Unit 7 Operational Sustainability Community Foundation Boot Camp Unit 7 Operational Sustainability Indiana Philanthropy Alliance © 2013-2018

Objectives for Unit 7 National Standards 5, 14 In this unit, participants will gain an understanding of – The business model of a community foundation

Community Foundation Models Each community foundation is a blend of strategies. The blend dramatically affects the business model. Endowment building – emphasis on unrestricted Donor-focused – donor advised funds are primary product Community leadership – focus on community change Affiliate structure – operating efficiency; frequently used in rural areas

Sustainability Is… It’s not an accident – It’s a decision The ability of a community foundation to fund its operations over time with predictable and reliable sources of income. Sustainability requires: An understanding of the “business model” of a community foundation An institutional decision making process that considers sustainability as a factor   It’s not an accident – It’s a decision

Let’s Talk About Revenue Administrative Fees Community foundation’s main source of income Normally, a percentage of the value of endowment funds Normally, calculated on a quarterly basis Non permanent fees are calculated in various ways

Best Revenue Good Revenue Not So Good Revenue Administrative fees on endowed funds Payout from operating endowment Good Revenue Administrative fees from pass-through funds Annual fundraising for operating funds   Not So Good Revenue Grant from unrestricted fund Draw on operating reserve

NOT determined by asset size Fund Mix = Number, Type and Size of Funds The Big Myth About Community Foundation Sustainability Sustainability is NOT determined by asset size It’s all about FUND MIX Fund Mix = Number, Type and Size of Funds

Asset – Expense Mismatch Total Assets Revenue Fund Mix Workload Expenses

So, workload varies dramatically by fund type; fees generally are 1-2% Funds are “Philanthropic Products” Which “Products” Have the Largest Workload? Scholarship Funds Donor Advised Funds Law governing scholarship is very specific; you need to accept applications, manage a selection process; involves working with schools, individual applicants Some donors require a lot of attention; some make lots of small grants Charitable Organization Funds Generally involves cutting one check annually; can require meeting with agency leadership periodically; can be extremely challenging if agency runs into serious financial trouble Unrestricted Funds Managing a competitive grant process requires reviewing proposals, site visits, committee process and reporting Community Project Funds Designated Funds Generally lots of transactions because of small gifts; can involve more reporting if CF takes expenditure responsibility Generally involves cutting one check annually   Field-of-Interest Funds Variable workload depending on purpose, process So, workload varies dramatically by fund type; fees generally are 1-2%

Community Leadership as a “Product” No standard source of revenue for this activity If no external funding needs to be supported by fees from funds Can provide visibility and attract donors for future Important part of the role of a community foundation Generally very time-consuming

Sample Fund Analysis Chart   Assumptions: each fully loaded staff hour = $50; each fund has a 1% fee Fund Assets Fee Cost Situation Donor Advised   $20,000 $200 Donor calls all the time asking for information on agencies Donor advised $50,000 $500 Wants to fund charitable activities of non 501c3 organizations $25,000 $250 Donor gives most of payout to her church Scholarship $5,000 $50 Committee process to award scholarship $40,000 $400 Unrestricted $300,000 $3,000 2 grant rounds per year Field of Interest $12,000 $120 Lots of small gifts requiring gift entry and acknowledgment letters; requires staff time to determine best use of fund Char. Org. endowment $30,000 $300 Agency having financial problems and wants $$ back; lots of meetings to address this issue $10,000 $100 One check per year Designated $15,000 $150 Donor requests change of beneficiary

Expense Analysis by Fund Type # Funds Total Assets Fees Staff Hours Expense* Fees Less Expenses Unrestricted Donor-advised Field of Interest Scholarship Designated Charitable Organization Community Project TOTAL *Staff hours x fully-loaded average staff hour expense (Here’s how to calculate your fully-loaded average staff hour expense. Divide your total annual budget by number of staff hours employed.)

Let’s Talk About Fees Its advantages are Its drawbacks are The 1% asset-based fee is a holdover from bank trust departments Its advantages are Donors are accustomed to paying It generates recurring revenue Its drawbacks are It is not related to the workload of managing a fund; fees are generally 1-2% It is subject to market fluctuations Revenue compared to asset base is low Some community foundation activities are not tied to assets, e.g., community leadership

How Did We Get Here? 1980s-1990s – emphasis on creating different fund types – donor advised, field-of-interest, scholarships 1990s – increasing emphasis on community leadership The instinct in the early years of growing a foundation is to say “yes” to everything 1990s – community foundations began to experience significant challenges with operating expenses 2003 – major study by FSG demonstrated the flaw in the revenue model by revealing the disconnect between assets and workload EVERY FUND HAS A STORY

Sustainability Number Sustainability Formula Sustainable Revenue Operating Expense Sustainability Number

Indiana CF Sustainability 2011 2016 Percent of expense covered by sustainable revenue Number of Indiana CFs 100%+ 13 17 90-99% 6 22 80-89% 16 70-79% 14 11 60-69% 5 50-59% 2 Under 49% 15 1 Total 73 74 Indiana aggregate of total expense covered by sustainable revenue: 2011 – 69% 2016 – 90%

Create a Sustainability Plan So What Do We Do? Community foundations need to periodically examine practices in light of changing environment, new information, etc. A board needs to: Educate itself about the drivers of the foundation’s revenue and expenses Make a commitment to sustainability and policy decisions that support it Create a Sustainability Plan

A Sustainability Plan Focuses On… Efficiency Find ways to manage more assets (that generate more revenue from fees) without increasing your operating cost (staff size). Revenue Generation Use the staff and volunteer time saved through increased efficiency and reallocate it to the staff working with the board on an intense focus on developing good assets.

Staff Time and Sustainability Increase efficiency Recapture staff time Redeploy staff time to activities that support asset building Laser-like focus on asset development

Ideas Understand your products Do an analysis of costs by fund type Develop a clear understanding about each “product” and how it adds value to the community Learn how to say “no”; explain why you have to say “no” Develop “products” that work; put time limits on non- productive funds Prioritize some products for growth, de-emphasize others. Leadership efforts are important, but the business model needs to be considered

Consider a major overhaul of scholarships This could include more designated funds, online application process, transaction-based fees Raise fund minimums or establish minimum fees or services for products Increase minimums to establish a fund. Can be different minimums for different types of funds depending of complexity of administration Establish a minimum fee, regardless of fund size. Can be different for each fund type. Establish a minimum grant size – transactions cost money Manage memorial funds

Understand the economics of your pass-through and endowed funds Pass-through funds are frequently assessed a higher fee because: We value endowed funds They are assumed to have more activity Spend time cultivating large funds Large funds make a dramatic difference to a product’s economics and to the Foundation Cultivating small funds in the hopes of a larger gift or bequest must be done judiciously

Provide alternative ways to involve small donors Promote field of interest funds or leadership funds which are open to very small donors or experiment with a membership model. Community project funds should have an entirely different fee structure Fees should be consistent with actual costs of management or consciously choose to subsidize the project. Donor education A community foundation needs to educate donors about the costs of fund management. Expenses in excess of fees must come from somewhere – the unrestricted fund, annual campaign, operating reserve.

Implementing new policies is delicate Revenue Sources Emerging foundations generally need to have higher fees than larger, more established CFs Consider a slightly higher fee on the unrestricted funds to support community leadership Consider a policy of allocating a portion of every unrestricted gift to the operating endowment Identify unrestricted or advised funds donors who might "invest" in the foundation operations while it is seeking sustainability Implementing new policies is delicate Grandfather in funds but change policies for new funds Create grace period for small funds to spend out.

Operational Changes Structural Changes Review your processes; can you eliminate steps or reduce paperwork? Standardization is important; every exception takes time Review your event activities to evaluate whether the net income is worth the time and expenses Evaluate your services and communications with current donors Structural Changes Consider entering into an affiliation or alliance Shared space with other nonprofits Combined back office It all adds up – a small change implemented rigorously over time can make a big difference

The Balancing Act Meeting individual donor expectations - the fund STORY Providing something for everyone Being a leader in the community All things to all people Providing responsible stewardship Long-term commitment to community Adding real value to community Building charitable assets for the future Creating the structure of a permanent institution

Discussion Topics Has your board ever discussed the different workload involved in managing different types of funds? What information would be helpful to you? After calculating your sustainability are you pleased? Concerned? What steps do you need to take to become more sustainable or maintain sustainability?

Resources – Sustainability Simple Sustainability Calculation Worksheet Book Recommendation: The Sustainability Mindset, Jeanne Bell et al Sustainability Costing Tool: interactive worksheets available on the CMF website: https://www.michiganfoundations.org/ You will need to set up an account to purchase from the store. Anyone can set up an account. You do not need to be a CMF member.