Bill and Melinda Gates, Community Foundations and the Challenge of Community Leadership

Community foundations across the country strive to serve as community leaders.  (In fact, according to the national standards, the definition of a community foundation includes the phrase “Serving in leadership roles on important community issues”.)  But tackling important issues can be frustrating.  Critical needs – such as workforce training, educational achievement and dealing with the opioid crisis – can, at times, elude long-term solutions.

If you are feeling exasperated by your community leadership efforts, you’re not alone.  Bill and Melinda Gates, who oversee the Gates Foundation, are also aggravated by their lack of progress in dealing with some of the world’s most intractable problems.  The vent their frustration in their most recent annual letter, which you can read here.

Keep in mind that the Gates Foundation has assets in excess of $50 billion, and last year awarded about $6 billion in grants.  Yet Bill and Melinda are discouraged by some areas where they have had little or no success.  Test scores in education don’t seem to budge. More than 2 billion people around the world lack access to a decent toilet.  And the fight to eliminate polio – a goal that looked within reach a decade ago – seems more elusive than ever.

What’s going on here?  Problems tacked by foundations generally fall into one of three categories.  Some – like creating a new vaccine – required clever analysis by a small group of knowledgeable people.  Other issues, such as providing access to sanitary toilets, are solved by mobilizing a large number of people performing specific tasks.  And a third category would be a combination of both.  Dealing with the opioid crisis, for example, may require both a breakthrough solution and a large team of workers to deliver that treatment.

Sometimes a problem might start out in one direction, then veer down a totally unexpected path.  When the Gates Foundation first began to fight malaria, they thought the answer was a more effective vaccination.  Turns out that wider use of mosquito netting over beds provided much of the solution.

To be sure, your community foundation will want to address matters that arouse a heartfelt desire by local leaders to make their town a better place.  The Gates Foundation reasserts that foundations have their best chance of success if they have “a maniacal focus on drawing in the best talent and measuring results”.

As a leader in your community, you have a birds-eye view of the landscape, and that helps you to understand how you can position your foundation to address compelling community needs.  Whether the issues you address require ingenuity or mobilization, a passion to solve an important problem goes a long way.  “If you want to improve the world,” Bill Gates once wrote, “you need something to be mad about”.

The Biggest Crisis You May Face in 2019? Would you believe, Elasticity?

As part of a community foundation, you will face lots of challenges in 2019.  Investment returns are anemic; asset growth is slowing; and, the field is up against increased competition from commercial donor advised fund providers.  But the next crisis you face may be caused by elasticity.


With the Tax Cuts and Jobs Act of 2017, by some estimates more than 25 million households will no longer be able to deduct charitable contributions when they file their taxes. That’s because the standard deduction has soared to $24,000 for a joint return, and $12,000 for a single return.  If a taxpayer does not have itemized deductions beyond that amount (typically, mortgage interest, charitable contributions and state and local taxes), then they use the standard deduction.

What does this mean for charitable giving?  It means that 25 million households – most of whom have incomes ranging from $100,000 to $500,000 – will no longer be able to deduct charitable gifts when they file their taxes.  In a very real sense, the “cost” of making a charitable gift just went up.  If this leads to a drop in charitable giving, charities could face a significant crisis as donations plunge.

Take the example of a family with total income of $200,000.  Assume they itemize, and they typically make $10,000 in charitable gifts each year.  That $10,000 is an itemized deduction and, with a marginal tax rate of 28%, the net “cost” of those gifts is $7,200 ($10,000, less a $2,800 tax break).

With the new tax law, however, this couple will likely take the standard deduction, and won’t itemize their charitable gifts.  That means there will be no tax cut offset for their $10,000 gift.  In effect, that level of charitable giving costs them 28% more.

This is where the concept of “elasticity” comes in.  Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change.  If the price elasticity of a product is -0.5, then a 10% increase in the price of a product will lead to a 5% decrease in the amount of the product sold.

Charitable giving is a product, and, with the tax reform act, for 25 million households the price of that charitable giving just went up.  So, how much will charitable giving drop?

That’s hard to say.  Some of the best work in this area is done by professors Jon Bakija of Williams College and Bradley Heim of Indiana University. In a recent paper (see source below), they conclude “peoples’ decisions about how much to donate to charity are influenced significantly by tax incentives”.  While the result depends on factors such as income levels and whether the change is permanent or temporary, the research indicates the price elasticity of demand for charitable giving may be in excess of -1.0 – meaning that a 28% increase in the price of charitable giving could lead to more than a 28% decline in charitable gifts.  Looked at another way, if these estimates are correct, the donors in our example above will decrease their annual charitable giving by at least $2,800.  If millions of households react in this way – well, you can see the crisis this may cause for community foundations, and for the entire charitable sector.

So what does this all mean?  We may not know for a while.  It may be that we need to go through a couple of tax preparation cycles before the reality of the new tax environment is fully understood.  And, economists will tell you that the drop in charitable giving due to the new tax law will be offset – somewhat – by the fact that donors will have more money in their pockets.  (That effect is measured by a different elasticity – the income elasticity of demand, which should cause charitable giving to go up as people feel wealthier).

It might be too soon to determine if the new tax laws will cause a crisis for charitable giving.  Donors may be deeply committed to the charities they support, and they may continue their giving despite the new laws.  It’s probably fair to say that those charities that have done the best job of building a strong relationship with their donors will suffer the least. 

As John Kennedy said nearly 60 years ago, there’s two ways to look at a crisis.  When written in Chinese, the word “crisis” is composed of two characters.  One represents danger.  The other represents opportunity.


Source: How Does Charitable Giving Respond to Incentives and Income? New Estimates from Panel Data; Jon Bakija and Bradley Heim; National Tax Journal, June 201

Your Best Employee May Be The One Who Tells You When You Are Wrong

It is March 27, 1977, and two 747 jets prepare to take off at the airport on the island of Tenerife. The captain of one of the planes, Jacob Van Zanten, has nearly rock-star celebrity status among airline pilots. He is a leader in his profession, and his face is used in advertisements for KLM, the company he flies for.

Van Zanten awaits instructions at the end of the runway. “Okay”, says the tower controller, “Stand by for takeoff”. Van Zanten hears the word “Okay”, and begins to rev the engines and proceed down the runway. He does not hear “Standby for takeoff”, because he is distracted. Because of heavy fog, Van Zanten doesn’t know that another 747 is already on the runway. . “Let’s go”, Van Zanten says.

Behind Van Zanten, in the navigator’s chair, the second officer has realized that Van Zanten is mistaken. He has time to correct the error, but he does not. A subsequent investigation concludes that the second officer felt too junior to the highly-esteemed Van Zanten, so he stays quiet. Van Zanten’s plane collides with another 747 on the runway, and 583 people died.

As a leader of the community foundation, you are not making decisions that are a matter of life or death. But you make decisions every day, and not all of your decisions will be the right ones. If you have a well-functioning team, you might have one or more staff members who are willing to challenge you, to tell you when you might have made a mistake.

The value of just such a staff member is examined in a new book, The Fearless Organization, by Amy Edmondson, a professor at Harvard Business School. Professor Edmondson says that organizational leaders need to make sure that their staff operates in an environment of “psychological safety”.

Psychological safety is broadly defined as a climate in which people are comfortable expressing and being themselves. In a psychologically safe workplace, people are not hindered by “interpersonal fear”; they feel willing and able to take the inherent personal risk of candor.

In the community foundation field, this attribute can be particularly useful. You are perceived as controlling a large amount of grant funding each year (though, in fact, you don’t – your grant review committee or board handles that). Yet very few people are willing to challenge you, to let you know you are wrong, to tell you that you have made a mistake. This makes a staff member who is willing to be candid with you all the more valuable.

Over my 22 years as a community foundation executive director, heaven knows I made my share of mistakes. The best outcome, however, came when a staff member was willing to challenge me, to second-guess me, to get me to understand that I had been wrong. I grew as a leader, and our foundation was better off because I was able to see my error, and correct it.

So the next time a staff member challenges a decision you have made, listen carefully. Their willingness to speak up can be a learning opportunity for you, and can help you towards your goal of creating a great community foundation.

Investment Returns in 2018 - Four Difficult Conversations You Will Face

The year 2018 ended as a difficult one for community foundation investment returns.  While daily swings of several hundred points are becoming common, virtually all asset categories – such as stocks, bonds, commodities, and real estate – finished in the red.  The S&P 500 fell 6.2%; the NASDAQ dropped 3.9%.  Bonds were no help, as they were flat or slightly down for the year.  And overseas stocked tanked, with both Europe and Japan down double digits.

For community foundation leaders, these results will mean that you will likely face four types of difficult conversations.  But, as Douglas Adams said in The Hitchhiker’s Guide to the Galaxy, “Don’t Panic”.  Remember, a community foundation has a long time horizon – as we like to say, our time horizon is forever. 

So, keep that in mind as you get ready for these difficult conversations.

Conversation #1:  Your Board Members – It’s important to be candid with your board on the consequences of negative investment returns.  You will have less money to award as grants and scholarships.  And your administrative fees will probably be below what you projected.  Be prepared to have a frank discussion with your board members on these matters.

Conversation #2: Your Investment Committee and Your Spending Policy – As you are aware, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) allows endowments to spend from “underwater” endowment funds, so long as the spending is prudent.   Your investment committee and board have the discretion to determine what a prudent amount is to disburse by determining the spending policy from your endowments. 

Because of 2018’s poor investment results, you will likely have a difficult conversation in determining whether to lower the payout rate in your spending policy.  A lower spending rate will mean less to distribute in grants and scholarships.

Conversation #3: Recipients of Grants and Scholarships – You will likely have less to distribute in 2019 due, first, to a lower spending policy and, second, to a decline in the value of your endowment assets.   Charities that receive annual support from you – such as from a designated fund – may receive less next year.

You may have a spending policy that minimizes the reduction of payouts in any one year by, say, using a 12-quarter rolling average to determine the endowment base.  This will muffle the effects for 2019 – but will also mean the asset decline will be felt for at least the next three years.

Conversation #4 – Your Donors:   You will be talking with your donors about several consequences of poor investment returns.  First, they may have created a fund with your foundation that will experience negative investment returns.  Second, they may be planning on making a gift using appreciated securities – and now the appreciation on those securities is a lot less.

What’s the common thread in each of these conversations?  It’s that a community foundation invests for the long term, and that short-term market declines are to be expected.  In my twenty-two years at a community foundation, I lived through the economic crisis of 2008-09, and watched the dot com bubble burst in 2000.  I even remember a Monday in October of 1987 when the stock market fell 25% in one hour.

Each of these declines seemed horrendous at the time.  But every time, the stock market bounced back. 

So, have these conversations with your board, your investment committee, the charities you support, and your donors.  Take a long view and remember that temporary declines are just part of the cycle of long-term investment performance.  Share this viewpoint over a calming cup of tea.  As the hero of The Hitchhiker’s Guide, Arthur Dent, is fond of saying, “A good cup of tea makes everything better”.

Free Parking for Employees? You May Owe UBIT Taxes

A little-noticed provision in the Tax Cuts and Jobs Act of 2017 could force community foundations – and the nonprofits that you support – to file Form 990-T, the tax return used to report unrelated business taxable income (UBTI).  But the law is frustratingly vague.  So, add this problem to the list of insomnia-producing worries to keep you awake at night.

The TCJA created a new section 512(a)(7) which specifically targets transportation fringe benefits provided by tax-exempt organizations to their employees.  The law prevents a for-profit organization from deducting qualified transportation fringe benefit (QTFB) when computing taxable income; the mirror image law for nonprofits forces a charity to pay taxes on the value of QTFB provided by employees.  Charities must include in UBTI the value of QTFB that would be disallowed as deductions to a taxable entity.

Qualified parking is considered a QTFB.  Qualified parking is defined as “parking provided to an employee by an employer … on or near the employer’s business premises.”  If you have a parking lot close to your offices, and your staff is allowed to park there for free, you might have to file a Form 990-T and report the value of that fringe benefit as taxable income.

Sound like a mess?  Yes, it is.  And from what I read the new law is very unclear.  Groups ranging from the National Council on Nonprofits to the American Institute of Certified Public Accountants have asked the IRS for clarification.  Does the IRS really want millions of nonprofit organizations to incur the time and expense required to file a Form 990-T, when they might otherwise not have to do so?

I’m going out on a limb here, but I’m going to predict that the Feds will come to their senses and issue guidelines that will relieve charities from the burden of filing a 990-T just to report free parking.  But, as with any tax matter, you should have a conversation with our tax preparation firm to determine what you should do for 2018.  In the meantime, go ahead and count sheep instead of parking spaces --- and enjoy a good night’s sleep.

Want To Boost Your Estate Planning Gifts? Wording is Important!

Professor Russell James from Texas Tech (a great resource for planned giving information) cites a study that was done regarding requests for charitable gifts in estate plans.

Professor James refers to a study in which professional advisors asked their clients if they would like to include a charitable bequest in their estate plans. As it turns out, the wording of the request resulted in a significantly different response rate.

When a professional advisor did not ask their client about making a charitable gift, around 5.0% of clients included a charitable bequest in their planning.

By being more intentional — by asking “Would you like to leave a charitable gift?” — the response rate more than doubled, to 10.4%

More creative wording led to an even higher response rate. When the professional advisor said, “Many of our clients like to leave money to charity in their will. Are there any causes that you are passionate about?”, the response rate jumped to 15.4% — more than three times the response rate when no question was asked.

Note that the wording makes two connections. First, it indicates that “many clients” do the same thing. Second, it puts the focus on “causes that you are passionate about”. Planting those two seeds tripled the response rate.

The lesson here? Thoughtful wording when asking for a charitable bequest can increase the number of estate gifts that you will receive in the future.


Donor Advised Funds - Big Changes Coming?

There’s been a lot of chatter lately on the potential of new regulations on donor advised funds. Nonprofit Quarterly has run a series of excellent articles advocating reforms by Dean Zerbe, Ray Madoff, and Ruth McCambridge.

The defense of a “hands-off” approach was put forth by five of the leaders of our field: Douglas Kridler, Alicia Philipp, Lorie Slutsky, Steve Seleznow and Max Williams — all of them leaders of large community foundations. They argue against additional regulations on donor advised funds, stating “our real, and hopefully shared, concern is to avoid government overreach, excessive regulation, and bureaucratic waste that could result from such rules”. You can read their article here.

The issues are masterfully summarized by Alan Cantor (who also cites other articles critical of donor advised funds). Cantor makes some excellent recommendations to the field. He also suggests a powerful strategy: “[I]f Congress doesn’t undertake reform of donor-advised funds? Community foundations should take it upon themselves … thereby establishing themselves as institutions that focus on improving the lives and futures of those around them.”

In the research we just posted, we take a different approach. We ask the question, “How can a community foundation more closely align grants from donor advised funds with the critical community needs identified in their unrestricted grantmaking process?” You can read the strategies we uncovered for strengthening this philanthropic partnership here.

A Wild Weekend Ten Years Ago, and Lessons for Today

Thinking back to the start of the financial crisis ten years ago is a good reminder that, like many things, stock prices do not rise in a straight line forever.  It’s been a good run for the last ten years, but how much longer can the good times last?  A decline is inevitable; here are some thoughts on how you can prepare your community foundation.

The morning of Monday, September 15, 2008 was quite extraordinary.  Those who watched global financial markets the previous week knew that we were in for a rocky patch.  The federal government had bailed out Bear Stearns in March and the Treasury had taken over Fannie Mae and Freddie Mac the weekend before.  Something big was coming.  We just didn’t know the extent of the damage.

Two blockbuster headlines greeted us that morning.  First, BankAmerica was buying Merrill Lynch – perhaps the stodgiest of the stodgy brokerage firms, which was created the same year the first community foundation was launched in Cleveland in 1914.  But more ominously, Lehman Brothers, a fixture on Wall Street for more than 150 years, filed for bankruptcy.

Stock prices swooned.  The S&P 500 index was already down 22% from it’s high the previous year.  In the next six months it would plunge another 47%.

Both Merrill and Lehman had been brought down by “toxic debt” – securities that many thought were safe but which were, in fact, close to worthless.  These securities – various forms of bonds made up of home mortgages – were widely held in the financial field – including by community foundations.

The collapse of Lehman is now parodied in popular culture.  In the movie Despicable Me, the main character Gru travels to the Bank of Evil, the bank that funds all evil plots for villains around the world, to try to take out a loan. As he passes under the banner with the bank's name, under "Bank of Evil", in small letters, it reads, "Formerly Lehman Brothers".  Even Disney has gotten into the act.  The animated film Zootopia depicts a financial firm called "Lemming Brothers", staffed by lemmings.  The double meaning is obvious.

The effects of the market decline on our community foundation were profound.  Our grantmaking slumped as we applied a payout ratio to a much smaller investment portfolio.  And our operating budget, built on quarterly fees, generated revenue 30% below what we had projected.

What can you do to get ready for the next market decline?  There’s at least three things to consider. 

First, have an intentional discussion with your investment committee, and your investment managers, regarding the impact of a stock market decline on your portfolio.  Do you have a sensible asset mix?  Are you overly exposed to risky stocks?  Put the question on the table, and get some answers. 

Second, brace your operating budget for a market decline.  Do you have a cash balance sufficient to weather an extended period of lower stock prices?  Are there elements of your operating budget that can be deferred, if necessary? 

Finally, educate your board, your donors and the nonprofit organizations you support.  Community foundations last forever, which means they can and will be exposed to the ups and downs of financial cycles.  A drop in the stock market will mean a cutback in your grantmaking, but tough times don’t last forever.  You will ride out the storm, and come back even stronger. 

I’m not predicting a financial crisis, and I have no idea how serious or prolonged the next financial slump will be.  But financial cycles are inevitable, and community foundations should be prepared.  “History does not repeat itself,” Mark Twain has written, “But it often rhymes”.

Charitable Deduction Income Limits and The Standard Deduction - A Note of Caution

There’s lots of changes in the new tax law (Tax Cut and Jobs Act of 2017 or TCJA) that will reduce the incentives for charitable giving (such as raising the standard deduction, meaning that fewer taxpayers will itemize).  One break which will help donors, however, is an increase in the charitable deduction income limitation.

The deduction for charitable giving is limited to a certain percentage of income, based on the nature of the gift made and the type of organization receiving the gift.  The new TCJA law raises the income limitation for cash gifts from 50% of adjusted gross income to 60%.   The new 60% charitable deduction limit applies only to cash gifts — not real property, not appreciated assets, just cash. (The deduction limits remain the same for gifting other assets, such as stock, real estate, and tangible goods.)   Any gifts above the income limitation can be carried over for five years. 

The increased standard deduction in TCJA means far fewer donor will itemized their charitble deductions.  Some have advocated “bunching” charitable contributions in a single year (by, say, a donation to a donor advised fund).  This would allow the donor to itemized deductions in the year of the “bunching”, and then using the standard deduction in subsequent years.

But in some circumstances this strategy may not be effective – and the problem can be illustrated with an example.  Suppose Bill and Melinda Getz are both 70-year-old retirees.  In 2017 they deposited $50,000 into their donor advised fund but, due to 2017 income limitations, they could only recognize $35,000 of that gift for their 2017 taxes.  They carried forward $15,000 to be used in 2018.

Bill and Melinda have $8,000 in itemized deductions for 2018.  Taking into account the $15,000 in charitable contributions carried forward from 2017, they would have $23,000 in itemized deductions.  They choose instead to use the standard deduction for a married couple for 2018, which is $24,000.  Since they have not used their charitable deduction carry-forward from 2017 to 2018 it carries forward another year to 2019, right?  WRONG!

Under current IRS regulations, the $15,000 carryover is treated as if it were claimed, even though Bill and Melinda choose the standard deduction. IRS rules say that when a taxpayer uses the standard deduction, any charitable deduction carry-forward is reduced as if you took the maximum possible charitable deduction.  Despite the fact that they did not itemize, the $15,000 of the carryover is treated as if it were reported and deducted. Bill and Melinda essentially forfeit their $15,000 charitable contribution deduction carry-forward.

For taxpayers who can “bunch” their charitable contributions without carrying a deduction forward due to the income limitation, this rule does not apply and accumulating charitable gifts in a single year can still be a good strategy.  But if “bunching” results in a charitable deduction carry-forward, the effectiveness of this strategy will be severely limited.

"An Agile Servant", Revisited

Next year will mark the 30th anniversary of one of the seminal works in research on the community foundation field.  An Agile Servant (The Foundation Center, edited by Richard Magat, 1989) was published to celebrate the seventy-fifth anniversary of the community foundation field.  It was one of the major products of the National Agenda for Community Foundations, a three-year project overseen by the Council on Foundations.

The book itself fits into two distinct parts.  Part I is a series of ten essays on everything from asset growth to leadership to collaboration.  In Part II, the reader can dig deeper into stories from sixteen community foundations across the country.  These stories talk of what works – and what doesn’t – in strategic directions relating to grantmaking, asset development, and community leadership.

Growth of community foundations was strong in the 1980’s, yet pale in comparison to today’s field.  The book noted 259 community foundations with total assets of $4.7 billion.  Today, over 850 community foundations boast collective assets in excess of $90 billion.

Even from a distance of nearly thirty years, many of the topics of the book still ring true.  James Joseph called on community foundations to step up their roles as community leaders.  Paul Ylvisaker cautioned that as the field grew we would become “inviting targets for public attention and increased regulation”.  Jennifer Leonard (now President & CEO of the Rochester Area Community Foundation) reviewed the different stages of community foundation growth and how those stages influence asset development priorities.

Steve Minter, who served as president and executive director of the Cleveland Foundation from 1984 until 2003, called for the creation of national standards for community foundations.  Eventually in 2000 the field approved those operating standards, and since that time they have been widely accepted by the entire field.

So if you have time yet this summer, dust off our copy of this book, or find it in your local library.  The title itself is a reminder to all of us that we need to be agile in what we strive for, while remaining a servant to our community. 

1930 Survey Shines Light On Early Community Foundation History

Somewhere along the way in my community foundation journey, I came across a document that provides interesting insight into the birth of the community foundation field. Titled “Community Trusts in the United States and Canada”, it’s a survey done by the American Bankers Association in 1930.   It's a fascinating snapshot of our profession, taken nearly 90 years ago.

At that time, 72 community foundations collectively held $32 million in assets.  Grants disbursed in that year were just under $1 million.

While 72 community foundations had been created, only 40 held assets – the rest were set up and functioning but had not yet received any gifts.  Furthermore, of the 40 with assets, only 31 were distributing grants – the rest were waiting until they grew larger before they started supporting local nonprofits.

At that time, every community foundation was in trust form, meaning that they were governed by one or more trustee banks.  The corporate form (in which a board of directors governs the corporation) became more popular after World War II.  Today, only a handful of community foundations continue to operate in trust form.

The New York Community Trust was the largest community foundation in 1930, with $8.7 million in assets.  This was followed by Chicago ($5.1 million), Boston ($4.8 million) and Cleveland ($3.0 million).  Rounding out the top ten largest were Winnipeg, Indianapolis, Denver, Buffalo, Milwaukee and Youngstown.

But the depression years were not kind to community foundations.  The collapse of the stock market meant that many donors has less money to donate.  In addition, most grants awarded were used primarily for poor relief.

Some community foundations decided to throw in the towel and call it quits.  The foundations in Pittsburgh, Cincinnati, Houston and Orlando “ceased to exist”.  The foundation in Rochester, New York was “absorbed by (the) Community Chest”.  Even Columbus, Ohio apparently dissolved, as the report said that “no response had been received (from Columbus) despite repeated inquiries”.

Yet the tough times of the Depression and subsequent war could not extinguish the resiliency of the community foundation concept.  Leaders we will never meet worked hard to create -- or reinvigorate -- community foundations in their hometowns.  Thanks to these foresighted folks, today we are the beneficiaries of a large and thriving network of community foundations.  There is a phrase I am fond of quoting:

It takes a noble person
To plant a seed for a tree
That will someday give shade to people
They will never meet

We never had the chance to meet those who blazed the path in creating community foundations nearly a century ago.  But as you go about your business today – doing good work to serve the people of your community – think about those noble people who planted the seeds which blossom today, and provide much-need shade.

If you would like a copy of “Community Trusts in the United States and Canada”, click here.



Community Foundation Magic Strikes Again

It’s happened again.  Those magical gifts that can transform a community foundation … and a community.

You are familiar with some of the stories.  David Gundlach leaves over $150 million to the Community Foundation of Elkhart County. John Santikos bequeaths over $600 million to the San Antonio Area Foundation.

Now, add the Community Foundation for the Fox Valley Region in Appleton, Wisconsin, to the list.  They’ve just announced an estate gift of more than $100 million to create a permanently endowed donor advised fund that will benefit causes important to the late David and Rita Nelson and their family, primarily in the Fox Cities and Green Bay areas of Wisconsin.

David Nelson managed the finances for the companies that published the Appleton Post-Crescent and Green Bay Press Gazette. Later he invested in radio stations and other businesses. Rita became a teacher after raising the couple’s three sons, returning to college and earning a teaching degree at age 50.  They were married for 73 years and died within five months of each other – Rita on Feb. 16, 2017, at age 93 and David on July 18, 2017, at age 96.

What’s the common thread here?  People who love their community, and work hard to amass significant wealth.  And a high-quality community foundation that is ready, willing and able to receive the gift and administer it consistent with the donor’s wishes.

Ask yourself – is your community foundation in a position to receive one of these magical gifts?  We tend to get consumed with daily “stuff” – but are you in a position to find, and secure, these extraordinary legacies?

Did these community foundations just get lucky? A wise person once told me that luck occurs when preparedness meets opportunity.  Elkhart, San Antonio and the Community Foundation for the Fox River Valley Region were prepared when opportunity came along.   

Home, and the Role of Community Foundations

I had the chance last week to pay a visit to my friends at the Council of Michigan Foundations (CMF), which is based in Grand Haven, Michigan.  Aside from the fact that they still had snow on the ground (!!!) the trip went well, and we had a great discussion. 

I also had the chance to congratulate Rob Collier, CMF President, on his upcoming retirement.  Rob has led CMF for nearly twenty years and has been a strong leader not only for his statewide association but for the national field as well.  The knowledge and strategic vision that Rob has brought to the field will be greatly missed.

My trip also gave me an opportunity to reconnect with Grand Haven, the town I was born in 61 years ago.  While I get the chance to visit periodically, my family moved away from Grand Haven in 1960.  There remains, however, something magical and inspiring about visiting the place of your birth.

It made me realize, on a very personal level, the importance of community foundations.  All of us are born somewhere, and our ties to the place of our birth never disappear.  We may travel the world, see lots of wonderful destinations and meet fascinating people, but the bond we have with the city of our birth is unique, strong and everlasting.

Today, virtually every hometown community in America is served by a community foundation.  Think of the positive impact we could have if we all gave a little something back to the community foundation that serves the place of our birth – so that it can remain a magical and inspiring place forever.

I am reminded of a quote from a T.S. Eliot poem:

We shall not cease from exploration,

and the end of all our exploring

will be to arrive where we started

and know the place

for the first time.

The Challenge of Staffing Growth – One Community Foundation’s Story

When I first came to the Community Foundation of Greater Fort Wayne in 1995, we had two-and-a-half staff – a full-time executive director (me), a full-time program officer, and a half-time receptionist.   (We had assets of about $30 million in 18 different charitable funds.)  That, of course, meant that I wore many hats:  Finance, development, marketing and communications, and occasional housekeeping. 

Complicating it all was the fact that 95% of our assets came from one donor (in a donor advised fund and a supporting organization) who was actively involved with the community foundation.  Furthermore, this donor was very frugal, and the administrative fees he had negotiated were quite low.

I knew right away that my first hire needed to be a financial manager.  Financial activity was tracked via spreadsheets – and, no, not Excel or even VisiCalc (remember that one, kids?) – we used pencil and paper spreadsheets which needed to be updated each month.  Bringing on a high-quality financial manager --  who implemented our new database software package --  was one of the best staffing moves I ever made.

The next staffing challenge came when our largest local bank decided to get out of the scholarship business, and we negotiated the transfer of those trusts to the community foundation.  Scholarships are a lot of work, but the fees from those trusts allowed me to bring on a half-time scholarship manager.

We had some strong growth in the late 1990s – a soaring stock market helped a lot – so my next step was to upgrade the half-time receptionist position to a full time executive assistant, with responsibility for maintaining our database.

By the early 2000s we continued to grow, and I was finding it difficult to both grow and steward our expanding donor base.  Around that time, Lilly Endowment in Indianapolis launched a program to strengthen fund development at Indiana community foundations.  I used the funding to hire our first full-time fund development officer, and a half-time manager of marketing and communications.

By 2007, I was feeling pretty good about our staffing – assets had gone over $100 million, and I thought we were fully staffed to continue the Foundation’s growth.  But, there is an old Yiddish saying which says, “Man Plans, and God Laughs.” 

I had stretched our budget aggressively to get to what I viewed as full staffing.  But between late 2008 and early 2009 our investments fell close to 30% -- which meant the budget approved by our Board in November 2008 was shot to pieces.  Not wanting to lay off anyone, we all took a salary reduction.

The reduction, thank goodness, was temporary.  By the time the 2010 budget was put together we were able to restore those cuts.  But if there was one lesson I took from my blunder it was this:  Make sure you have a strong cash cushion to help you get through stock market declines.  I’ve lived through several of them, and they will happen again.  So be prepared.

Well, that’s my staffing growth story.  You, of course, face a different set of circumstances.  As Brian Fogle of the Community Foundation of the Ozarks is quoted as saying, “When you have seen one community foundation … you have seen one community foundation.”  Your situation is different, but hopefully you can learn from my mistakes.


The Dreams of Martin Luther King, and the Role of Community Foundations

Last week, the nation marked the 50th anniversary of the assassination of the Reverend Dr. Martin Luther King in Memphis, Tennessee on April 4, 1968. 

I was only eleven years old, but I remember it well.  At the time I worked as a paperboy, delivering the afternoon newspaper (The News-Sentinel) in Fort Wayne, Indiana. What I remember most was how many people were their front porch steps that next afternoon, waiting for news of what happened.  That’s how you got your news in 1968 – you read it when the paper was delivered.

From the hindsight of 50 years, a lot of progress has been made in race relations.  I can recall as a young boy going to a restaurant in a southern city and seeing a “colored only” sign.  Those days are gone forever.  But you only need to watch the evening news to realize that we still have a long way to go.

What does this have to do with community foundations?  You, as leaders of the community, can be the voice for those things that Dr. King held dear:  Civility.  Inclusion.  Hope for the future.

Community foundations were not, in most cities, viewed as leaders in 1968.  Now your friends and neighbors look to you to be at the head of the parade -- to lead your community to the land that Dr. King dreamed of.  Dr. King said it best when he said:

 “We all have the drum major instinct. We all want to be important, to surpass others, to achieve distinction, to lead the parade. ... And the great issue of life is to harness the drum major instinct. Keep feeling the need for being first. But I want you to be the first in love. I want you to be the first in moral excellence. I want you to be the first in generosity.”

The kind of leadership a community foundation can provide is crucially needed.  What you do, every day, is important.  Keep the dream alive.


Magneto and the Use of the Variance Authority, Part II

As was discussed in the previous blog post, power vested in your Board of Directors under the variance authority language is not unlimited.  (Of course, even Magneto is not invincible – Wolverine stabbed him, right?)  But the variance authority is a great superpower – so, how can you make sure you are able to use it to advance the forces of good, truth, justice and the American Way?

As with any question involving legal issues, make sure your legal counsel is part of your decision-making with any variance authority matter.  The concept of variance authority originates from the trust law doctrines of cy pres (modifying a purpose restriction) and deviation (modifying a management restriction).  There is an abundance of legal doctrine in this area.

The use of the variance authority is addressed in the Uniform Prudent Management of Institutional Funds Act (UPMIFA).  While states were free to adopt their own versions of UPMIFA, the uniform law added a provision that allows a charity to modify a restriction on a small (less than $25,000) and old (over 20 years old) fund without going to court.  If a restriction has become impracticable or wasteful, the charity may notify the state charitable regulator (usually the attorney general), wait 60 days, and then, unless the regulator objects, modify the restriction in a manner consistent with the charitable purposes expressed in any documents that were part of the original gift.

But your use of the variance authority may not fall under the provisions of UPMIFA.  If that’s the case, here are six ideas to consider when contemplating the use of the variance authority.

#1 – Make sure all your funds have fund agreements, and all fund agreements contain the variance authority language.  This is a simple first step, but a crucial one. 

#2 – Store the original copies of agreements in a safe place.  This may sound obvious, but in the case of fire, flood or theft these are the source documents you can turn to when a question arises.  Digital scans of all your agreements can help a lot. 

#3 – Review your state laws.  Many states may address the use of the variance authority in state law.  Find out what your state requires.

#4 – Find out what your attorney general expects.  In most states the attorney general oversees the regulation of charities.  Many attorneys general ask that they be notified when you use the variance authority.  Most don’t require you to ask permission; rather, they ask for notification which gives them the chance to review the matter.  Get clarity from your attorney general on what they expect.

#5 – Communicate with the donors, or their family.  Keep all interested parties apprised on how you are managing a fund.  In most cases, it would make sense for you to communicate a potential change with a donor, or their family, or their original professional advisors.  If they object you need to consider your options, but good communication can avert a variety of potential future problems.

#6 – Make sure your board fully understands the variance authority.  Take time during board orientation sessions, or regularly at a board meeting, to review what the variance authority means and when you can use it.  If an issue arises where use of the variance authority is contemplated, make sure all the board members are fully briefed on the matter, and are in agreement with the recommended course of action.

Variance authority power is central to the entire concept of community foundations.  Your foundation will still be working to improve the quality of life in your community one hundred years from now.  Thoughtful use of the variance authority will ensure that your funding will be used in the future to address the most compelling community needs – whatever they are at that time. 

Set up an effective process for using the variance authority, and stick with it.  These Magneto-like powers will help give you the tools to effectively achieve your mission.  Your great-great-great grandchildren will thank you for it.

Magneto, and the Limits to Variance Power, Part I

When I was much younger, I had the good fortune to be awarded a full scholarship to attend the Woodrow Wilson School of Public Policy at Princeton University.  For a poor kid from the Midwest it was an unbelievable opportunity.

I had dreams of elected office, and I was going to use my time at Princeton to learn everything I could to solve our country’s problems:  homelessness, drug abuse, unemployment and other issues facing state and local government.

I received the scholarship thanks to a $35 million gift made in 1961 by Charles and Marie Robertson, who inherited the A&P supermarket chain.  But it was students like me who caused a problem for Princeton.

The children of the Robertsons argued that their gift should have been used to prepare graduates of the Wilson school for service in the federal government, particularly in foreign relations.  (Keep in mind, in 1961 many Americans thought war with the Soviet Union was inevitable.)  Princeton, they claimed, had improperly altered the terms of the gift – by giving financial assistance to someone like me, and hundreds of other, who had no interest in the foreign service – and a lawsuit was filed to return the money. Princeton recently settled the lawsuit for millions of dollars.  (You can read more about the Robertson lawsuit here.)

Aha!  I know what you are thinking.  All fund agreements at a community foundation must include the language on the variance authority, and, with that, lawsuits on donor intent could be avoided.  Here is typical language:

The Board of Directors of the Community Foundation may modify any restriction or condition on the distribution of assets for any specified charitable purpose or to specified organizations, if, in their sole judgment, such restriction becomes, in effect, unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the area served by the Foundation.

These words give your community foundation extraordinary power in making changes on the use of charitable dollars.  It’s like Magneto, one of the X-Men.  Magneto has the power to alter the subatomic makeup of any metal, to turn it into a force for good.  Your board of directors, thanks to the variance authority language, can be thought of as the Magneto of fund agreements --- they have the power to change the agreement and turn it into a force for good in your community.

Well, maybe not.

There have been at least two lawsuits over the years challenging the authority of a community foundation to invoke the variance authority.

The New York Community Trust found itself as the target of a lawsuit whose origins dated back many years. In 1971, the New York Community Trust’s board chose to reallocate the annual distribution from six trust funds, including one created by John D. Rockefeller, Jr. They cited tax law changes and existing anti-poverty programs as the reason for diverting funding away from several charities, including one known as the Community Service Society.

Many years later, the Community Service Society sued, asserting that the New York Community Trust abused its power and unfairly diverted the annual payouts. While the judge ruled that community foundations had the right to divert funds using the variance authority, the ruling narrowed the circumstances when that power could be used. In addition, the state attorney general at the time took the position that, when the variance authority is used, community foundations should report that use to them.

Another high profile case involved community foundations in the San Francisco area. Beryl Buck, a childless widow, died in 1975 when she was 75 years old. She left $10 million in stock in the Belridge Oil Company, stipulating in her will that the income was to be used exclusively for ''nonprofit charitable, religious or educational purposes in providing care for the needy in Marin County, Calif., and for other nonprofit, charitable, religious or education purposes in that county.'' The San Francisco Foundation was asked to administer the Buck fund.

Just four years later, the stock in Belridge became much more valuable when it was purchased by Shell Oil Company. The Buck fund was now worth more than $250 million, and the corresponding annual payout rose substantially, as well. Marin County was a substantially wealthier community than San Franciso and the San Francisco Foundation, citing this fact, started to use some of the income from the Buck fund for anti-poverty programs in San Francisco.

Residents in Marin County sued, and they were joined by the state’s attorney general. Eventually the judge ruled that the San Francisco Foundation could not base it’s use of the variance authority on the relative wealth of the two communities. Rather, they had to prove that it would be illegal, impracticable or impossible to spend all of the annual distributions in Marin County. Using that standard, the residents in Marin County prevailed.

So … you have the variance authority which, on its face, seems quite broad.  Yet courts, and state attorneys general, have limited this power at community foundations.  Where does that leave you?

In our next blog post, we’ll talk about steps you can take to make sure you are properly using the variance authority. You may not have the powers of an X-man, but the powers you do have would make Magneto proud.

Community Foundation Tax Credits: An Idea Whose Time has Come?

OK, so the new tax legislation means that lots of our donors won’t itemize charitable deductions any more.  This will hurt – but how much?  (See blog post below).

Your state could help lessen the impact by creating a community foundation tax credit.  Five states already offer a tax credit of some type for certain gifts to community foundations. The availability of a credit on state taxes might help offset the changes in federal tax law.

How does this work?  In a typical case, a donor would receive a credit on their state income taxes equal to some percentage of their gift (usually to an endowment fund).  In Kentucky, for example, the credit is equal to 20% of a qualified gift.

You can read our full report on community foundation tax credits here.

Will such a credit cost your state money?  Yes, it will.  But offsetting that is that fact that the charitable organizations that your community foundation supports typically are also funded by your state government.  Social service, community development, education and arts and culture organizations often receive state grants to support their work.  If a state tax credit attracts donations that increase your grantmaking, you will often be helping organizations working to achieve goals deemed important by your state policymakers.

Time will tell what effect the new federal tax legislation will have on the gifts received by community foundations.  But the next time you talk with one of your state legislators (or your governor, for that matter), ask them to consider a community foundation tax credit.

Special Note:  A big note of thanks to Kristi Knous of the Community Foundation of Greater Des Moines.  Kristi made some suggestions to my description of the tax credit for Montana and North Dakota – the research now on the website reflects those changes.  Thanks, Kristi!

And let me add another note of thanks.  Judy Sjostedt, executive director of the Parkersburg Area Community Foundation, has also pointed out that West Virginia has a tax credit that is utilized by some community foundations in that state.  The research report has been adjusted accordingly.  Thanks, Judy!


As much as it pains me to say this, in many ways it’s a tough time these days to be the leader of a community foundation.  On top of competition from commercial donor advised funds and muted future prospects for investment returns, now comes the Tax Cuts and Jobs Act of 2017 which will mean far fewer people will be able to deduct charitable gifts on their tax returns.  In addition, the exemption from the estate tax doubles.  The effect on charitable giving is unclear, but most experts think charitable gifts will go down, perhaps by billions of dollars a year.

Sometimes it seems community foundations are just afterthoughts in the grand political scheme.  Bruce Springsteen said it best:

Lights out tonight, Trouble in the heartland,

Got a head on collision, Smashin' in my guts, man,

I'm caught in a cross fire, That I don't understand.

We all face pressure to grow our community foundations.  I know that asset growth is not the best metric for measuring community foundation success, but in a world where your staff expect annual raises and health care costs rise by double digits each year, asset growth is the best way to both produce a balanced operational budget and continue to serve the needs of your community.

But let me suggest a viewpoint that is not all doom and gloom. 

Yes, some donors will reduce their charitable giving because they don’t get as generous of a tax deduction.  I’ve worked with plenty of those donors in the past.

But it’s been my experience that your very best donors – the donors who will support you for a very long time -- don’t make their gifts for the tax consequences. They do it for love.

They love their school. They love their soup kitchen.  They love their local philharmonic orchestra.

Or maybe they want to preserve in perpetuity the memory of a love they lost. The child that died too soon. Their favorite grandmother. Their hardworking parents.

For many of them, they just want to express their love for the community that means so much to them.

Your best donors are the ones who give based on love, not on tax consequences.  Those gifts help them fulfill a deeply personal need – the need to keep alive, forever, a kindness remembered, a cherished experience, or a heart-felt memory.  You, as the leader of your community foundation, help those donors achieve their loving goals for good.  And forever.

Washington can change the tax incentives but they could never change the love that your donors have for you and what you do for your community.  Take the long view.  Have faith that what you are doing can survive the political winds. Springsteen also speaks of this:

There's a dark cloud rising from the desert floor

I packed my bags and I'm heading straight into the storm

Gonna be a twister to blow everything down

That ain't got the faith to stand its ground

Community foundations seem like they are heading into a storm.  But have faith.  It’s not the Badlands.  It’s the Promised Land. 


Regulation of Donor Advised Funds – The Hits Just Keep On Coming

When I was growing up in the 1960’s, local radio stations would play an endless stream of Top 40 hit songs.  “And the hits, “ the disc jockey would say, “Just keep on coming”.

I’m beginning to feel that way about regulations on donor advised funds.

Donor advised funds have attracted the attention of federal regulators for more than a decade, starting with provisions in the Pension Protection Act of 2006.  A series of unfavorable news stories and academic studies suggest that community foundations should expect more regulation in the future.

The Tax Reform Act of 2017, as it was origination introduced, contained, near the end, Section 5202, “Additional Reporting Requirements for Donor Advised Fund Sponsoring Organizations”.  This section would have required some new calculations on payouts from donor advised funds in the Form 990.  Charities offering donor advised funds would also need to “indicate whether the organization has a policy with respect to donor advised funds … for frequency and minimum level of distributions.”  If you have such a policy (and community foundation national standards now require you to have such a policy), then you would need to include a copy of that policy with your Form 990 submission.

To the best of our knowledge, the Section 5202 language was removed from the bill prior to passage.  It does, however, give us an indication of the general tenor of regulations which might soon be enacted.

In addition, on December 4, 2017, the Treasury Department and Internal Revenue Service (IRS) issued Notice 2017-73, new proposed guidance for donor advised funds (DAFs). The regulations say that you can’t use a donor advised fund distribution to buy a ticket to a charity dinner or satisfy a membership charge.  In addition, a donor advised grant can’t fulfill a legally binding charitable pledge.  In both of these instances, that’s the way community foundations currently manage donor advised fund grants.

Another interesting provision of the new regulations would indicate that a distribution from a donor advised fund must be treated for public support test purposes as personally coming from the donor advisor, and not from the sponsoring organization. 

Say, for example, that Bill Gates uses his fund at the Montana Community Foundation to make a distribution to The Nature Conservancy.  (Bill Gates doesn’t have a donor advised fund at the Montana Community Foundation – I’m just making this up!)

In this case, when the Nature Conservancy is preparing it’s public support test calculation on their Form 990, the gift from the Gates Donor Advised Fund would be treated as coming personally from Bill Gates, rather than from the Montana Community Foundation.  That would have the effect of reducing the percentage of public support received by the Nature Conservancy.

Will that make much difference?  In the vast majority of cases, no.  But there may be communities where a single donor might be funding most of the annual budget of a startup charity.  Under the new regulations, it’s possible the startup charity could risk being reclassified as a private foundation. 

The regulatory hits just keep on coming.