the future of community foundations: the next decade - … · 2006-02-24 · the future of...
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The Future of Community Foundations: The Next Decade
Prepared for
John S. and James L. Knight FoundationJuly 7, 2005
Foundation Strategy Group, LLC
20 Park Plaza 50 California Street Blvd. Georges-Favon 6Suite 1127 Suite 3165 P.O. Box 5702Boston, MA 02116 San Francisco, CA 94114 1211 Geneva 11U.S.A. U.S.A. SwitzerlandTel: 617-357-4000 Tel: 415-397-8500 Tel +41.22.807.24.82
www.foundationstrategy.com
© Foundation Strategy Group, LLC2Knight Foundation – 7/7/05 - MRK
1. Community Foundations have a sustainable economic model
2. The more we grow the easier it will be to balance our budget
3. Any fund is a good fund – regardless of size, type or customization
4. Community Foundations can only be compared by asset size
5. Community Foundation success depends on growing Donor Advised Funds (DAFs)
6. Community Foundations can compete with commercial gift funds by offering donor advice and better service
Many Community Foundations Operate Under A Set of Six Prevailing Myths
© Foundation Strategy Group, LLC3Knight Foundation – 7/7/05 - MRK
1. Community Foundations have a sustainable economic modelThere is a fundamental mismatch between CFcosts and revenues69% of CFs cannot cover costs from traditional fees alone39% of CFs had a deficit -- after all sources of income -- in at least one of the last five years
2. The more we grow the easier it will be to balance our budgetThe likelihood of a deficit increases with size up to $250 million in assets
3. Any fund is a good fund – regardless of size, type or customizationAt least 2/3 of all funds typically cost more than the revenues they generateFunds that are unimportant to the foundation’s mission are often subsidized by scarce operating dollarsAccount customization, product variations, discounted fees, and small funds are the major factors behind excessive costs
FSG’s Research Disproves these Prevailing Myths
© Foundation Strategy Group, LLC4Knight Foundation – 7/7/05 - MRK
4. Community Foundations can only be compared by asset sizeCFs perform a similar set of 87 basic activitiesSimilarities are driven more by product mix rather than asset sizeSmall foundations may be more cost efficient than large ones
5. Community Foundation success depends on growing Donor Advised Funds (DAFs)
There are many different models for CF successThe likelihood of a deficit increases with the percent and growth rate of DAFs
6. Community Foundations can compete with commercial gift funds by offering donor advice and better service
Donors are price sensitive – they rarely want and are even more rarely willing to pay for philanthropic adviceCommercial funds have an overwhelming competitive advantage on cost, technology and marketing – which most CFs cannot match
FSG’s Research Disproves these Prevailing Myths
© Foundation Strategy Group, LLC5Knight Foundation – 7/7/05 - MRK
Lower tax rates
Rising interest rates
More competition
Greater reliance on technology
Expanding social needs
New Trends Portend Increasing Pressures on Community Foundation Sustainability
© Foundation Strategy Group, LLC6Knight Foundation – 7/7/05 - MRK
Competition will drive differentiation
Community foundations will increasingly specialize in order to compete in their local markets and demonstrate their value
Slower growth will drive efficiency and, in some instances, consolidation
Fewer new community foundations will be started
Cost pressures may drive smaller foundations to partner with each other or larger foundations
Sharing the most efficient practices will be essential
The Impact of These Trends Will Drive Continued Change in the Field
Smaller foundations may be more dependent on national services because they cannot afford to offer them on their own
© Foundation Strategy Group, LLC7Knight Foundation – 7/7/05 - MRK
Community foundations would
gain efficiency benefits from
nationalizing …
Investment management of
pooled funds
DAF administration, grant
processing and back office
support
Marketing research & materials
… But there are also strong reasons to keep these activities local
Investment links to trustee banksLocal investment advisors who refer donorsBuilding close relationships with donors Leveraging knowledge of the nonprofit communityLocal donor development activitiesTargeted marketing materials that appeal to local constituencies
The Drive for Efficiency Will Encourage Consolidation, Yet Be Offset by the Advantages of Local Relationships
© Foundation Strategy Group, LLC8Knight Foundation – 7/7/05 - MRK
Value Propositions State of the Field
Three Value Propositions for Community Foundations Have Emerged offering Different Degrees of Comparative Advantage
CF’s Comparative Advantage
Efficient vehicle for implementing charity
Knowledgeable advisor in guiding donor contributions
Change agent in the community (i.e.,community leadership)
Significant area of investment and progress
Receiving more attention recently but still a low area of CF investmentBroad donor willingness to pay remains questionable
Underinvested in to dateConstrained by the existing revenue model
Low
Medium
High
© Foundation Strategy Group, LLC9Knight Foundation – 7/7/05 - MRK
CFs Will Need to Tap into Alternative Sources of Revenue to Subsidize Community Leadership Activities
• Community Leadership Contributions
• Self Administered Grants
• Grants from Others
• Endowed Operating Funds
• Alternative Fee Structures
© Foundation Strategy Group, LLC10Knight Foundation – 7/7/05 - MRK
From 2005
Small area of CF investment– 0-10% of costs
Supported by fee-based revenue streams
Extension of unrestricted grantmaking
Intentionally non-competitive with local nonprofits
Limited source of CF differentiation
To 2015
Significant area of investment– 10-25% of costs
Self-funded by operating contributions
Discrete and often not dependent on grantmaking activity
Supporting, but also raising funds alongside local nonprofits
Primary source of CF differentiation
The Most Profound Shift in the CF Field Over the Next Decade May Be a Consequence of the Greater Emphasis on
Community Leadership
© Foundation Strategy Group, LLC11Knight Foundation – 7/7/05 - MRK
Question and Answer Discussion
© Foundation Strategy Group, LLC12Knight Foundation – 7/7/05 - MRK
Achieving Community Impact
Community Foundations can create value in many ways beyond their grantmaking
• Using communications tools to achieve program goalsStrategic
Communications
• Educating citizens and legislators• Polling and research reports• Influencing legislation• Working with policy makers behind the
scenes
Influencing Public Policy
• Engaging donors• Building knowledge of social Issues and local
nonprofits• Capacity building for nonprofits• Social investing
Non-GrantmakingInitiatives
© Foundation Strategy Group, LLC13Knight Foundation – 7/7/05 - MRKSource: FSG Interviews with Community Foundations
More Involved Donors Want Opportunities for Leadership and The Ability to Set a Larger Agenda
Personalizing relationships, the ultimate goal of tailored offerings, leads to stronger and better defined donor interaction
More Engaged Donors’ Needs
• Leadership opportunities in priority interest areas
• Matching funds for signature projects
• Opportunities to come to the table with others working for common goals
• Participation in setting the agenda for the community
© Foundation Strategy Group, LLC14Knight Foundation – 7/7/05 - MRK
Meaningful Volunteer Opportunities Are A Key Way to Provide Value to Current and Prospective Donors
Unlike most nonprofit organizations, community foundations rarely involve donors as volunteers
• Allows donors to meet others with similar interests
• Builds a donors’ level of knowledge about and commitment to philanthropy
• Creates opportunities for Foundation staff to collaborate with local leaders
• Enables the Foundation to capitalize on the knowledge in the community, aligning the interests of volunteers and the Foundation
• Connects most engaged donors with the resources of the Foundation
© Foundation Strategy Group, LLC15Knight Foundation – 7/7/05 - MRK
Baton Rouge’s Philanthropic Development Committee Incubates New Ideas To Advance the Practice of Local Leaders
“Leadership for us is expressed by people who come up with great ideas and have the energy to make it happen.
We incubate leadership ideas, and chase the best ones.”
--John Davies, Baton Rouge Area Foundation
Source: FSG Interviews with Community Foundations.
Locate LeadersIncubate
Leadership Projects
Build Network of
Leaders
Expand Circle of Support
Spread Best Practices
© Foundation Strategy Group, LLC16Knight Foundation – 7/7/05 - MRK
Community Foundations Can Conduct Thorough Research on All Aspects of the Region’s Well-Being
Knight Foundation’s indicators project has brought similar knowledge into its communities
© Foundation Strategy Group, LLC17Knight Foundation – 7/7/05 - MRK
Kansas City maintains “Donors’ Edge” -- an online database of more than 500 local nonprofit organizations that offers performance assessments on program impact, management, governance, and financial soundness
Arizona developed Dot.Che, a searchable database of nonprofits, now used by Triangle and several other community foundations
– This permits customized email lists to donors based on their interests, and instant donor profiles
– Donors have used the facility for several million dollars of online donations directly to nonprofits
– This also serves as a peer-to-peer communication tool for donors –organizing them around issues, and issuing challenge grants to each other
Community Foundations Are Creating Online Resources aboutLocal Nonprofits to Assist, Inform and Connect Their Donors
© Foundation Strategy Group, LLC18Knight Foundation – 7/7/05 - MRK
Hartford’s Non-Profit Support Program Improves Its Grantees’Performance and Resonates Well With Donors
“In conversations with donors, the fact that we have a well developed program that helps ensure the non-profit sector is well-managed resonates well.”
--Michael Bangser, The Hartford Foundation for Charitable Giving
Source: FSG Interviews with Community Foundations; Hartford Foundation for Charitable Giving website.
Non-Profit Support Program
Technical Assistance
Knowledge Sharing
Learning Opportunities Loans
• Organizational assessments and technical assistance grants to identify capability needs and gaps
• Newsletter and peer support
• Non-profit financial management and mini-MBA educational series
• Low-interest loans of up to $75,000
© Foundation Strategy Group, LLC19Knight Foundation – 7/7/05 - MRK
Kalamazoo’s Program Related Investments Revitalize the Community and Regenerate the Circle of Wealth
Kalamazoo now has 11% of its unrestricted endowment assets in mission-related investments
Source: FSG Interviews with Community Foundations
$4.7 Million Loan Pool for
Downtown Revitalization Program
Related Investments To
Build An Entrepreneurial
Climate Loan Guarantees for Home Ownership Program
Investments to Bring Venture Capital Firm to
Kalamazoo
Development of “The Innovation
Center”
“We see part of our role as finding non-traditional ways to build up the community, to have a long-term effect.”
© Foundation Strategy Group, LLC20Knight Foundation – 7/7/05 - MRK
The New Hampshire Community Foundation has led statewide efforts to influence policy and legislation – despite a political environment that was hostile to activist intervention
– Negotiating the deregulation of public utilities
– Leading the development of a long range plan for the state's transportation system
– Changing the state's laws and stance governing how it treats alcohol, tobacco and drug abuse
– Drafting legislation that governs conflicts of interest among nonprofit Trustees
– Creating programs that in five years doubled the protected land in the entire state
As a Public Charity, Community Foundations Are Legally Permitted to Take an Active Hand in Influencing Legislation and Political Policies
One public charity spent $90k in lobbying fees to pass a $4 million bill
© Foundation Strategy Group, LLC21Knight Foundation – 7/7/05 - MRK
Foundations Are Increasingly Using Communications to Achieve Changes in Awareness, Attitude, and Behavior that Advance Goals
“We’re using the power of communications to accomplish our social goals, just like any corporation uses advertising to accomplish its economic goals.”
– Stuart Schear, Robert Wood Johnson
Inform and Advance the
Dialogue
Creating Value Help Grantees
Achieve GoalsInfluence Behavior
Source: FSG Interviews
© Foundation Strategy Group, LLC22Knight Foundation – 7/7/05 - MRK
There are many different models for successBuilding unrestricted endowment and charging a 1% fee is not the answer for every community foundationFoundations are learning from each other about alternative sources of revenue, ways to increase efficiency, and strategies for creating impact Foundations must be more selective about which products they offer
The competitive advantage of community foundations lies in their ability toEngage donors in their workAchieve impact in their communitiesCreate value in ways that only community foundations are positioned to achieve
Ultimately, a Community Foundation’s success will depend on its strategic focus and operational alignment
The Potential of Community Foundations Has Only Begun to Be Seen
© Foundation Strategy Group, LLC23Knight Foundation – 7/7/05 - MRK
Question and Answer Discussion
© Foundation Strategy Group, LLC24Knight Foundation – 7/7/05 - MRK
Background Data
© Foundation Strategy Group, LLC25Knight Foundation – 7/7/05 - MRK
39%
69%
0% 20% 40% 60% 80% 100%
Unable to cover operating costs in each of the last five years from traditional revenue sources (i.e.,fees and operating endowments alone)
Operated with a budget deficitin at least one of the last five years after all sources of revenue (excluding operating reserves and self-administered grants)
COF/FSG 2005 Survey of Community Foundation CEOs and CFOs – 246 RespondentsWhich statements accurately characterize the finances of your foundation?...
Source: February 2005 Survey of CF CEOs and CFOs, Sponsored by the COF Community Foundations Leadership Team, Conducted by FSG
Recent FSG Research Has Found Serious Challenges to Community Foundation Sustainability
© Foundation Strategy Group, LLC26Knight Foundation – 7/7/05 - MRK
$0-$
4.9M
$5-$
9.9M
$10-
$24.
9M
$25-
$49.
9M
$50-
$99.
9M
$100
-$24
9.9M
$250
M-$
499.
9M
$500
M+
0%
20%
40%
60%
COF/FSG 2005 Survey of Community Foundation CEOs and CFOs – 246 Respondents
The Frequency of Budget Deficits Tends to Increase as Foundations Grow in Assets Up to $250 Million
Source: February 2005 Survey of CF CEOs and CFOs, Sponsored by the COF Community Foundations Leadership Team, Conducted by FSG
Operated with budget deficits in one or more of the last 5 years (before using operating reserves
or self-administered grants)
Percent of Respondents
The costs of growth frequently exceed the increase in fees –for many small foundations, things may get worse before they get better
© Foundation Strategy Group, LLC27Knight Foundation – 7/7/05 - MRK
$0-$
4.9M
$5-$
9.9M
$10-
$24.
9M
$25-
$49.
9M
$50-
$99.
9M
$100
-$24
9.9M
$250
M-$
499.
9M
$500
M+
0%
20%
40%
60%
COF/FSG 2005 Survey of Community Foundation CEOs and CFOs – 246 Respondents
Smaller CFs Are More Likely to Generate Revenue from Sources Other Than Fees, Including Donors and Other Foundations
Source: February 2005 Survey of CF CEOs and CFOs, Sponsored by the COF Community Foundations Leadership Team, Conducted by FSG
Percent of Respondents
Generate more than 20% of operating revenue from sources other than fee
revenue and operating endowment funds.
Unlike foundations with a broader base of assets, the operating model of the smallest foundations may be unable to sustain operations on fees alone
© Foundation Strategy Group, LLC28Knight Foundation – 7/7/05 - MRK
41%46%
50%
68%
33%
34%36%36%
0%
20%
40%
60%
80%
Unrestricted & FOIFunds
Donor AdvisedFunds
Non-Endowed Funds Rapidly IncreasingNon-Endowed Funds
COF/FSG 2005 Survey of Community Foundation CEOs and CFOs – 246 Respondents Operated with budget deficits in one or more of the last 5 years (before tapping into operating
reserves or receiving internal grants to cover the deficit)…?
Foundations with Large Percentages of DAFs or Non-Endowed Funds Experience Greater Difficulty Covering Operating Expenses
Source: February 2005 Survey of CF CEOs and CFOs, Sponsored by the COF Community Foundations Leadership Team, Conducted by FSG
Over ½
DAF
Under ½
DAF
Over ½
Unrestr&
FOI
Under ½
Unrestr&
FOI
Over 1/3
Non-Endowed
Under 1/3
Non-Endowed
RapidlyGrowing
Non-Endowed
NOTRapidlyGrowing
Non-Endowed
Over 2/3 of respondent foundations with rapidly increasing portions of non-endowed funds have experienced budget deficits in the last 5 years
Percent of Respondents
Operating with Budget Deficits(last 5 years)
Average for All Respondents
39%
© Foundation Strategy Group, LLC29Knight Foundation – 7/7/05 - MRK
($28)($91)
($48)($52)($72)($99)($270)($433)($256)($298)
($564)($465)
$1,268
$247
$29
$201
$13
$164
$9 $15 $15$9$62 $27
-$800
-$600
-$400
-$200
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400C
omm
unity
Res
pons
ive
Des
igna
ted/
Agen
cy
Nei
ghbo
rhoo
dG
rant
s
Lead
ersh
ipIn
itiat
ives
Don
or A
dvis
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Sch
olar
ship
s
Cha
ritab
le G
iftA
nnui
ties
Def
erre
d G
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GLB
T In
itiativ
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Affil
iate
d Fu
nds
Foun
datio
nP
rogr
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ctiv
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Cap
ital/
Pas
sTh
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hC
ampa
igns
Revenue ($000s)Cost ($000s)
Total Cost and Revenue by Product ($000s)Example Kalamazoo Community Foundation
For Each Foundation, Analysis of Cost and Revenue by Product Reveals Which Products Generate a Contribution or Require a Subsidy
Note: Revenue includes Administrative Fee Revenue (including 1% fee for Community Responsive funds), Operating Fund, Interest Earned on Checking, Grants and Sponsorships, and Spendable Gifts – Does not Include Internal Grants for Neighborhood Grants Program, GLBT, and dues for COF, CFA & CMF ($61,942)
Source: FSG Analysis of Kalamazoo Community Foundation Staff Surveys and Operating Expenses – 2002 Data
Contribution Generated or Subsidy Required($268)$804 ($37) ($33)($241) ($90)($316) ($63)($107)($232) ($29) ($1)
© Foundation Strategy Group, LLC30Knight Foundation – 7/7/05 - MRK
15% 21% 23% 18%25% 22%
32%12%
12%
12%17%
13% 17%15%
18%17%
18%28%27%
22%15%
18% 17%15%
21% 25% 17%15% 11%
36% 26%33% 26%
36% 35%38%
23% 26% 33% 27% 31%
8%15%
5%11% 11% 10% 14% 13% 11%
5% 8% 8%
24%21% 25%28% 32%
27%20%
0%
20%
40%
60%
80%
100%
Cle
vela
nd
San
Fra
ncis
co
Col
umbu
s
Milw
auke
e
Ariz
ona
Car
olin
as
New
Ham
pshi
re
Kal
amaz
oo
Phi
lade
lphi
a
Ver
mon
t
Ber
kshi
reTa
coni
c
Riv
ersi
de
Providing Non-Grant Services tothe NonprofitCommunity
Other StaffActivities(adjusted for paidtime off)
Making Grants
Maintaining Funds
Acquiring NewFunds and Gifts
Foundation Costs by Type of Activity
Note: Providing Non-Grant Services to the Community includes holding and attending events or convening constituencies in the community, defining and participating in community initiatives, conducting or producing research, providing capacity building services to nonprofit agencies, supporting endowment building efforts of nonprofit agencies, providing fundraising or fiscal agent services, participating in philanthropicassociations/organizations/board committees, including attending and presenting at conferences
Source: FSG analysis
Community Foundations Currently Devote Limited Resources to Community Leadership Outside of Making Grants
© Foundation Strategy Group, LLC31Knight Foundation – 7/7/05 - MRK
Source: FSG analysis; organization 990-PFs; Chronicle of Philanthropy Survey of Donor-Advised Funds, May 2004
Assets per Fund
Community Foundation Products and Donor-Advised Fund AlternativesGrants as a % of Assets vs. Assets per Fund, 2003
Valu
e of
Gra
nts
as a
% o
f Ass
ets
National Philanthropic
Trust18%
Fidelity Charitable Gift
Fund24%
Schwab28%
Tides Foundation
36%
Rockefeller Philanthropy
Advisors47%
Major Jewish Federations
23%
Lower “Mass Market”Asset Values, Pass Through
Emphasis
Higher Asset Values,
Grantmaking Emphasis
ModerateAsset Values,
Endowment Emphasis
Highest Asset Values,
Endowment Emphasis
Average CF in Sample
15%
The Beginnings of Differentiation Based on Serving Unique Donor Segments Is in Evidence Today
0%
10%
20%
30%
40%
50%
$0 $250,000 $500,000 $750,000 $1,000,000