The Case Against Community Foundations

05 Jul The Case Against Community Foundations

5 July 2022

By David Allen, Development for Conservation

Many nonprofit conservation organizations have their long-term stewardship funds invested through a local community foundation. And why not?

• Community foundations are usually conservative in their investments, but they are very good at it – often getting better returns than the land trust would be able to do alone.
• Community foundations are populated by staff and volunteers highly skilled at major gift fundraising – deeply listening, working hard to fully understand the needs of the land trust client, handling questions and objections, and quelling fears.
• And they provide juicy incentives. “If you set up your endowment with the community foundation, we will match your deposited funds with and additional 50%, so your $100,000 campaign results in a $150,000 endowment.”

What’s not to like about that?

Well, maybe more than we want to look at – like the fine print.

Let’s start by keeping the end in mind. The purpose of land trust endowments is that they provide “forever” funding for stewardship and monitoring AND even allow the core organization to dissolve and pass the “forever” funding to the entity or entities taking over those responsibilities. Maybe the preserves and easements transfer to another entity as a group, but maybe not. Teasing apart how much of the overall endowment actually goes with each preserve or easement could be tricky.

Land trust stewardship endowment programs need to anticipate that this might be an issue.

Also, comingling stewardship endowments for multiple properties makes sense for most land trusts, because expenses necessary for any given property will not be uniform over time. Some years you might need a little more; some years a little less. What might be needed in any given year will be related to what the land is doing; not to what the market is doing.

Land trust stewardship endowment programs need to anticipate that this might be an issue.

And then there’s the IRS definition of “endowment.” An endowment is a fund permanently restricted by the donor. Unrestricted funding can be treated as an endowment (for example a “Board-restricted” fund) but can’t be called an endowment. In our comingling, we often mix in Board-restricted funds with donor-restricted funds, which works great for us. But what happens when those funds are committed to the community foundation? In many cases, they all become irreversibly treated as if they were donor-restricted.

Land trust stewardship endowment programs need to anticipate that this might be an issue.

For the record, I have never heard of a community foundation abusing their fundamental donor relationships, including those with land trusts. And I have been reassured time and again by community foundation representatives that the stuff I worry about will never happen. But when I ask to see it as a part of a legal agreement, it’s not ever there.

And standing next to perpetuity, I am impossibly young.

“Don’t worry,” says the barber, shears in hand. “You’re going to look great!”

So what – specifically – am I worried about? Three things:

1. That the funding would not follow the land if the land trust were to ever dissolve. If another land trust took responsibility for stewarding the fee and easement properties, would they automatically also receive the funding to do so? What if they only took responsibility for one? Or several? Would appropriate amounts follow the stewarded land to each of the transferred entities?
2. That the land trust is giving Board-designated money to the community foundation that it can’t get back. At least theoretically, if the Board accepts unrestricted money, it can decide to use it in a restricted way. And if, at some point in the future, it needs that money for something else, it can revise its decision. I am convinced that a community foundation would probably grant that money back to the land trust if asked, but it would not be compelled to do so, and there is no legal recourse if the decision was no.
3. That 50 years from now, different people would make different decisions. In 50 years, no one at the land trust and no one at the community foundation will still be in their current seats. Can we count on those who follow to always make the same decisions we would have made? History would suggest not. And yet the land trust obligation is about perpetuity. If we can’t be certain about 50 years from now, how confident can we be about perpetuity?

I will also admit that it rankles me a bit to participate in raising money for other nonprofits. I realize that there is a time and a place for everything, but to actively raise money for our mission and then give it away to a community foundation still bothers me. And just so we’re clear on that point, ask your CPA whether money conveyed to the community foundation still belongs on your balance sheet. The answer is most often No. Bottom line = money conveyed to a community foundation no longer belongs to you.

So – here’s what I recommend to anyone who will listen. Invest some amount, on the order of $25,000 or so, in your local community foundation. You want to do this because you want the land trust to be visible in the community foundation’s materials. Community foundation donors may very well see your account and donate to it directly as a result. That would be a good thing.

Be very careful when conveying donor-restricted endowment funding to a community foundation and either request land trust directed severability or establish independent accounts for each preserve. This will be cumbersome, but may be a critically important detail if the worst were to ever happen.

I cannot and do not recommend conveying unrestricted or Board-restricted funds to a community foundation unless you can be assured in a legally binding agreement that you will be able to access any and all of those funds if you need them for something else.

I am neither an attorney nor a CPA, and I cannot provide legal advice. I am also not a community foundation expert. But I have read a number of community foundation agreements, and so far, I have only been impressed that they work great for the foundation.

It’s in the fine print.

Cheers, and Have a great week!

-da

PS: Your comments on these posts are welcomed and warmly requested. If you have not posted a comment before, or if you are using a new email address, please know that there may be a delay in seeing your posted comment. That’s my SPAM defense at work. I approve all comments as soon as I am able during the day.

Photo by urformat courtesy of Pixabay.