What is the Financial Justification for Your Gift Planning Program? Richard W. Lawrence

1. What is the Financial Justification for YourGift Planning Program? Richard W. Lawrence Executive Vice President & Chief Operating Officer Kristen L. Dugdale Vice President, Gift Planning

2. Current Environment • Budgets are tight and likely to remain so • Pressure to raise current funds • Deferred gift activities might be “deferred” • Gift planning directors might have to defend program budget

3. Gift Planning’s Measurement Problem • Hard to quantify means it is hard to manage • Other development efforts are more quantifiable • “Dollars in the door” seems more tangible—easier to measure • Yet, significant dollars come from planned gifts, especially bequests

4. What Might Leadership Be Thinking? • How do I allocate development resources? • How integral is the gift planning staff to the success of outright and campaign giving? • What is the cost/benefit relationship of deferred gifts? • If we cut X in annual giving or major gifts, we know the likely result. If we cut gift planning, there is no immediate loss, right?

5. Director of Gift Planning Challenges • You might be fortunate to have leadership that strongly supports gift planning • Current environment will bring scrutiny • How do you advocate to keep or to augment resources? • Qualitative case • Quantitative case • Do you speak your leadership’s “language”?

6. Case Study University of Colorado Foundation

7. A For-Profit Lens On a Non-Profit Activity

8. What Is Our Cost to Raise a Dollar?

9. Efficiency of Various Business Units

10. Simple Formulas Don’t Work for Gift Planning

11. The Planned Gift Measurement Problem • Most planned gifts have an associated time deferral element • Most planned gifts have undetermined gift value • Many planned gifts are revocable We gain the greatest insight by linking today’s gift planning activities to some measure of the value that they create

12. Present Value Formula

13. Present Value of $100,000

14. “Kristen, Why Invest in Gift Planning?”Action Plan • Identify the costs attributable to gift planning fundraising activities • Identify the cash flows that will be associated with today’s activities • Identify the timing of those cash flows • Calculate the present value of those cash flows • Divide the cost of the fundraising activities by the present value • Et voilà! Cost per present value dollar raised

15. The Process • Set the broad gift planning fundraising goal • Divide the goal into gift types • For each gift type, determine assumptions for horizon and investment return • Calculate a future value for each type and discount it to present value • Determine the costs associated with raising the gifts and divide them by the present values • Et voilà!

16. The Numerous Variables • Goal • Split of the Gift Types • Horizon Assumptions • Investment & Payout Assumptions • Discount Rate

17. Set the Goal • Our gift planning goal for Fiscal Year 2008 was $15.6 million in face value terms (revocable and irrevocable gifts) • The goal was based generally on an average of the amounts raised over the previous 10 years • The goal did not include realized bequest expectancies or life income gift maturities

18. The Goal Categorized by Gift Type • $3.3 million in internally-managed CRTs • $3.3 million in gift annuities • $1.9 million in externally-managed CRTs • $0.9 million in outright gifts where gift planning was significantly involved • $6.2 million in revocable gifts (new bequest intentions, IRA beneficiary designations, etc.) • The gift types were generally based on the split of deferred gift types in our previous campaign.

19. Determine Average Horizons

20. Horizon assumptions predicated on facts • Trust & Annuity horizon assumptions were determined by averaging the remaining horizons of every trust and/or annuity in our current program (15 years for trusts, 12 years for annuities). • Is the horizon to short, as we did not look at original gift dates? • Is the horizon to long, as we did not allow for the possibility of earlier than expected terminations? • Because of these variables, we added 5 years to the assumption for trusts & 3 years to gift annuities • Horizons = 20 Years for trusts; 15 years for annuities. • In the case of gift annuities, we also considered the ACGA suggested rate for a 75 year-old.

21. Horizon assumptions for bequests • Made an assumption that specific & residual bequests would be split 50/50. • Applied an annual total return to residual bequests of 3%. • Compared the gift date of recorded bequests in our system to the realization date (if any), and averaged all for a period of 4 years. • Conservatively added to that term by using 10 years.

22. Chose not to discount bequests based on their revocability. • NCPG’s Survey of Donors conducted in 1992, and updated in 2000. • 92% of donors did not take charity out of the will. • 86% did not change the amount to charity. • Of those who did change the amount, 1/10 did so to increase the amount. • Only 1/100 decreased the amount & others made changes for “mechanical reasons”. • Results reaffirmed in 2000 survey.

23. Determine Payout Rates and Projected Investment Returns

24. Determine a Discount Rate • Should we use the endowment rate of return to discount the value of a future gift to the university? • Or use the Higher Education Price Index? • Or pick a rate in the middle? We decided to use a 7% discount rate

25. Costs PV of Gifts = Cost per PV $ Raised Calculate the Present Value of Gifts • Grow each gift type out to its estimated future value (net of payments and costs) • Apply the discount rate to determine the net present value • Add the net present values across gift types

26. Costs PV of Gifts = Cost per PV $ Raised How Will We Take Costs into Account? • Start with the department budget number • Subtract the costs to manage existing life income gifts • Subtract out estate administration and “customer service” costs

27. Gift Planning Budget Items • Salaries and benefits • Promotional activities and events • Travel • Gift management fees not charged to trusts • Legal and compliance • Professional development • Overhead and other operating costs

28. The Budget Items Are Allocated to Activities

29. Costs PV of Gifts = $0.09 Et Voilà! • We estimated our cost to raise a present value planned gift dollar to be nine cents • Additionally, we decided to defray costs of administering certain existing and new gifts by charging expenses to the trusts

30. Dollars Raised by Gift Type(Millions of Present Value Dollars) Cost per PV Raised $0.06 $0.03 $0.03 $0.06

31. Some Observations • Consistently exceeded goals • Actual cost to raise a dollar beat estimates • Different “winning” category every year • Revocable category is understated • Some assumptions were inaccurate • Looking forward • If we add costs will we add revenue? • How can we get more cost-efficient? • Should we focus on older donors (higher PV)?

32. Some Conclusions Gift planning makes logical sense from a business perspective “You have to know your business to know your business.” Don’t expect to reconcile cost per dollar raised data with announced fundraising totals Be careful of over-interpreting the analysis Think through your “product mix” carefully; focus where possible on the shortest and surest opportunities

33. Other ways to measure a program • Evaluate based on the effectiveness or charitable impact the charity makes • Marginal costs/Diminishing Returns?

34. Discussion • What questions do you have? • Has your VP of Development or your CFO asked you to justify the value of your gift planning program? • How have you responded? Have you used other methods to make the case?

35. The End