November 2003
Church Budgets in a Bear Market

When the Next Egg Shrinks

People die. They don’t take anything with them. They leave everything they own behind. Through their estate plans (if they have any), they give what they own to other people, the government, charity — and hopefully their churches.

Since Episcopal churches have existed in the United States, endowments have been created by generous people who have left property and money through bequests. 

How should those endowments be used? Should parishes have an endowment at all? How should they be managed? And how do you manage your parish’s operations when the value of the endowment shrinks?

Using endowments
The way endowments are used is often predetermined by the donor and generally support five categories of church life: building maintenance, Christian education, music, youth and outreach/mission work. Exciting, creative uses of endowments in these categories enhance outreach and service.

Sometimes endowments are used in less exciting ways, like supporting the church’s operating budget. If that is the case, a certain complacency often becomes ingrained in the vestry and clergy, for relying on the income from dead people’s money can yield a dead church. I know of one parish where the endowment income is sufficient to pay the clergy, maintain the building and pay a full choir. They don’t even need a congregation! And they do virtually nothing beyond their buildings and music (which are lovely, by the way).

Should you have an endowment?
How an endowment is used is at the heart of this question. If everyone would tithe, we wouldn’t need endowments. Perhaps so. But everyone doesn’t tithe, and endowments can be a strong force for mission.

Here at the Episcopal Church Foundation, we believe that parishes of all sizes, small and large, should have endowments and that they should be used in ways that support the mission of the parish.

Managing endowments
Vestries, because they are responsible for all material assets of the parish, are responsible for receiving, managing and using endowments. In larger churches this responsibility is often delegated to a finance or investment committee. Vision, policies and marketing need to be tight, focused and in writing:

  • Vision: What is your vision of how endowment funds will be used? Is it available to potential donors? Trouble arises when this vision in unclear or nonexistent. 
  • Policies: Potential donors want clear policies to assure them the money will be managed well and for the purpose they have stipulated. Guidelines should address the kinds of gifts that are acceptable (types of assets, minimum size); how the funds will be managed (investment policies, risk tolerance, asset allocation, total return expectations); and how the funds will be used (spending rules or how much “draw down” is authorized). 
  • Marketing: engage and educate. Get the word out about long-term gift planning. Help parishioners understand the benefits for both congregation and donor.

Dealing with shrinking assets
Many churches use the total return method of calculating how much they will draw from their endowment each year. They measure performance by adding together capital growth and income — and draw down a consistent percentage of the total asset value each year — some use 5% based on a three year rolling average of asset value.

For those who calculate their draw down on a rolling average, the impact of a bear market is softened, or “smoothed,” and its effect on income should be minimal.

For those suffering from more severe drops in income, consider changing the formula temporarily. After all, endowments are often considered insurance for a rainy day, and the investment markets have had pretty crummy weather in the last three years!

Reduce activity, fire staff, and close down programs only as a last resort. Indeed, abundance and scarcity issues are in sharp relief when our net worth falls.

Relative wealth comes to me with a bang when I’m reminded that 60% of the world’s
population has never made a phone call! And relative wealth from a parish perspective comes clear when I’m reminded that more than half of Episcopal churches
have annual budgets less than $100,000.

Get creative
If possible, get creative when things get tight. One vestry member told me, “with our endowment income down, there was talk about cutting our outreach programs. But
we didn’t want to do that — they’re our whole reason for being! So we first asked parishioners to give a ‘13th month’ pledge, to make up the difference. If there still was a
difference, we would draw a little more from our endowment than the formula allowed — as a strictly temporary measure.”

I’ve known that parish for years and been impressed by the frequency of their abundance thinking, the regularity with which they review their blessings and strengths and give thanks to God for them. It wasn’t a surprise that the parishioners gave almost enough, through the “13th month” extra pledge request, to balance the budget.

Many parishes will cut outreach first without reviewing their options. Remind yourself
what is important — i.e. God’s work and the mission of your parish. Then review the
purpose of your endowment. Does a reduction in the endowment’s asset value affect the income? Does a reduction in the income affect the programs? Can the reduction be made up temporarily by more draw down?

By combining clear vision with a sense of abundance about our church’s endowment, we can continue our good works and “ride out the storm” of declining market value.

Fred Osborn is the director of Philanthropic Services for the Episcopal Church Foundation. To learn about gift options available to support your church including the financial benefits, contact the Foundation at (800) 697-2858 or all@EpiscopalFoundation.org

This article is part of the November 2003 Vestry Papers issue on Church Budgets in a Bear Market