The Evolution of Community Foundation Relationships with Agencies and Affiliates

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2 The Evolution of Community Foundation Relationships with Agencies and Affiliates

3 Suzanne Friday, Esq. Senior Legal Counsel Vice President of Legal Affairs Experience and Training - Past Counsel, Nature Conservancy and Partner Nauman Smith Shissler & Hall, LLP - LLM in Taxation, Georgetown Law - EO Professor, Widener Law School - Admitted, Pennsylvania Bar, LCC Virginia Bar Lara Kalwinski, Esq. Policy and Strategy Associate Director of National Standards Experience and Training - Legacy Foundation, Indiana - PHJC Foundation, India - JD/MPA (Nonprofit Mgmt) from Indiana University - Admitted, Illinois Bar

4 DISCLAIMER This presentation does not provide legal, tax or financial advice. Consequently we urge you to seek the advice of your own legal, tax or financial professionals in connection with exemption organization matters. This communication (including any attachments or handouts) is not intended or written to be used and cannot be used, for the purpose of avoiding tax-related penalties.

5 Three Hours of Fun! 2:00-2:30 Legal Framework for Agency Relationships 2:30-3:00 Legal Framework for Affiliate Relationships 3:00-3:30 Agency Funds: Stories from the Field 3:30-3:45! BREAK! 3:45-4:30 Affiliate Funds: Lessons Learned from the Field 4:30-5:00 Discussion

6 Setting the Stage

7 Legal Requirements for CFs Treasury Regs A-9(f)(11) Ohhh, so this is where many of the National Standards requirements come from! - Single Entity with Component Funds - Name - Common governing instrument - Common governing board - Variance Power irrevocable and no subject to material restrictions or conditions - Reasonable Return on Investments - Periodic financial reports

8 What is a community foundation? A community foundation is a tax-exempt, nonprofit, autonomous, nonsectarian philanthropic institution supported by the public. With Long Term Goals of: - Building permanent, component funds established by many separate donors to carry out their charitable interests - Supporting the broad-based charitable interests and benefitting the residents of a defined geographic area, typically no larger than a state - Serving in leadership roles on important community issues.

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10 Legal Framework for Agency Relationships

11 What is an Agency? A public charity under Section 509(1), 509(a)2, or 509(a)3, this may include an endowment created by a government unit (caution!).

12 Section 501(c)(3) Public Charity Private Foundation Operating Non-operating

13 Public Charity Section 509(a)(1) Traditional Organizations 170(b)(1)(A)(i) 170(b)(1)(A)(ii) 170(b)(1)(A)(iii) 170(b)(1)(A)(iv) to schools 170(b)(1)(A)(v) Churches Schools Hospitals Support orgs Governmental Units 170(b)(1)(A)(vi) Publicly supported orgs Section 509(a)(2) Gross Receipts Organizations Section 509(a)(3) Supporting Organizations Type I Type II Type III Section 509(a)(4) Testing for Public Safety Organizations Functionally Integrated Non-functionally Integrated

14 What is not an Agency Private Foundations - Subject to material restriction? - Circumvent minimum distribution requirements? Non-charity - Burdensome due diligence processes - Ensure grants used for charitable purposes, rather than general support of a non-charity

15 Types of Agency Funds 1. Agency Fund that is a Component Fund 2. Agency Fund that is Not a Component Fund

16 Agency Fund - Component Fund An agency fund is a type of designated fund established by a charity at a community foundation for the charity s own benefit or the benefit of a related entity. The donor or resource provider and the beneficiary or recipient organization are the same entity. - Agency as Donor - Third Party as Donor - Comingling Funds (due diligence &paperwork) - Variance Power - Endowed - Not Endowed (no unilateral right to withdraw)

17 Agency Fund Not a Component Fund The Foundation serves its community in many ways, including, by raising new charitable resources, serving donors, strengthening local non-profit organizations through grants with technical assistance, and to managing, maintaining, and enhancing the community s philanthropic assets in perpetuity. As part of its philanthropic activities, the Foundation offers a service to smaller community-based charities in overseeing and managing their individual capital and endowments by, among other things, allowing these charities to invest alongside the Foundation's endowment through the Corporation. - Economies of Scale - Low Cost Basis - Enhancing Overall Capital Available to the Charitable Organizations of the Community

18 Which Entity Owns the Funds? Component Fund - Community foundation - Irrevocable Transfer, no unilateral right to withdraw money from the fund - Variance Power clearly stated in the fund agreement or accompanying documents - Notice of use of variance power but not request for permission to use - Clarify in the fund agreement - Understand FAS 136

19 National Standards Note: The National Standards for U.S. Community Foundations have helpful information about variance power, agency, and affiliate funds on the website Community foundation policies and procedures are checked for variance power as part of the accreditation process. While the website s current resources are excellent, stay tuned in the coming months for updates including sample agency and affiliate (component) fund agreements. If you just can t wait, submissions@cfstandards.org for samples.

20 Which Entity Owns the Funds? Not a Component Fund - Agency - Revocable transfer, unilateral right to withdraw money - Community foundation does not have variance power - Community foundation investment management and oversight - Agency board receives and analyzes reports on performance - Clarify in the transfer agreement - Understand FAS 136

21 Two Boards with Fiduciary Duties: Community Foundation State specific, think about issues such as: - Investment committee is responsible for the oversight and implementation of the investments strategies, making recommendations to the full Board of Directors as to the long-term asset allocation model, and selection and oversight of the underlying investment firms selected to manage the Corporation s endowment, each of which is registered either under federal or state securities law. - SEC registered investment adviser that serves as a consultant and performs independent due diligence on all underlying investment managers retained by the Corporation and utilized by the Foundation, provides investment reports. - Foundation is transparent with its donors, including agencies and provides regular updates on the asset allocation model, managers retained, and performance.

22 Two Boards with Fiduciary Duties: Agency State specific, think about issues such as: - Decide that a transfer is prudent and consistent with its fiduciary responsibility to the organization because of the benefits provided as a result of the relationship with the community foundation. - Request written updates on asset allocation model, managers retained, and performance. - Review updates provided about investment management and performance. - Train incoming board members to understand the investment of funds.

23 FAS 136 FAS 136 applies to the accounting treatment of agency funds, not the legal ownership. When agencies make transfers to the Foundation are made consistent and are recorded as both assets and offsetting liabilities by the Foundation in its financial records, ledgers, annually independently audited financial statements, and the 990. FUN FACT If the funds are component funds, then despite zeroing out assets and liabilities, the contributions counts toward public support test.

24 Registration with Regulators A charitable foundation that oversees the investment of its own assets may not be subject to registration with federal regulators. H O W E V E R A charitable foundation that invests on behalf of another charitable entity, may qualify for state and federal exemptions to registration requirements. If questioned, the foundation must prove how it meets the exemption. Registration requirements are fact intensive. Meaning: do your due diligence and have it in writing if you decide to invest for other charitable entities. Due diligence may include a no-action letter, public statement of non-concern, or interpretative letter from federal and/or state regulators.

25 Registration with Regulators: Considerations for Non Component Funds THE MORE YOU KNOW Federal and State requirements are not the same. Each state has its own regulations. Do you need: - Registration as an investment advisor - Registration as securities - Registration as broker/dealer - Registration of employees, officers, and employees as agents - Review of custody arrangements (segregated accounts, qualified custodian, transparency) - Employee registration as investment advisor - Registration as municipal investment advisor

26 Form 990 Reporting: Component Funds The community foundation should report agency funds on the 990. A charitable contribution (irrevocable gift) to the agency fund is treated as a contribution to the community foundation for the purposes of the Form 990. This treatment allows contributions to be included in calculating the public support test and is consistent with the principle that the contributions are contributions to the community foundation and subject to the community foundation s legal control. Grants from the agency endowments to the agency should also be recorded as grants from the community foundation to the agency for purposes of the 990. Component Funds and Not Component Funds Fees from funds are reported on the program services line as income or as other income. ASK YOUR ACCOUNTANT!!!.

27 Legal Framework for Affiliate Relationships

28 Affiliate Organizational Forms 1. Component Fund 2. Separately organized supporting organization 3. Separately organized nonprofit corporation with its own determination

29 Single Entity with Component Funds Legal Requirements for CFs Treasury Regs A-9(f)(11) - Name - Common governing instrument - Common governing board exercising powers - Variance Power irrevocable and no subject to material restrictions or conditions - Reasonable Return on Investments - Periodic financial reports

30 Supporting Organization Type I Most Common: - Often described as indicating a parent-subsidiary relationship - Generally involves the charity appointing a majority of the supporting organization board. Type II Least Common: Usually involves an overlapping board relationship where at least a majority of the members of the supporting organization s board are also members of the supported charity s board. Type III: - Operate with a degree of independence from the organization they support. - Typically the supported organization appoints one member of the governing board of the supporting organization and institutes other procedures designed to ensure that the supporting organization is responsive to it. - Type III supporting organizations may provide financial support to their supported organization or they may directly carry out a program or function for it.

31 National Standard 9 A community foundation's governing body maintains oversight and control over geographic affiliates. A geographic affiliate is a component fund (or collection of component funds), established within or by the community foundation, serving a defined geographic region and under a common advisory group.

32 Being Clear about the Relationship Affiliates are organized as geographic component funds of the community foundation. As a component fund of the community foundation, the geographic affiliate is not independent. In addition, the host community foundation has overriding governance authority. No representative agreement or operational policies between the two foundations contradict the host community foundation s control and oversight.

33 Being REALLY clear about the Relationship

34 I am just a sample. Advisory Committee A community foundation advisory committee may be established in accordance with Foundation bylaws for the purpose of broadening the Board of Directors knowledge of charitable needs in the community

35 I am just a sample. Drafting Advisory Committee Language - The Advisory Committee shall include one Foundation director, current or past. - The initial committee shall consist of those individual named in the addendum. - Members of the Advisory Committee must be residents, employees, or have long-time associations with the community and should include individuals who reflect the areas breadth and diversity. - The committee will have X number of initial members. - The committee will serve X-year terms.

36 I am just a sample. Advisory Committee Rules and Procedures The Advisory Committee may suggest policies and procedures for its internal operations which provide for Advisory Committee officers, regular and special meetings, subcommittees, and other similar matters, as the Advisory Committee may determine to be desirable in the fulfillment of the Advisory Committee s duties and responsibilities; provided that such rules of procedures must be approved by the President of the Foundation and are in no way inconsistent with the Foundation s bylaws.

37 Advisory Committee Duties I am just a sample. - Maintain Foundation Polices and Standards - Maintain confidentiality of committee deliberations - Abide by the Foundation s conflict of interest policy - Act in accordance with relevant Foundation policies - Promote the Geographic Affiliate Fund - Consistent with the Foundation s policy on donor fundraising, solicit donations, and contributions to the Fund with the assistance of Foundation staff. - Have as a goal the creation of permanent funds to benefit the BLANK area. - Evaluate and Advise Grant Requests - Make recommendations as distributions from the Fund to the Foundation - If requested, consult with the Foundation concerning grants from other funds to charitable organizations in the area. - Exercise Leadership - Keep abreast of issues in the area and the philanthropic field - Help identify people of achievement and distinction who can serve on the committee. - Reach out to community leaders and professional advisors and assist in connecting them to Foundation staff. - Perform additional duties as necessary or appropriate.

38 I am just a sample. Services Provided by the Foundations - Quarterly reports on the investments of the component funds and on all cash receipts and disbursements of the Fund. - Promotion of the Fund in the Foundations' communications materials. - Staff support of Advisory Committee meetings. - Staff support in evaluating grant requests, monitoring grants funded, and other reasonable grant support as requested. - Staff support in endowment building techniques. - Staff consultation on developing brochures for fund development, grant applications, and other information for grantseekers. - Donor relations support, including language and mechanisms for receiving gifts and creating funds. - Maintenance of the Fund s records. - Other services as requested by the Committee and approved by the Foundation s Board of Directors.

39 Distributions I am just a sample. All grants from the Fund require the approval of the Foundation Directors after receiving a written recommendation from the Advisory Committee. While the Directors generally will approve recommendations by the Advisory Committee for the disbursement of grants (as long as the grant is in compliance with the policies and procedures of the Foundation and all legal and tax requirements applicable to the Foundation), the Directors will at all times retain sole discretion with respect to the approval of grants. No distribution shall be made from the Fund to any entity if such distribution will in the judgment of the Directors endanger the Foundation s status under the Internal Revenue Code 501(c)3.

40 I am just a sample. Ownership of Assets The assets of the Fund shall be the property of the Foundation for all purposes. The assets in the Fund shall be invested and reinvested by the Foundation as a part of its investment portfolio. The assets of the Fund may be commingled and invested with other assets of the Foundation. Separate accountings for the Fund shall be maintained to the extent necessary to determine the net income of and the total assets in the fund.

41 I am just a sample. Transparency Each year, the Foundation will provide the Advisory Committee with a copy of the Foundation s annual audited financial statements as prepared by the Foundation s independent certified public accountants, as well as such other information relating to the Fund as the Advisory Committee may reasonably request from time-to-time. The Foundation will provide the Advisory Committee with quarterly reports on the investments included in the Fund, and all cash receipts and disbursements from the Fund.

42 I am just a sample. Principles for Geographic Affiliate Funds - All geographic affiliate fund Advisory Committee members are considered volunteers of the Foundation and shall fall under the conflict of interest policy and other relevant policies covering all aspects of Foundation management. - Funds shall operate under the Foundation s asset management program and shall abide by the Foundation s gift acceptance polices and criteria for establishing funds and fund agreements. - The Foundation s asset development plan shall address the asset development plan for the geographic affiliate fund. The geographic affiliate fund shall operate under the Foundation s donor service guidelines and communications with donors shall include a statement of the Foundation Board s variance power. - The Foundation s communications tools shall include the activities of the geographic affiliate fund.

43 Questions Web Resources Call: (703) (800)

44 Affiliates Law, Regulation, Suggestions: That s nice, but how does this work in the real world?

45 Sheryl Aikman

46 9 affiliates (within 18-county service area) 3 serve specific communities 6 serve counties

47 Total endowed assets $12,512,180 Range among affiliates $320,000 - $3,258,244

48 Agency Funds 179 Total assets $54,666,988

49 Questions for New Organization Funds How does an endowment or charitable fund fit into your organization s financial plan? How did the organization build these funds? What are your most important objectives for these funds? How are the funds invested now? How are you measuring that investment s performance?

50 Will Ginsberg

51 Angela Detlefs-Trettin Joe Sorenson

52 Iowa Affiliates

53 Questions Web Resources Call: (703) (800)

54 Agency Law, Regulation, Suggestions: That s nice, but how does this work in the real world?

55 Will Ginsberg

56 Questions Web Resources Call: (703) (800)