Community foundations are facing a profound identity crisis because of the recent emergence and rapid proliferation of commercial gift funds.
Historically, community foundations have seen their role as raising permanent, unrestricted endowments to meet community needs within a specified geography. The phenomenal asset growth of commercial gift funds, however, has led community foundations to question their role in the charitable landscape.
Commercial gift funds and community foundations compete mainly for donor-advised funds, in which donors receive the tax benefits of giving to a charity -- the community foundation or commercial gift fund -- yet may “advise” the fund manager on subsequent disbursements to nonprofit organizations. Facing competition from a wide range of institutions now offering donor-advised funds, traditional community foundations are reevaluating their purposes and functions.
At the heart of this crisis lies a choice between two different approaches -- one that focuses on catering to donors’ needs, the other that focuses on community needs. How foundations resolve this crisis will have important implications not only for philanthropy in the United States, but also for giving in countries in Eastern Europe, South America, and Africa, where the U.S. community foundation model is being adapted to different cultural, political, and economic contexts.
Sharp differences exist between these two approaches. Donor-focused foundations see their missions as responding to the needs of individual donors. By contrast, the mission of community-focused foundations is to build unrestricted endowment assets to meet community needs. Both institutions, however, are increasingly relying on donor-advised funds, but toward very different ends.
Donor-focused foundations view acquisition of donor-advised funds as the end result, while community-focused foundations view such funds as a means to develop a relationship with donors, the objective of which is eventually to acquire unrestricted assets from those donors.
How will foundations resolve this tension? The management expert Peter Drucker has identified five questions that every nonprofit group must ask itself: What is the nonprofit organization’s business (mission)? Who is the organization’s customer? What does the nonprofit group’s customer consider to be value? How does the nonprofit organization define results? What is the nonprofit group’s plan?
Mr. Drucker’s first four questions bring into sharp relief the differences between donor-focused and community-focused foundations, illuminating the crucial role that community-based foundations play in promoting civil society and building social capital. Of course, not all community foundations will have a community-based focus, but national foundations, which have played a crucial role in nurturing and sustaining community foundations thus far, can and should focus their support toward strengthening community-based community foundations.
For commercial gift funds, the question of who is the customer has a simple answer. The customer is the individual donor who opens a charitable account, and the mission is to serve that customer’s needs. To the extent that customer-focused community foundations cater and respond to individual charitable interests, they differ little from commercial gift funds. The mission of community-focused community foundations is to build unrestricted assets, and the customer is the community as a whole rather than individual donors.
A sense of community lies at the heart of this paradigm.
Historically, community foundations have relied on a geographic focus to help define and reinforce a sense of community. More recently, ethnic, women’s, and religious community foundations have employed other definitions of community. Commercial gift funds, on the other hand, have no pretense of creating any shared sense of community. Their success -- nearly 100 are awaiting IRS approval -- has profoundly challenged this community-based paradigm, spurring community foundations to reconsider geography, start-up costs, and the value of social capital.
For community-focused community foundations, the customer is the general public. The issue for these foundations, however, is what economists refer to as the free-rider problem. Because everyone benefits, no one feels a singular obligation to underwrite the public good. If someone else pays for it, the free rider still benefits. Consequently, community-focused community foundations often have trouble persuading individual donors to contribute to the larger social good.
Commercial gift funds and donor-focused community foundations do not have to grapple with the free-rider problem. They provide a service to individual donors who have established donor-advised funds. The individual donor customer is neither prohibited from doing nor encouraged to do things that contribute to building the larger civil society. The donor is interested in the level of personal service and in meeting his or her charitable interests rather than serving the needs of the larger community.
But a downside exists: Donor-focused community foundations will likely avoid controversial topics for fear of alienating potential new donors or discouraging existing donors from adding to their donor-advised funds. Even if a commercial gift fund or donor-focused community foundation has an unrestricted grants pool alongside its donor-advised funds, it is less likely to support projects that might hurt its image with donors.
Commercial gift funds have, without a doubt, forever changed the charitable landscape. The questions are: What is the relevant lesson for community foundations, and what role, if any, might be played by national private foundations? By their very names, community foundations are more than a charitable bank account for individual donors. If they weren’t, commercial gift funds and donor-focused community foundations would be distinctions without a difference. If donor-focused community foundations represent the future, they will be eclipsed by commercial gift funds, which are more efficient and offer more investment choices.
The real lesson to be drawn from burgeoning donor-advised funds is that the community-building roles of traditional community foundations have enormous value -- a value that commercial gift funds and donor-focused community foundations are incapable of replicating.
National private foundations cannot afford to remain neutral as community foundations go through this period of introspection. Over the years, private foundations have invested significant resources to help community foundations expand their capacity, investments that are at risk if community foundations move from a community-focused to a donor-focused approach. National foundations would help ensure a continuous crop of local partners and collaborators long into the future if they expand grant programs aimed at building unrestricted assets and encourage local grant-making efforts that dealt with difficult community issues.
For better or for worse, commercial gift funds have raised donors’ expectations for a wide range of services.
If they are to compete with gift funds, community foundations must improve their marketing, donor services, and technological capacity. National foundations should explicitly support community-focused community foundations in all three areas.
To help strengthen market presence and lower costs, private foundations might encourage mergers among community foundations in close geographical proximity. Efforts to develop new relationships with financial institutions could be strengthened with an infusion of philanthropic venture capital from national foundations.
Such efforts are worthy of support and should be pursued, not because such partnerships will circumvent or undercut the growth of commercial gift funds, but rather because they may help to expand the long-term unrestricted assets available to benefit the common good of cities and towns across the globe.
Emmett D. Carson is chief executive officer of the Minneapolis Foundation. This article was excerpted from
“The State of Philanthropy 2002,” published by the National Committee for Responsive Philanthropy.