What the heck is a community foundation?
Shannon O'Leary
Chief Investment Officer at Saint Paul & Minnesota Foundation | Managing Multi-Billion-Dollar Portfolios with a focus on Mission-Aligned Strategy
It has recently occurred to me that not very many readers of this newsletter actually know what the Saint Paul & Minnesota Foundation is, or how it may be similar or different from other foundations, and what implications this may have for the management of our assets. Not all foundations are alike, and, as one of the larger community foundations in the country, we look even weirder than most. So today let’s explore the community foundation concept, and the Saint Paul & Minnesota Foundation more specifically.
WHAT IS A COMMUNITY FOUNDATION
Let’s start with the basics: What is a community foundation?
The less-than-satisfying answer is that it depends. Community foundations are products of their community, the community's specific needs, and the interests of the donors and nonprofits that are solving problems in that particular place. In the most simplistic terms, a community foundation is a financial entity that accepts, invests, grows, and distributes funds to local nonprofits. There are more than 750 community foundations in the United States presently serving their communities and regions.
Most community foundations manage the funds of people in a specific geography, and then utilize those funds in a variety of ways to benefit that community. Making grants to nonprofit organizations is a common activity of a community foundation. Some foundations, like ours, work with individuals to establish donor advised funds (DAFs) or private foundations and we provide a variety of other charitable giving tools . We also work with nonprofits to establish and grow their endowments .
Our foundation began in 1940 with a gift of $5,000 from Annie Paper, which she left to the Foundation in her will. The Annie F. Paper Fund has grown over the years and continues to provide grants in support of children’s rights and immigrant assistance. Because of the thousands of donors like Annie who conduct their philanthropy through the Foundation, today we steward nearly $2 billion in charitable assets and grant out over $100 million annually.?
How is a community foundation different from a private foundation?
A private foundation is generally funded by a small group of individuals, families or entities. A community foundation, by contrast, is funded by the public more broadly. We are required to meet the IRS’s “public support test” which requires that more than one-third of our annual revenue come from the public’s donations. Private foundations and community foundations also have a number of other differences in terms of tax treatment and restrictions.
BEYOND THE DOLLARS
In addition to stewarding charitable funds, community foundations often provide a unique form of leadership.
We are often called upon for our non-partisan guidance by government, businesses, organizations or social movements. Our team knows the work of organizations that are closest to pressing issues and the most effective solutions; we can facilitate critical connections and convenings to move initiatives and ideas forward. We can intervene quickly to direct funds, as we did in response to the coronavirus through the Minnesota Disaster Recovery Fund in partnership with the Minnesota Council on Foundations. That fund provided timely and critical support as communities dealt with the unique ramifications caused by the pandemic.
You may not even see the fingerprints of our Foundation on well-known initiatives. For those of you in Minnesota, even if you haven’t heard of us, I’ll bet you have heard of the platform GiveMN , which many of us use on Give to the Max Day. GiveMN started here, at the Foundation, to inspire more generosity and make it easier for nonprofits to receive donations. GiveMN has since spun off and is now its own 501(c)(3).
The Foundation has been involved in countless other initiatives, including:
● The construction and eventual expansion of the Minnesota Children’s Museum .
● The opening of the Science Museum of Minnesota .
● The emergence of new and critical nonprofits like Ujamaa Place and The Sanneh Foundation , to name just a couple.
● The creation of the Arts Partnership , which established an unprecedented collaboration between the Minnesota Opera , the Ordway , The Saint Paul Chamber Orchestra and Schubert Club .
● We have a long-time partnership with Como Park Zoo and Conservatory and supported its evolution into one of Minnesota’s top tourist destinations.
● We are called upon for timely philanthropic efforts of our state, including supporting the Minnesota Super Bowl Legacy Fund and the Minnesota Homeless Fund established by Governor Tim Waltz.
● Upon the tragic murder of George Floyd, the Foundation immediately made grants to organizations that provided trauma-related services to the community.
● We also have several ongoing programs, like our annual Facing Race Awards which recognizes and celebrates those doing extraordinary work to combat racism.
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PARTNERING WITH A COMMUNITY FOUNDATION
When I arrived at the Foundation, I had no idea how many constituencies we served, or how all our unique audiences interacted with us, and with each other. Here’s what I have discovered thus far:
Nonprofit Leaders
Some of our readers are non-profit leaders, and many of them are currently utilizing our investment solutions for their own assets. We work with more than 200 nonprofits to manage and grow their endowments . Through our values-aligned investment strategies, those endowment dollars are invested in ways that work with community-led solutions, not against them. As their out-sourced CIO solution, my team and I attend a number of these entities’ finance committee meetings to update them on their investments and learn more about their expectations and needs for the assets funding their amazing work in the community. We also provide several capacity-building services to further support their efforts.?
Client Foundations
The Saint Paul & Minnesota Foundation is a bit unusual in that we also support two private foundations, the F. R. Bigelow Foundation and the Mardag Family Foundation . We have deep historical ties to both entities that go back decades, and our team staffs the full suite of services needed to manage their activities, including the management of their investments. Co-investing with a larger pool of assets provides the client foundations and our nonprofit partners with the economies of scale in assets to participate in a well-diversified institutional investment solution without breaking the bank on investment fees.
Donors
Let’s say you donate to 12 nonprofits each year. You can log onto 12 websites, respond to appeal letters, write checks, and track receipts. Or you can do what I did: establish a Donor Advised Fund (DAF) through the Foundation, receive a tax break the year you give (only 1 receipt to track), and then recommend grants from that fund.
Working with the Foundation also means I do not have to be an expert on nonprofits. As the Feeding Our Futures scandal illustrated, it is critical to perform due diligence before you give. The Foundation staff provides a safeguard against my money going into some random fraud dude’s pocket. If I want guidance on other organizations that are doing work related to causes I care about, our staff can make recommendations on giving to maximize my impact.
You can open a DAF at other financial institutions like, say, Schwab. And your fees will go to…Schwab. Depending upon how your funds are invested, your investment allocations may actually be canceling out the work you are aiming to support through your grant making. When you work with a community foundation, you are amplifying the impact you can have by supporting all of the community-based work I highlighted above. And your fees flow into the community in other forms because our staff and their families live here too and contribute to our economy.
Professional Advisors
Lots of folks reading this newsletter are CPAs, attorneys, wealth managers and others who advise people on matters related to their finances. We partner with advisors to help them offer tax-beneficial philanthropic products, services, and insights, especially when their clients are making critical life changes, like selling a business , real estate , or setting up their estates. Attorney Jacqui Dorsey explains it well from her vantage point. Read her account of why she chooses to work with a community foundation.??
MANAGING ASSETS ACROSS ENTITIES
You might be looking at all these audiences and wondering how on earth we structure the portfolio to meet their needs. Do they have different expectations for returns? How do we manage differences in cash flows? What implications are there for rebalancing and what assets we can utilize?
Way back in the 1990s, the Foundation identified the need for an investment vehicle to support unified management of this wide variety of charitable dollars dedicated to our community. The solution: a partnership of nonprofit entities that, via a private letter ruling from the IRS, has its own designation as a nonprofit. This vehicle pools the assets into the largest portfolio here at the Foundation, allowing my team to view ~$1.6B of assets as a single unit for investment purposes, and thus passing the benefits of economies of scale back to all of our constituents. That means more dollars go to the community and not to fees!
The larger asset base is also very helpful in managing across the spectrum of return expectations and cash flow needs. The assets are managed for the very long term to support a relatively stable cash flow stream, while maximizing return and managing volatility. A long time horizon gives us plenty of flexibility to diversify across both public and private market assets, which in turn allows us to mix assets in a manner that produces sufficient cash flow to meet a variety of needs from our various audiences. We also manage several smaller pools of assets that donors and nonprofits can choose when their time horizon is shorter or they are looking for a different sort of investment solution. These smaller pools are generally very liquid and do not hold private market assets.?
BACK TO THE DOLLARS
To tie this all together, if you’ve been following this newsletter, you’ve read about some of the work that I do as the CIO of a community foundation to influence systems change in the financial industry. We use our investment dollars to advocate for greater sustainability and diversity of our asset managers. I recently wrote about how we call for accountability in managers to live up to and grow their commitments to diversity. We leverage our institutional assets for good by making investments in local, community-based initiatives like NICE Healthcare , and by ensuring that the funds we manage are not invested in assets and entities that perpetuate the very problems that our nonprofit partners work to solve.
My challenge: support spending of inflation + 5% in perpetuity. Fortunately, as you have read above and in prior newsletters, applying the Foundation’s core values to the investment team’s work makes it far more likely that we will achieve the returns we need to support our community over the long term.
I’ll offer the following resources as additional reading and viewing material.
Link to resources
Partner and Practice Group Director - Endowments & Foundations and Private Wealth | Helping clients achieve their mission through investments
1 年I love this! Great post.