Unless you are an endowment donor, you probably have no idea what generational equity is all about. When a donor makes an endowment gift to a charity, the donor has two purposes. One is to provide the organization with funds today and the other is to continue providing funds long into the future. As a matter of fact, an endowment gift is expected to continue on in perpetuity – i.e., forever; unless there is a provision in the gift for some endowment term other than perpetual.

The endowment donor’s intention is to provide the charity with some income today and an investment that will produce income each year in the future. Generational equity is the concept that aims at providing that future stream of income in an amount that is as valuable in the future as the current income is today. One of the best ways of demonstrating generational equity is to discuss the restricted endowment gift.

Donors may make endowment gifts where the income each year is available for any current operating purpose. This is generally referred to as an unrestricted endowment contribution. Donors may also make an endowment gift where the income each year is restricted to a specific purpose – known as the restricted endowment gift.

Here’s an example. I might make a restricted endowment gift to my university in the amount of $100,000 with the income restricted to the purchase of business books for the library. Using the university’s endowment spending policy of 4% in the first year, my gift will provide the university with $4,000 that they should spend on business books for the library. If we assume that library editions of these books average $200 each, the university would be able to purchase 20 books.

Next year, under the concept of generational equity, I would like the university to again be able to purchase 20 books. However since the price of library editions increased to $206 each, the university would need $4,120 to purchase 20 books. Since the university’s endowment spending policy is 4%, they would need an investment of $103,000 to generate the $4,120 needed to purchase the 20 books required by my restricted gift.

How is the university going to accomplish this? What they need to do is to invest my $100,000 initial gift in such a way that they not only generate the 4% needed to pay for books each year, but receive a greater return than the current cost in order to generate additional investment income in the future.

In our simplified example above, a 7% return in the first year would have not only produced the $4,000 needed to purchase 20 books at $200 each, but it would also have increased the investment balance to $103,000. The 7% return produced $7,000 of total return, of which only $4,000 was withdrawn to purchase books, leaving $3,000 that was added to the $100,000 and invested for the future.

In a perfect world where the investment returns are consistent and the rate of inflation in the cost of books is equally consistent, my one-time restricted endowment gift continues to provide the university with the ability to purchase 20 new business books for the library every year. Even 100 years (4 generations) from now, when books cost $700 each, the concept of generational equity will provide the investment income sufficient for the university ($14,000) to purchase those 20 business library books.

Of course, this is not a perfect world; inflation rates and investment returns may not behave according to plan, but conceptually generational equity is the goal. Minor corrections may have to be made from time-to-time to continue to focus on the donor’s intention when the gift was first received.

Generational equity has not been achieved if 100 years from now, my endowment gift is still producing only $4,000 per year and the university which would only provide enough money for the library to purchase less than 7 books for the library.