Sponsorships Could Cut Waste in Charity World

The number of charities that start and fail, or that duplicate services already offered by more-established groups, could be

reduced considerably if more organizations got their start under fiscal-sponsorship arrangements, say some nonprofit leaders and philanthropists.

In a fiscal-sponsorship relationship, a tax-exempt nonprofit organization receives donated funds on behalf of a group that is involved in charitable activities but, usually, has not obtained charity status under Section 501(c)(3) of the Internal Revenue Service tax code. Often, fiscal sponsors also offer administrative and management support.

The services that fiscal sponsors offer could make the charitable world more efficient and free up more dollars for programs, proponents of the idea say.

“I personally believe there are too many nonprofit organizations out there, too much reinventing the wheel,” says Bill Mott, director of the Ocean Project, a Providence, R.I., group that works in behalf of a network of aquariums, zoos, natural-history museums, and conservation organizations. Being fiscally sponsored frees him up to focus on his mission rather than on writing payroll checks, he says.

“It may end up being better for the sector to have many organizations under one infrastructure, rather than a thousand organizations with a thousand accountants,” says Ellen Friedman, executive director of the Tides Center, a fiscal sponsor in San Francisco.

‘Oozing Potential’

Boosters of fiscal sponsorship say promoting standard practices among fiscal sponsors, such as strict financial oversight of sponsored projects, could bolster the entire nonprofit world.

“Fiscal sponsorship is one of those tools and resources that is oozing potential but has never had enough time or resources to really come into its own,” says Tom Reis, a program director at the W.K. Kellogg Foundation, in Battle Creek, Mich.

Until recently, organizations that practiced fiscal sponsorship knew little or nothing about one another. Then, in 2004, the Tides Center and seven other groups formed the National Network of Fiscal Sponsors.

At the same time, Tides, one of the nation’s oldest and largest sponsors, with 300 projects across the country, received a $4-million, four-year grant from the Kellogg foundation to improve its own operations, study the field of fiscal sponsorship, and develop standard practices for the field.

“A lot of the fiscal sponsorship that’s going on in today’s world is ad hoc,” Mr. Reis says. “It’s done as a favor to organizations that don’t want to be a nonprofit.” In the interest of improving philanthropy, he says, Kellogg aims to make fiscal sponsorship a more efficient and commonly used resource.

“It’s not that fiscal sponsorship is in a state of disrepair,” he says. “Like everything else in the nonprofit sector, it could be done better.”

Supported by the Kellogg grant, Tides last year conducted a first-ever survey of 111 fiscal sponsors. The study, whose results were published in July, found a great variety in how groups define sponsorship and how they practice it, Ms. Friedman says.

“There are some of us that really intentionally practice fiscal sponsorship as our contribution to the sector,” she says. “Others do it in an informal fashion, rather than as a core, central part of their work.”

More than one-third of respondents were community foundations that offer fiscal sponsorship as a complement to their grant-making activities. Close to one-third were arts organizations. A smaller fraction of respondents, about one-fifth, said they solely served as fiscal sponsors.

The survey also found that many, but not all, fiscal sponsors provide some level of administrative services, such as accounting and bookkeeping services, consulting on programs, human-resources management and employee benefits, shared office space, technology services, legal advice, grant-seeking and fund-raising assistance, and management training. Fees for sponsorship ranged from about 1 percent to 15 percent of sponsored projects’ budgets, with higher percentages for government grants and, sometimes, additional charges for certain services.

While 90 percent of respondents said they sign formal written agreements with all projects, they varied in how much they communicated with sponsored projects, the legal relationship between the sponsor and project staff members, and the amount of written documentation they required regarding charitable expenses and programmatic activities.

The respondents also reported differences in who had legal discretion over sponsored projects’ funds — the project, the sponsor, the funder, or the project and sponsor together.

Tides favors a strict approach. Sponsored groups are legally considered direct activities of the Tides Center, and their staff members are considered Tides employees, with full benefits.

“We have to have a very close relationship with our projects to ensure that the activities they engage in are charitable, that staff are treated properly, that they have enough money,” Ms. Friedman says.

Foundations Wary

Because of the risks involved with giving money to one organization to support another — and the lack of a legal definition of fiscal sponsorship — private foundations may be cautious about making grants to fiscally sponsored projects, says Jill Blair, a management consultant in Seattle who advises nonprofit organizations.

Her firm, BTW Consultants, last year interviewed 12 foundation representatives about their views on fiscal sponsorship.

“Most private foundations don’t really understand [fiscal sponsorship] and are wary,” Ms. Blair says. “When they see that a program is fiscally sponsored, they don’t know what it means, they don’t understand it, and they don’t know how to deal with it.”

When grant makers shy away from supporting a sponsored project, she adds, “that creates pressure for the sector to keep incorporating.” And that, she says, can lead to redundancy, with donors and foundations supporting multiple charities that do the same work: “We find 10 projects in the same city that don’t know each other.”

Joshua Mintz, general counsel at the John D. and Catherine T. MacArthur Foundation, in Chicago, agrees that the relationship between a fiscal sponsor and a project may not be immediately clear to grant makers.

“It’s a very poorly understood set of relationships,” he says. “Fiscal agent or fiscal sponsor mean different things for different people, and the legal rules are not always well understood.”

Foundations have reason to be cautious, says John Edie, Washington director of the consulting firm PricewaterhouseCoopers. If a sponsored project’s activities do not qualify as tax deductible, he says, the foundation’s grant would not count toward the 5 percent of their assets that foundations are required by law to give out each year.

“There’s sort of this perception that if you write the check to a charity, everything’s OK, but that’s not correct,” says Mr. Edie, former general counsel at the Council on Foundations, in Washington.

While agreeing that foundations should tread carefully, Mr. Mintz does not think foundations should avoid supporting organizations that have fiscal sponsors. “I don’t think it chases people away,” he says. “Careful foundations will look at the whole picture.”

Ms. Blair’s telephone survey found that community foundations are generally more familiar with the concept of fiscal sponsorship than are private foundations, in part because many of them practice or encourage it. “Many community foundations extend fiscal sponsorship as an offering to the community,” she says.

For example, the Community Foundation of Lorain County, in Lorain, Ohio, supports fiscally sponsored projects, says Brian Frederick, the foundation’s president. “We really evaluate it on a case-by-case basis,” he says. “It’s actually been a pretty important tool for how we’ve funded nonprofits over the years. The nonprofit sector is struggling in northern Ohio. Workplace and corporate giving is down. We’ve been discouraging new nonprofits from starting.”

Because of its knowledge of the nonprofit landscape in its home county, Mr. Frederick’s foundation is able to match promising projects with potential sponsors.

“It allows them to do good things but not take on all the liabilities and responsibilities of a nonprofit,” he says.

At the same time, he adds, the organization is reluctant to serve as a fiscal sponsor itself to fledgling projects, something it did more of in the past. “I don’t think we were providing the fiscal oversight that we needed to,” he says.

For instance, he recalls, the organizers of a road-beautification project the foundation sponsored eventually stopped keeping the area up. “There were no problems with the project itself, but no sustainability plan,” Mr. Frederick says. “They lost interest, and everything went to seed.”

Creating Standards

The key to ensuring that foundations take fiscal sponsorship seriously, says Ms. Blair, is to “create a true standard of practice rather than allowing willy-nilly nonprofits to take on the responsibility of fiscal sponsorship without really understanding it.”

With standards in place, Ms. Blair sees the potential for well-organized fiscal sponsors to ensure that new charitable projects learn how to manage their finances and staffs and run their programs well. And she thinks foundations ought to have an interest in seeing fiscal sponsors succeed in that role: “The philanthropic sector should be very interested in promoting an institution that has as its goal the promotion of good nonprofit practice.”

Does your group or program operate with the help of a fiscal sponsor —or does your organization serve as a fiscal sponsor? What are the pros and cons of that arrangement? Share your experience in the Fund Raisers forum.