Editorial - Endowments and tax breaks

The highlight of my March was helping to prepare and run a workshop in New York for the Doris Duke Charitable Foundation and the Nonprofit Finance Fund. The participants were board members and senior executives from sixteen non-profit jazz presenting organizations from around America, ranging from art centers to radio stations.

They were all recipi—ents of challenge funding from the Duke Foundation, the purpose of which is to contribute towards establishing - or in some cases growing - endowments. The income from the endowments is earmarked for costs directly associated with the presentation of jazz (artists fees, marketing, etc.).

The workshop focused on the issues surrounding the creation and management of endowments - and underlined the dangers of seeing endowments as a 'silver bullet' outside the context of the overall structure of an organization's assets and balance sheet. An endowment is all very well but not so much use if you are so chronically short of working capital that you can't see past next week's payroll...

The occasion was a highlight for me for three reasons: first, as a jazz nut, it was great to spend some time with others even more passionate and unequivocally more knowledgeable than I am. Second, the Jazznet initiative is an original and well-directed attempt to provide targeted, long-term support to an area of cultural life that is generally neglected by the forces of cultural philanthropy. This means that it is deeply appreciated by the recipients, and so the occasion was a jolly one. Third, the workshop gave me a context for pushing my own thinking forward a bit.

The central role of endowments, usually created through tax-deductible contributions, is, of course, one of the critical differences between the more diverse ecology of the American funding system and that of Europe. In the United Kingdom, we look enviously at the autonomy offered to many (but by no means all) American cultural organizations by their endowments.

The current boom in the American economy, the growth in foundation assets, the requirement that they disburse at least 5% of those assets' value per annum, and the growth in individual giving, together offer significant opportunities for creating and growing endowments.

In America, nevertheless, many arts organizations look with reciprocal feelings of envy at the levels of core public funding enjoyed by cultural organizations in Europe. Each community believes that the other has a regime that offers greater prospects of autonomy, the ability to program more adventurously and to cultivate artistic innovation in the absence of a commercially viable market for the fruits of that innovation.

In the United States, the prospect of significantly increased public funding seems fairly remote; and in the United Kingdom, the tax regime, the underdeveloped culture of personal philanthropy, and the planning horizons of most cultural institutions together have made endowments an equally remote proposition.

So both sides tend to be fairly fatalistic about the status quo.

The general disposition towards the creation of endowments on the part of the funding community in the UK has, in any case, been distinctly sniffy: they tie up funds for a relatively small annual benefit; their existence provides a context, both at individual organization and at collective level, for the incremental withdrawal of public funding, and so why bother sweating over their creation; and, it is argued, endowments encourage a lack of accountability and therefore sloth on the part of the beneficiaries.

These arguments against endowments, which have predominated in the UK funding system, seem to be, on balance, misguided. The first (ratio of effort to reward) is short-term. The UK lottery, which might have been used for endowments, has largely gone the way of North Sea oil and gas - into either immediate consumption or into infrastructure that increases, rather than decreases, reliance on public funding.

Non-profit arts organizations are red-ink businesses, and if you increase either their physical infrastructure or their programming then, all other things being equal, more red ink will flow. One or two 'annuities' have been created, where both capital and income from a quantum of investment is run down over a period of time. But annuities are designed to run out.

The second argument (public sector claw-back) may or may not be true, but the price of public funding of the arts, like that of democracy, is eternal vigilance. Pound for pound claw-back of public funding where there is an increase in private funding is not automatic, and endowments are simply one of any number of pretexts for the reduction of public funding. The lottery was and is a far greater one. Claw-back is prevented by effective political mobilization.

The third argument (endowments encourage lassitude whereas grant in aid encourages accountability) seems simply perverse. Surely it is the largely unitary public funding system, on balance, that - without constant self-awareness - is most prone to complacency, lack of imagination and a tendency to infantilize its clients.

On balance, the American grass seems greener albeit harder work to grow.

However, the recent provisions in the UK budget, trailed in Platform Two, provide some water that, one hopes, may not be spilled quite as casually as the lottery's largesse. The provisions for tax deductibility intimated by the Chancellor earlier this year were indeed included in the budget.

According to Michael Brophy, Chief Executive of the Charities Aid Foundation: "In making the UK the most liberal tax environment for giving in the world, these initiatives have the ability to generate in excess of £1 billion [$1.6bn] for good causes within two years." (See www.cafonline.org/news/news_frame.cfm?whichStory=156.)

This provides the arts, as part of the voluntary sector, with a 'second chance'. Let's plan for it and use it intelligently. I would suggest that it's worth edging endowments further up the UK arts agenda.


—Adrian Ellis

AEA Consulting LLC

Past issues:

Volume Two
Number 1 - Number 2 - Number 3

Volume One
Number 1 - Number 2 - Number 3 - Number 4 - Number 5 - Number 6

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