Community Funds Urged to Make Big Changes to Survive

A much anticipated report, released here at this year’s annual community-foundation conference, outlines the future role of such funds within the philanthropic world.

But the report’s title, “On the Brink of New Promise: The Future of U.S. Community Foundations,” could just as easily have been called “On the Brink of New Peril.” The report lays out in stark terms the view that some community foundations could become irrelevant if they refuse to make innovations in coming decades.

Several sessions at the meeting here last month focused on the same theme — how community foundations must reinvent themselves and take strong leadership roles in their community.

Historically, community foundations have focused on aggregating philanthropic assets from individuals, and educating those donors about local charities and needs. But both those services have been threatened. Some organizations, such as the Tides Foundation and Rockefeller Philanthropy Advisors, provide extensive philanthropic guidance to wealthy donors for significant fees. Meanwhile, some large financial companies, such as Fidelity Investments and the Vanguard Group, provide donor-advised funds with modest minimum investments at a lower cost than donors find at many community foundations.

“With many other types of organizations able to handle the services that community foundations have traditionally managed — often with lower costs and greater efficiency — community foundations more than ever will need to ‘walk the talk’ of community benefit,” the new report says.

The report was written by Lucy Bernholz, president of Blueprint Research & Design, in San Francisco, and Katherine Fulton and Gabriel Kasper, of the Monitor Institute, in Cambridge, Mass.

It notes that community foundations have largely been in a defensive posture since 1991, when Fidelity began encroaching on the foundations’ turf by establishing its Charitable Gift Fund. To remain relevant in the future, community foundations must focus less on the assets they accumulate, and more on the impact they have on communities, the authors write.

“Big bets will need to be made and whole new ways of structuring the work of community philanthropy created,” the report says.

The report can be downloaded at no cost at http://communityphilanthropy.org.

In a separate session, John Kania, managing director of Boston’s Foundation Strategy Group, argued that community foundations’ greatest competitive advantage over other providers of donor-advised funds lies in becoming a “change agent” in their cities, towns, and counties. But the group’s research shows that community foundations typically spend 5 to 15 percent of their budget on “non-grant services to the community,” such as convening local groups, conducting research, and helping improve the capacity of other charities.

“This has to change,” Mr. Kania said. “There needs to be more investment in this area.”

He listed several community foundations that have already started services that are making a big difference in their cities and towns. Among them: DonorEdge, a project of the Greater Kansas City Community Foundation, which allows donors to search a database of performance assessments on nonprofit groups in the local area; and dot.che, proprietary software developed for the Arizona Community Foundation that helps link donors and nonprofit projects.

Consultants weren’t the only ones beating the drum for change. At a breakfast session, Jennifer Leonard, chairwoman of the Council on Foundations’ Community Foundations Leadership Team, and president of the Rochester Area Community Foundation, in New York, urged foundation leaders to make changes, rather than simply react to competitive threats.

“What will the next Fidelity moment be for our field?” she asked. “And what can we do to be ahead, rather than playing catch-up?”

Shrewd investing has helped many community foundations increase their grant dollars, according to a new report by the Council on Foundations. The report found that the median return at 169 community foundations in 2004 was 10.8 percent, meaning half earned more and half earned less.

More important, community foundations have earned a median annual return of 9.5 percent over the past 15 years. If one assumes a spending rate — including investment and administrative fees — of 5.5 percent, that return has added to the amount community foundations can give away, according to the report. Inflation averaged 2.8 percent over the 15 years studied.

But Michael A. Miller, of Colonial Consulting, an investment firm that advised nonprofit groups, argued in a presentation that community foundations could bolster returns by adopting some of the strategies that have led to even better returns for the large university endowments.

Comparing figures for the 10-year period ending in June 2004, community foundations earned 9.5 percent annually, while large universities recorded a 12.2-percent annual return, according to data compiled by the Council on Foundations and the National Association of College and University Business Officers.

Universities with big endowments have achieved better returns than other endowments in recent years through successful forays into so-called alternative investments, such as hedge funds, private-equity funds, and timber.

Mr. Miller urged caution before jumping into any alternative investment, particularly hedge funds, which have become popular among endowment managers. The primary benefit of alternative investments, he said, is that they provide diversity while also offering the potential for gains that preserve a foundation’s purchasing power.

Community funds are gradually embracing alternative investments. In 2004, the 169 funds in the council’s study had 9.8 percent of their assets in such investments, up from 0.9 percent in 1999.

To order a CD-ROM of the Council on Foundations report, “2004 Investment Performance and Practices of Community Foundations,” go to http://www.cof.org or call (888) 239-5221. The cost is $15 for members and $30 for nonmembers. Printed copies are available for $50 for members and $65 for nonmembers.

Another new study, by the Columbus Foundation, found that total assets at 636 community foundations rose 13 percent in 2004, to $39.4-billion.

Gifts to community foundations in 2004 totaled $4.2-billion, an 11-percent increase over 2003. For the fourth straight year, the Tulsa Community Foundation received the most — $272-million in 2004.

The 2004 gifts helped lift the Tulsa fund into the ranks of community foundations with more than $1-billion in assets. Tulsa had assets of $1.25-billion, placing it fifth on the list of the wealthiest community foundations. The New York Community Trust, with $1.8-billion in assets, topped the list, as it has every year since the survey began in 1988.

The participants in the survey awarded grants totaling $3-billion, up 14 percent from 2003, and triple the $1-billion awarded by community foundations in 1996.

To view the results of the Columbus Foundation’s current and past surveys, go to http://www.columbusfoundation.org.

Printed copies of the 2003 survey results are available free from the Columbus Foundation, 1234 East Broad Street, Columbus, Ohio 43205; (614) 251-4000.