A SIGNATURE PROGRAM OF INDIANA GRANTMAKERS ALLIANCE

1. A SIGNATURE PROGRAM OF INDIANA GRANTMAKERS ALLIANCE

2. 2013 BOOT CAMP

3. Community Foundation Boot Camp Unit 4Operational Sustainability

4. 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 • It’s not an accident – It’s a Decision 8

5. 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 • Percentage of fund value • Percentage based upon total gifts • Percentage based upon total disbursements • Minimum transaction fee

6. 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 10

7. The Big Myth About CommunityFoundation Sustainability Sustainability is NOT Determined by Asset Size It’s All About Asset Mix Asset Mix = Number, Type and Size of Funds

8. Asset – Expense Mismatch Total Assets Revenue Asset Mix Workload Expenses

9. 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% 13

10. Sample Fund Analysis Chart Assumptions: each fully loaded staff hour = $50; each fund has a 1% fee 14

11. 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 11

12. 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

13. Sustainability Formula Sustainable Revenue Operating Expense “Sustainability Number”

15. 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

16. 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. 24

17. 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 25

18. 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

19. 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

20. Ideas • Revenue Sources cont. • Diversify the fee structure to include other types of fees beyond asset fees • 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 • 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. 28

21. 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 29

22. The Balancing Act • Meeting individual donor expectations • 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

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