A duty of perpetual care A process to forecast the financial need for meeting perpetual obligations

Objectives Explain financial modeling from a 30,000 foot level Further the conversation about what is needed ($) to ensure perpetuity Encourage widespread adoption of forecasting

Definitions Behavioral Finance – A field of finance that proposes psychology-based theories to explain market anomalies. Discovery - The process of disclosure whereby the organization provides essential information that the analyst requires to build the model/forecast. Real Rate of Return – The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. Nominal Rate of Return - The amount of money generated by investments before expenses such as taxes, investment fees and inflation are factored in.

Definitions – cont. Internal Inflation Rate -The increase in the cost of doing business to the organization over a specific time period. Rebalancing - The process of realigning the weightings of an organization’s portfolio of assets. Duty of Perpetual Care - The obligations that an organization assumes in caring for perpetual obligations. In the conservation world these obligations typically include annual monitoring, prescriptive management requirements as provided in the deed of conservation easement, etc.

Obligations under law Section 1.170A-14(a): To be eligible for a deduction under this section, the conservation purpose must be protected in perpetuity. Section 1.170A-14(c)(1): To be considered an eligible donee under this section, an organization must be a qualified organization, have a commitment to protect the conservation purposes of the donation, and have the resources to enforce the restrictions.

Currently, the most common method of planning for perpetuity is… Where we need to be as organizations and a community…

Why Model? To achieve… To avoid… Increase the probability of success Increase stakeholder confidence Increase fundraising

Transition to mS Slides

Case Study – Colorado cattlemen’s (CCALT) Endowment: $2.45M Goal: 7% Return (this is a 5% real rate of return) 319 conservation easements $16,000 contribution/easement (2014 ) $11,000 contribution/easement (2009-2013) $160,000 in stewardship costs/year $501/easement Is $2.45M enough to fulfill our perpetual obligations?

Initial forecast Results: 2024: CCALT begins to eat into the principal of the stewardship fund 2042: CCALT would utilize its entire endowment Investment policy may be too restrictive to achieve goals Current portfolio has potential to underperform

Recommendations Have $10M in the Stewardship Fund by 2032 Increase the per transaction Stewardship Fund Contribution Develop a plan to fundraise for potential Stewardship Fund shortfalls Continue to track progress Adjust Risk Profile Consider increasing fund draw to match costs Consider one advisor

CCALT’s Response Increased per transaction stewardship fund contribution to $16,000 (up from $11K) Developed a plan for analyzing our situation and making adjustments on a consistent basis (review annually) Review and revise investment policy

Revised forecast w/ scenarios

Takeaways Conservation Organizations … Must identify and understand financial metrics as they relate to meeting perpetual obligations Should ask for help Need to start modeling their financial needs Modeling must be done on a consistent & regular basis Need to develop a goal-based investment policy Need to be transparent with stakeholders (understand and talk about our unfunded liabilities) Need to diversify stewardship revenue streams

A simple way to forecast stewardship contribution needs A perpetuity equation Limitations Needs: Cost of stewardship per easement Investment return goal Equation: Stewardship Contribution = Cost of stewardship per easement/investment rate of return goal Example (CCALT): $501 per easement/4% = $12,525 Assumes no growth in expenses Assumes that desired rate of return is achievable Does not necessarily factor in cost of enforcement (which is why Terrafirma and legal defense funds are so important)

Questions?