GIFT Boot Camp Unit 5 - Operational Sustainability

Report
A SIGNATURE PROGRAM OF
INDIANA GRANTMAKERS ALLIANCE
COMMUNITY FOUNDATION BOOT CAMP
UNIT 5
OPERATIONAL SUSTAINABILITY
SUSTAINABILITY IS…
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
REVENUE SOURCES
Administrative Fees
 Community foundation’s main source of income
 Normally, a percentage of the market value of endowment
funds
 Normally, calculated on a quarterly basis
 Non permanent fees are calculated in various ways
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Percentage of fund value
Percentage based upon total gifts
Percentage based upon total disbursements
Minimum transaction fee
REVENUE SOURCES
BEST
 Administrative Fees on Endowed Funds
 Payout from Operating Endowment
GOOD
 Administrative Fees from Pass-through Funds
 Annual fundraising for Operating Funds
NOT SO GOOD
 Grant from Unrestricted Fund
 Draw on Operating Reserve
THE BIG MYTH ABOUT COMMUNITY
FOUNDATION SUSTAINABILITY
ASSET MIX = NUMBER, TYPE AND SIZE OF FUNDS
ASSET – EXPENSE MISMATCH
THINK OF FUND TYPES AS DIFFERENT “PRODUCTS.” WHICH TYPES OF
FUNDS (“PRODUCTS”) HAVE THE LARGEST WORKLOAD?
 Scholarship Funds – law governing scholarship is very specific; you need to accept
applications, manage a selection process; involves working with schools, individual applicants
 Unrestricted Funds – Managing a competitive grant process requires reviewing proposals,
site visits, committee process and reporting
 Community Project Funds – generally lots of transactions because of small gifts; can involve
more reporting if CF takes expenditure responsibility
 Field-of-Interest Funds – variable workload depending on purpose, process
 Donor Advised Funds – some donors require a lot of attention; some make lots of small
grants
 Agency Endowment 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
 Designated Funds – generally involves cutting one check annually
So, workload varies dramatically by fund type; fees generally are 1-2%
SAMPLE FUND ANALYSIS CHART
Assumptions: each fully loaded staff hour = $50; each fund has a 1% fee
Fund
Donor Advised
Assets
Fee
Cost
Situation
$20,000
$200
$5,000
$50
$300,000
$3,000
$25,000
$250
Donor gives most of payout to her church
Field of Interest
$12,000
$120
Scholarship
$40,000
$400
Lots of small gifts requiring gift entry and acknowledgment
letters; requires staff time to determine best use of fund
Committee process to award scholarship
Agency endowment
$10,000
$100
One check per year
Designated
$15,000
$150
One check per year
Agency endowment
$30,000
$300
$2,000
$20
Agency having financial problems and wants $$ back; lots of
meetings to address this issue
Wants to fund charitable activities of non 501c3 organizations
$50,000
$500
Scholarship
Community Fund
(unrestricted)
Donor Advised
Donor advised
Designated
Donor calls all the time asking for information on agencies
Committee process to award scholarship
2 grant rounds per year
Donor requests change of beneficiary
LET’S TALK ABOUT FEES
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 involved in managing a fund;
community foundations fee everything pretty much the same amount
 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?
 In the 1980s – 1990s there was lot of emphasis on creating different fund
types – donor advised, field-of-interest, scholarships
 In the 1990s their was an increasing emphasis on the important
leadership role community foundations can play
 The instinct in the early years of growing a foundation is to say “yes” to
everything, leading to an operational model which is not sustainable.
Over time a foundation is able to analyze which activities are manageable
which are not.
 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 FORMULA
SUSTAINABLE REVENUE
OPERATING EXPENSE
“SUSTAINABILITY NUMBER”
GIFT Community Foundation Statistics
Based on 2012 CF Insights Data Information
66 community foundations reporting*
SUSTAINABILITY STATUS OF GIFT COMMUNITY FOUNDATIONS
SUSTAINABILITY RATE
100% or more
90-99%
80-89%
70-79%
60-69%
50-59%
40-49%
30-39%
0% - 29%
NUMBER OF GIFT CFS
PERCENT OF GIFT CFS
9
12
13
8
12
5
3
4
none
14%
18%
20%
12%
18%
7%
5%
6%
NOTE: Sustainability rate is calculated by the following formula: Administrative Fee Income + Operating
Endowment Distribution Divided by Total Operating Expenses
*Affiliate community foundations were counted as one organization.
SO WHAT DO WE DO?
 As in any enterprise, there is a need for community foundations to periodically
examine practices in light of changing environment, new information, etc. Most
established community foundations have done this several times.
 A board needs to make a policy decision as to the appropriate balance of
sustainable and other revenue and make decisions that, OVER TIME, will move in
that direction
 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.
 If you have some challenges with sustainability you need to create a long term plan
to achieve sustainability
OR
 If you are currently in a sustainable situation, develop organizational decision
making structures can ensure you stay that way
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.
IDEAS
PRODUCT MIX AND SERVICES
 Understand your asset mix and its economic implications. The fully loaded cost of
administering each product can be much higher than the traditional fees charged
 Develop a clear understanding among board and staff about the purpose and
operation of each “product” and how it adds value to the community
 Learn how to say “no”; learn how to explain why you have to say “no”
 Develop “products” that work; for example, put time limits on non-productive
funds
 Prioritize some products for growth, while maintaining or de-emphasizing others
 Consider a major overhaul of scholarships – by far the most time-consuming
funds. This could include more designated funds, online application process,
transaction-based fees
 Prioritization may slow asset growth but contributes to controlling costs and
focuses staff efforts on high priority growth areas
 Leadership efforts are important, but the business model of these efforts needs to
be considered
IDEAS
FUND MANAGEMENT
 Raise fund minimums or establish minimum fees or services for products
• Each Foundation holds a large number of small funds with low total asset
values and low fee revenue
• 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 – every transaction costs money
• Grandfather in existing funds but change policies for new funds
• Standardization of systems – every exception takes more time
 Understand the economics of your pass-through and endowed funds
• Donor behavior and fund economics can vary significantly for endowed
versus pass through funds
IDEAS
FUND MANAGEMENT CONT.
 Spend time cultivating large funds
• Large funds make a dramatic difference to a product’s economics and to the
Foundation
• Foundations cultivate small funds in the hopes of a larger gift or bequest, however,
they must carefully consider the potential of many small funds to realize this hope
 Provide alternative ways to involve small donors
• For example, promote one or two specific field of interest funds or leadership
funds which are open to very small donors or experiment with a membership
model
REVENUE SOURCES
 Increase fees and tighten the pricing tiers
• In general, emerging foundations need to have higher fees than larger, more
established CFs in order to improve sustainability prospects
• Pricing tiers are too wide for some products, where most of the funds and assets
can be in funds of <$200,000
• Consider a slightly higher fee on the unrestricted funds to support community
leadership
IDEAS
REVENUE SOURCES CONT.
 Diversify the fee structure to include other types of fees beyond asset
fees
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Adjusting fee structures to account for underlying differences in products often
generates additional fee revenue
Foundations should consider different pricing structures, particularly for enhanced
services or high volume funds, which more closely align with the cost drivers for the
fund. Community project funds can have an entirely different fee structure.
 Cultivate alternative sources of revenue
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It is essential to get creative beyond administrative fees to support growth and
leadership
Build or increase your administrative endowment; you can use not only the earnings but
depending upon your policies maybe some of the growth.
Identify unrestricted or advised funds donors who might "invest" in the foundation
operations while it is seeking sustainability.
Evaluate funds that have the best possibility for immediate growth, such as agency or
designated endowments that benefit from multiple donors. Board members and other
donors may not know of an agency's endowment and would be delighted to contribute.
IDEAS
OPERATIONAL CHANGES
 Review your grant process; can you eliminate steps or reduce paperwork? (see
projectstreamline.org for great materials on this topic)
 Review your event activities to evaluate whether the net income is worth the time
and expenses involved; money saved is like more revenue.
 Consider the costs of newsletters and other marketing efforts that don't have
measurable results. Even electronic messages take staff time.
 Evaluate your services and communications with current donors. 75% of gifts to
Indiana community foundations in 2011 went into existing funds. These are likely
existing 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
STAFF RESPONSIBILITIES
 Change in leadership often brings a change in other
staff positions
 The CEO needs to determine what is best for the
organization
 Review processes and procedures
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Do away with “legacy” processes
Implement technology where possible
Streamline processes to avoid multiples “touches”
Written documentation of processes
o Ensure adequate separation of duties
o Review Management Letter prepared by external
auditors for issues identified in most recent audit
The Balancing Act
 Meeting individual donor
expectations
 Providing something for
everyone
 Being a leader in the
community
 All things to all people
 The fund STORY
 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
STAFF TIME & SUSTAINABILITY

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