5/1/2013)
We accepted a gift – part outright, part deferred – for the construction and naming of a building. The building is estimated to cost $25 million. The total gift commitment is $10 million. This doesn't seem to make financial sense to me and I wonder if my organization isn't acting unethically, as well as financially irresponsibly. To me, the ethical issue is that we are accepting an offer that doesn't come close to meeting our needs while at the same time implying that it does. (Last month, the issue was the economics of a new building and its connection to philanthropy; this month, the ethical considerations of accepting current and deferred gifts that don't cover the costs of the project.)
Ethical decision-making requires professional technical competence – it is not simply a feel-good or gut- driven process – and in deciding whether to attribute a planned gift to a future program we need to assume certain things, a process with ethical underpinnings. The donor wants to name a building but the gift is small compared to the projected construction cost. In addition, the gift amount does not take into account the financial impact of maintenance. Can a deferred gifts fit into this picture?
As fundraisers we're highly inclined to say yes, but there are times when the rubber meets the road and we have to sober up. While deferred-gift donors ought to be credited with the full amount of their gift – because in their minds that amount is what they are parting with and because we have no real way to know what the gift will be worth when it becomes available – an important part of that recommendation is that the full amount be credited not in the current portion of the results (in a campaign or otherwise), but in the deferred portion. That is, instead of calculating a present value for deferred gifts for credit in an effort that recognizes only current values, divide fundraising results into two parts: current and deferred. Then, within the deferred section, credit the entire amount of the gift. Let the accountants worry about the present value for purposes of auditing the books. We should celebrate our donors' philanthropy as robustly as possible.
But, when it comes to lining up the gift's future value with the future (or current) need, how do you reconcile any differences between what actually ends up in the bank and the cost of the project? Even a reasonably calculated discounted future value is still no money at all. Unfortunately, the senior staff at far too many nonprofits don't care; they aren't going to be around when the issue becomes real. As we honor legacy so much in our world, however, we ought to apply the concept to our professional selves as well. What are we leaving our successors?
Even though not possible to know years in advance the value of the gift when it will be received or the future cost of the project it's associated with, it is possible to lay down guidelines by which assumptions are made. If you forecast a high investment growth rate or a low cost growth rate or a low discount rate, you'd better be able to explain why. Future trustees and senior staff will need to understand. The differences can be meaningful. A low discount rate means the projected amount will be higher in future years: a 4 percent discount rate over 25 years, for example, puts the value of $100,000 at about $37,500; a 5 percent rate makes the projected amount about $29,500.
This decision-making process is not merely math-centric; the math is actually the easy part. It begins with ethical considerations. Enough bogus assumptions, especially if they appear to be made only to satisfy people chasing large but vaporous fundraising numbers, can generate serious problems in the future – to say nothing of poor morale. Given all the considerations, perhaps we can begin with these two solid policies: 1) balance conservative with realistic; and 2) never permit a deferred gift to be credited to a project that needs money now.