Gifts with strings attached: restricted giving doesn't have to leave an institution in a tangle.

FACULTY AND STUDENTS PUSH KNOWLEDGE FORWARD IN THEIR own ways every day. They expect that freedom, and the academy is designed to give it to them. But donors, whose gifts often come with usage restrictions, may not be so generous.

"The whole notion of restrictions from the donor's side stems from two areas," says Charles Gordy, managing director of Planned Giving Services at Bank of New York. "One is control, making sure the money is spent in the manner you want it spent. The other is legacy." In fact, he says he'd be surprised to learn of a gift of more than $1 million that doesn't come with strings attached.

Many donors want restrictions because they're concerned about the accountability of nonprofit organizations. According to Brookings Institution research released in September 2004, 31 percent of Americans believe charitable organizations are very good at helping people--yet only 11 percent believe nonprofits are very good at spending money wisely. A mere 19 percent believe these organizations are very good at running their programs or services.

"As long as we've had private philanthropy, we've had these issues," explains Evelyn Brody, a professor at Chicago-Kent College of Law at Illinois Institute of Technology who researches issues surrounding charitable giving. Still, restricted gifts aren't handcuffs. With careful strategic planning, an institution can identify its needs and seek out donors with matching interests. Carefully crafted agreements can help donors understand the limits of their gifts--and a willingness to turn the occasional gift away can help keep the school on its long-term mission track.

Larger Gifts, Fewer Givers

The Council for Aid to Education's latest report on institutional giving found that donations increased by just under 5 percent, to $25.6 billion, between 2004 and 2005. Gift totals for capital purposes, which are often restricted, increased by 5.6 percent, faster than giving as a whole. At the same time, the number of donors appears to be falling; alumni participation has fallen steadily and now stands at 12.4 percent, down from a high of 13.8 percent in 2001. Although respondents weren't asked about restrictions, the trend toward fewer people making larger girls for capital campaigns would be consistent with an increase in these types of gifts.

Greg Norwell, a trusts and estates lawyer at Defrees & Fiske in Chicago, advises clients to add restrictions on bequests in their wills. At a minimum, an institutional recipient should get a bequest only if it is still in existence and operating as an IHE. Many of these donations are small enough that they may not even come to the attention of a university's planned giving staff, but Norwell says that donors still deserve to know that their money is going to its intended purpose.

For larger donations, Norwell says gift givers may set up a supporting foundation rather than make a direct gift. "If the family finds that the charity is not using the money the way they want it to, they could move the money to another charity," he notes.

One class of donor does seem comfortable with unrestricted gifts: entrepreneurs. Westminster College in Salt Lake City has an ongoing campaign to ask donors for unrestricted gifts for the President's Innovation Network fund, which would be used for research and development of new campus programs. Nancy Michalko, vice president of Advancement and Alumni Relations, finds that this appeals to donors who have started their own businesses. These folks understand the creative freedom that can come with unrestricted investments, because similar funds may have allowed them to launch.

Seeking Out Restricted Gifts

Westminster College welcomes restricted gifts, too. In January 2006, officials announced that the chairwoman of its Board of Trustees, Ginger Giovale, was donating $10 million toward a new science building, the largest gift in the institution's history. "It's really easy for the board and the people close to you to know your priorities and restrict their gifts to them," says Michalko.

The institution is responsible for developing a strong long-range plan and strategic vision, Michalko notes. Then, donors can see how their gifts will support the long-term interests of the school, and they want to participate. "We're asking our donors to come with us on the journey," she says.

At Radford University (Va.), the emphasis is on matching the interests of the institution with the interests of donors. It's all about segmented marketing, says Mike Westfall, associate vice president for Advancement there, as well as a partner in Supporting Advancement, a website that tracks fundraising issues. "Donors aren't looking to make a gift, they are looking to make an impact," he says. Even in the annual fund, he has found that allowing donors to earmark their gift for a specific college helps them feel more tied to their alma mater.

Managing Donors

Stephen A. Weldon, director of Planned Giving at California State University, Monterey Bay, faces an unusual situation. The institution is only 10 years old, so there are very few alumni, let alone many in a position to make large donations. Rather than wait for the graduates to make their mark on the world, the university is seeking funding from people who support the mission of its programs.

One way Weldon finds donors is through lawyers, accountants, and financial advisors. Weldon talks to these professionals about the school's needs and goals so that they can recommend it to clients with matching interests who are looking to make a significant donation.

When donors get sound advice from lawyers or accountants who have worked with them for years, they are often better able to understand when an institution's requests are reasonable.

For example, Cal State, Monterey Bay, recently accepted a very large anonymous donation, but it isn't clear under California law that the name of a donor to a state-supported institution can be protected. The donor's personal counsel was able to understand the issue and work with Weldon's team to craft an agreement that would likely stand up in court, should the case be challenged. The client also learned that his anonymity is not guaranteed.

Had the agreement come from the university's lawyers rather than the donor's own counsel, it may have come across as a deal-killing imposition.

There's another advantage to working with professional advisors. "[They] can talk to donors and their families in ways that I can't," Weldon says. In his experience, those conversations help set a tradition of philanthropy within the family. Children understand their parents' wishes, and they know that the gift was not coerced.

Scholarship gifts, in particular, can become too restrictive, as donors often want to help students with the same background, Westfall notes. But a scholarship for a student from a particular small-town high school who studies engineering seldom may be awarded, hurting the donor's magnanimous intentions.

At Radford, the solution is to explain that situation to donors, then use language giving preference to one type of student but allowing others to receive the money if no one suitable applies.

Likewise, Weldon at Cal State helps donors understand that a restricted gift may have a finite life. "We talk to the donor about what the usable life of the building will be. If the building is destroyed or [must shut down], we'll make reasonable attempts to replace it," he says. By helping the donor understand the contingencies involved, a gift agreement can be structured with flexibility so that the institution can continue to evolve.

What if donors aren't happy? In most cases, Brody says, the donors have little standing under the law--they've already given up the money. But that doesn't mean an IHE should ignore a donor's wishes. There's enormous reputation risk, for one thing. And many savvy donors are adding "gift-over" provisions to their gifts, which would require that the money go to a second charity if the first cannot meet the restrictions. In that case, the charitable intentions of the gift are preserved, and the second charity has standing in the courts to oversee the work of the first.

As for heirs, most judges do not view disinherited children as disinterested parties equipped to evaluate a charity's spending, Brody says. But heirs may become involved if the gift is through a family foundation. This can lead to sticky situations.

In 1961, Princeton University received a $35 million donation from the Robertson family, heirs of the founders of the A&P supermarket chain. The money was set up in a separate supporting foundation to be used by the Woodrow Wilson School of Public and International Affairs to train students to take foreign relations and other jobs in the federal government.

Family members are on the board of the foundation, which in 2002 filed suit alleging that Princeton diverted funds from the endowment to other areas of the university. The money has grown to $650 million and represents about 6 percent of Princeton's total endowment, and the conflict has become very public.

"No Thanks" Can Be the Answer

In a handful of cases, a particular recipient and donor have reached an impasse, and the money is returned. While Westminster College was announcing funds for its new science building, for example, Florida State University returned $11 million earmarked for the same.

The money came from Robert Holton, an FSU chemistry professor who had made a great deal of money after developing a synthetic version of Taxol, a cancer drug. He wanted to build a new chemistry building with dedicated facilities for synthetic organic chemistry, which the university found too expensive and too limiting. The decision to return the money was made in January of this year after negotiations, court hearings, and litigation beginning in 1999, when the university received the first installment of the gift.

"Our president doesn't take $11 million lightly," says Brooks Keel, associate vice president for research at FSU. The problem, he says, is that the gift agreement for the second installment included such restrictions as the number of fume hoods that would be in the building, the square footage of office space, and the type of shelving used to hold journals. Instead, FSU and most of its chemistry faculty wanted a building that could accommodate changes in all chemistry disciplines.

The money was returned in three checks that were hand-delivered to Professor Holton's foundation offices-two for the donation installments, and a third for the accumulated interest. "That part of the negotiation was simple," Keel says.

Meanwhile, Holton is suing the school for funds outside of the donation that came from his laboratory research account. He has said he believes that the proposed state-of-the-art synthetic organic chemistry laboratory would make Florida State a center of excellence in the field, enhancing the university's status.

Returning a gift isn't always simple. Donors may not want the funds back. "They may have taken the tax deduction, or they don't want the money to go to their kids," Brody says. Moreover, she adds. if the university and donor agree to give the money to another charity, the university's trustees may very well have violated their fiduciary responsibilities to the institution.

Princeton has never returned a gift in its 250-year history, says university spokeswoman Cass Cliatt, but officials have often turned money down. "We certainly would not hold it against the donors if they found another institution that could support their gifts," she says.

That attitude dominating an IHE's approach to restricted gifts would serve it well, although few have the luxury of Princeton's resources. "The charity sometimes needs to be saved from itself," Brody says, as gift officers have an enormous temptation to accept restricted gifts to get credit for the money now and cross their fingers against problems down the line.

"If the need and interest don't match, we need to be professionals and walk away," Westfall says. As an organizational issue, institutional leaders should ensure that development officers are not compensated in ways that create adverse incentives.

Harnessing Donors' Creativity

Meeting gift restrictions may interfere with an institution's mission, but they can also put the brainpower of alumni and friends to work. "Sometimes the donor comes up with ideas that the institution hasn't thought of," says Brody.

Westminster College has found just that. In 1997, it approached a donor about a science building, but the donor wanted to expand Westminster's aviation program. The result was a $7.4 million donation and the creation of a pilot training program in addition to the aviation management program that had long been in place. Without the donation, Michalko says, the existing program would have been shut down. Thanks to the donor's vision, the college has a unique major that attracts students. It's proof that gifts with strings attached may well be worth unwrapping.

Resources

Brookings Institution, www.brookings.edu

Council for Aid to Education, www.cae.org

Supporting Advancement, www.supportingadvancement.com

RELATED ARTICLE: What's in a name? Potential headaches.

SOME DONORS WANT THEIR NAME IN BRIGHT lights on a building forever. Others have deeply held personal reasons for keeping their name off of a gift. Although these requests seem easy to accommodate, neither is. In fact, name restrictions can bring on painful giving headaches.

For one, name donors do not always bring credit to the institution. The Kenneth L. Lay Chair in International Economics at the University of Missouri-Columbia remains funded but vacant; at press time, Lay was on trial for his role in the collapse of Enron Corporation.

Queen's University in Kingston, Ontario, meanwhile, has removed the name of former Hollinger International executive David Radler from a building, but it did not return his $1 million Canadian donation. He pleaded guilty to fraud and is cooperating with investigators. There are concerns that both Lay and Radler made the money for their donations through improper activities.

When naming rights are among a gift's restrictions, Mike Westfall, associate vice president for Advancement at Radford University (Va.), says that a quick solution is to include a clause revoking the name if the donor is convicted of a felony. That would have saved MU and Queen's from much controversy.

Secret Givers

Anonymity carries its own burdens. Sure, there's no embarrassment if the donor ends up in prison, but there could well be repercussions if the donor's name is leaked. Gift offices need procedures to limit the number of people who know an anonymous donor's name, and all should understand the fiduciary breach that goes with careless gossip or calculated disclosure.

If possible, the institution accepting an anonymous gift should retain the right to disclose the donor if the anonymity harms the university's reputation. A $35 million gift made to Princeton in 1961 was anonymous until 1973. At that point, leaders of the gift's supporting foundation agreed to be named to quell rumors that the funds had come from the Central Intelligence Agency. That story was hurting the institution's Woodrow Wilson School of Public and International Affairs, for which the gift funds had been earmarked. The school reportedly began having trouble attracting students and faculty, interfering with the good intentions behind the donation.

State-supported institutions face an additional challenge on donor anonymity, as open-records laws may require that the names of donors to government entities be disclosed. Donor agreements may have to specify that anonymity is respectedonly to the extent that the law allows.

One state, Colorado, explicitly protects the identity of unnamed givers. The University of Colorado Foundation worked with legislators in that state to pass House Bill 1041 in 2005. It clarifies what information must be disclosed by a private foundation related to a state-supported institution. Donor anonymity is protected and proprietary fundraising information is sheltered, while the information needed to assure accountability to Colorado's citizens remains available.