Disrupting Philanthropy

Community foundations are here for good — but are they here to stay?

Back Article Jan 25, 2018 By Dave Kempa

When an earthquake struck Napa Valley in August 2014, destroying homes and businesses, injuring 200 people and killing one, residents rallied to support their neighbors, donating almost $11 million to the Napa Valley Community Foundation.

The foundation gave $5.4 million to support almost 1,400 quake victims, $1.1 million to 23 local nonprofits providing aid and $800,000 to community preparedness services. They’ve set aside $2 million for any future natural disasters in the region.

It was a prime example of the way in which a community foundation — connected deeply to its region’s philanthropists and nonprofits — will identify an urgent local need and rally the community to action.

But is it enough?

A growing chorus believe market disruption has left the industry’s business model in jeopardy, and challenges in community outreach and attracting younger philanthropists continue to act as barriers for the modern community foundation. Do these community-based organizations have what it takes to survive and thrive in the 21st century?

The Future of Philanthropy

Community foundations often describe themselves as a region’s savings account or 401(k). They take in large funds from philanthropic donors, hold onto them in perpetuity and then distribute the money accrued on the funds to nonprofits and philanthropic efforts serving the region’s greatest needs. They differ from private foundations in both organizational structure and the tax breaks donors are eligible for on their gifts — with the added benefit that foundations often already know the biggest needs in the community.

“We live on the administrative fees that come from the funds that we hold,” says Connie Harris, CEO of the Solano Community Foundation. “That’s how we stay alive for the most part.” A fee is processed after a donation is made; community foundations try to get over a 5 percent return just to continue getting by.

The higher the returns a community foundation gets from investments with its dollars under management, the more money it can put into local philanthropic efforts. San Joaquin ranges between 6-9 percent, depending on the year. Amador reported an eight percent return in 2016.

But in the last 15 years, new technology and private investment/financial firms are offering the same service as community foundations’ most common source of income — donor-advised funds — for a fraction of the price.

A 2017 study titled “Community Foundation Business Model Disruption in the 21st Century” commissioned by the Council on Foundations, posits that community foundations have historically processed their clients’ funds through local financial advisers who typically charge about 1 percent of the managed dollars. But the industry has seen a mass shift of folks moving to online and automated financial services, some of which charge as little as .18 percent. Financial behemoths like Fidelity and Vanguard are engaged in a price war expected to benefit investors.

The smaller, local financial advising firms with knowledge of the region — which community foundations are used to working and building relationships with — simply cannot compete with the larger firms’ rates.

“The scale that they’re operating at is massive compared to a relatively small community foundation,” says Daniel Kaufman, co-founder and principal of Third Plateau Social Impact Strategies, of Sacramento. “Their market is international, most community foundations are local.” Such economies of scale make room for lower processing fees — often lower than any local firm could match.

“We’ll never compete on price, but I think that the service that we provide to donors and the connectivity to the community is why donors do use community foundations.” Veronica Blake, CEO, Placer Community Foundation

So far this market disruption has not yet fully played out. The local financial advisers and estate planners that community foundations tend to build their philanthropic relationships and business models around are still here today.

Most in the community foundation universe see the concern, though some disagree on the level of concern. They believe foundations provide something unique. “There are perhaps less expensive donor-advised funds in the commercial market,” says Veronica Blake, CEO of Placer Community Foundation, but automated financial planning services and behemoths like Fidelity and Charles Schwab know nothing of the local community. “We’ll never compete on price, but I think that the service that we provide to donors and the connectivity to the community is why donors do use community foundations,” Blake says.

This appears to be the selling point for most of the nation’s community foundations. They know their regions’ strengths and weaknesses better than anyone else, and they are uniquely placed to address those weaknesses.

“Every community foundation is just a little bit different,” says Linda Philipp of the San Joaquin Community Foundation. “We all focus on the individual needs of our communities.” Philipp says the San Joaquin Community Foundation, founded in 2012, spent its first five years on education and outreach, and it’s only now finally paying off. “People are starting to get the idea now, so we really have experienced some tremendous growth over the last couple years,” she says.

The Solano Community Foundation, for instance, focuses on education — third-grade reading and ninth-grade math in particular, known as “bottleneck years” that can affect learning in those subjects long after. In Placer County, the foundation is rallying community support for affordable housing. The Amador Community Foundation recently spearheaded a campaign to save a homeless shelter whose shuttering would have put 38 residents on the streets.

Most of the region’s community foundations report confidence in the future, so long as awareness is increased. Often, says Kathleen Harmon of the Amador Community Foundation, “people have no idea what a community foundation does.”

Strangers In Town

An international firm doesn’t know what the local issues are, Philipp says. “They’re not going to make those connections for people,” she says. “They’re just the vehicle only. We’re so much more.”

In the same way that each community’s needs are unique, every foundation is at its own stage in monetary and community development.

At a recent gathering, California’s community foundations self-reported that dollars under management ranged from $8.2 billion at the Silicon Valley Community Foundation — which recently took in half a billion dollars from Facebook’s Mark Zuckerberg — to “under $10 million” at the state’s smallest foundations. San Joaquin and Placer reported $12 million and $14.5 million, respectively. Sacramento Regional Community Foundation was just over $125 million.

Once a community foundation has funds, it can theoretically hold onto them forever. But if they want to continue to experience growth, these groups need to keep younger residents in their regions giving, engaged and onboard with the community foundation concept. Often that involves young people donating in smaller amounts, so they can get to know and appreciate the work these foundations do over time. The more points of contact between a community foundation and young folks who want to give back, the logic goes, the better the chance of building a lasting relationship.

One way to maximize engagement is the one-off fundraising event, such as Giving Tuesday or the Big Day of Giving. Last year, Amador raised $110,000 on Giving Tuesday, with all 26 participating regional nonprofits reporting new donors.

Other foundations seek youth in leadership roles. “We recognize that the future is in that next generation,” Philipp says. “What we have done is added new board members who are younger and who represent that next generation coming in.” Philipp is retiring as head of the San Joaquin Community Foundation later this year. Her successor is just 36 years old.

And then there’s the challenge of fostering a culture of giving.

Historically, according to Harris, Solano County has the lowest per capita rate of giving in the Bay Area. Just last year the county’s largest source of giving — the Frank H. and Eva B. Buck Foundation — folded, leaving the Solano Community Foundation as the largest grantmaker in the county, and not before leaving the community foundation some of its grant money. A new fund could mean the world to the county’s 600 nonprofits.

The modern community foundation’s strongest value sell is its role as the nexus between do-gooder organizations and folks who want to see their money go back into the community. But in a time of diverse challenges, how should it look to the future?

“I think there’s a golden opportunity for community foundations moving forward,” says Kaufman, of Third Plateau. “They sit at the intersection between the philanthropic community and the nonprofit community, and if they strategically collect data from both sides they can very smartly and efficiently move philanthropic capital to the needs of the community.” ν

This story is part of the 22nd annual Capital Region Cares, Comstock’s special publication dedicated to nonprofits and charitable giving. You can order the 2017-2018 edition online here. To submit your nonprofit success story for consideration in next year’s edition, fill out this online form.