Community Foundation Fundamentals

What is a community foundation?  Community foundations exist throughout the United States (over 700 in number) and the world. Generally, they serve donors and are identified with specific geographic regions.

A community foundation’s endowment fund is comprised of many different component funds that have been set-up by donors. Many of these funds are managed for perpetuity such that donated funds will grow to keep pace with inflation and make annual charitable payouts (grants). Donors also have the option of establishing non-endowed component funds that may be fully granted out over a period of time. A description of how each component fund is to be administered is set forth in a fund agreement between the donor and the foundation.

Community foundations offer great flexibility to donors who can chose to give unrestricted donations, establish a scholarship fund, create a fund that will benefit a specific organization, or set-up a fund that will provide grants in their chosen field-of-interest (e.g., the arts).

Another type of fund available to donors is the donor-advised fund, which allows a donor to make a tax-deductible contribution to the foundation and at some point in the future make recommendations to the foundation about grants from the fund’s assets.  If a donor chooses a charity that meets the IRS definition and passes the due diligence process, the foundation makes the grant. This may include charities outside of the local community.

What is the variance power?  This power allows a community foundation under certain circumstances to alter the gift instructions contained in the fund agreement. This power is so important to the long-term management of an endowed fund that it is included in the tax law governing community foundations and is a requirement of all accredited community foundations.  The reason is simple: some donor instructions may become impossible to meet at some point in the future. Perpetuity, someone once said, is a very long time. For example, a designated charitable recipient organization may go out of existence or lose its non-profit status. In that case, the board of directors must have the power to alter the original gift instructions while still attempting to honor the donor’s original intent. To date the Community Foundation of Mendocino County (Foundation) has not used its variance power.

How does a foundation make grant decisions?  A community foundation is “donor focused” in that a donor who establishes a component fund may select the fund’s grant-making scope based on their interests and priorities. Most community foundation donors use the foundation’s local knowledge and center their giving on local causes and organizations. However community foundations honor the fact that some donors have interests that extend beyond regional boundaries and want to incorporate non-profits outside of the county into their giving programs.

Community foundations are distinguished by having a deep understanding of the needs of the communities they serve. Foundations regularly connect donors to projects of interest and ensure each gift (from both living and deceased donors) is used in a way that is effective and accomplishes the donor’s goals. Community foundations help build local philanthropy by offering donors a way to “give back” locally through their estate plans. (In the absence of a community foundation, these legacy gifts often go to institutions outside of the local community.)

Grants and scholarships are awarded by the board of directors depending on how each component fund is structured. Grants from designated funds (set-up to aid specific non-profit organizations named by the donor) are made annually with a simple staff review to ensure the non-profit continues to meet its mission. Grants from field-of-interest funds (set-up for a specific geographical area or area of interest) often involve a process in which experts in the field (e.g., historical preservation) volunteer to review applications. Unrestricted donations are pooled into the Community Endowment Fund. This fund is the source of the annual Community Enrichment Grants, which are evaluated by volunteer advisors in each region of the county. The Community Endowment Fund also is used to support local community initiatives as recommended by a board committee. Scholarship fund recipients are often chosen by a committee of people who reflect the values and aspirations that led the donor to establish the fund. (Although all Foundation scholarships benefit people from Mendocino County, many of the scholarship payments are sent to schools out of the area.) Grants from donors-advised funds are recommended by the donors, many of whom rely on the community foundation to assist them find the projects that most directly meet their philanthropic goals. They are free, however, to designate grants outside our County, and some exercise that right.

What is an endowment?  An endowment is a sum of money, usually relatively large, that is invested such that it grows over time to maintain its buying power and makes distributions periodically, most often annually. Community foundations pool the money of component funds with a long-term orientation into an endowment investment pool.

Many endowed component funds come from estate gifts received following the deaths of donors who have established fund agreements with the foundation during their lifetimes. The money is invested in the endowment investment pool and, depending on how the agreement is structured, grants are paid out in perpetuity or a period specified in the fund agreement.

The amount of the annual payout is dictated both by the fund agreement and by the foundation’s spending policy which sets the percentage of the endowment that can be spent each year. The Uniform Prudent Management of Investment Funds (UPMIFA) sets guidelines for how much of an endowment fund may be used in light of economic conditions and community needs.

When a large donation is received into a component fund, it may not yield grants until the investments produce enough gains to allow for grants without eroding the principal needed to produce future grant payments. Thus a large donation might be received into a fund within a reporting period, but only a relatively small amount in grants paid out of that fund for that same period.

How is the Community Foundation governed?  The Community Foundation of Mendocino County is a  California nonprofit public benefit corporation that is exempt from federal income tax under Internal Revenue Code (“Code”) section 501(c)(3), and that qualifies as a “public charity” under Code sections 509(a)(1) and 170 (b)(1)(A)(vi), as modified by Treasury Regulation[s] section 1.170A-9(f)(11).

The Board of Directors of the Foundation and its CEO/President operate the Foundation in a manner consistent with The National Standards for U.S. Community Foundations®, an annual accreditation program that fosters excellence in community philanthropy. The Foundation also receives an annual audit of its financial statements and reviews and updates its bylaws on a regular basis. Audited financial statements and the 990 annual tax returns are available on the Foundation’s website.

Board members are selected to represent the entire county, and often serve as committee members or regional advisors prior to their appointment. The Foundation also has an extensive network of volunteer advisors (over 174) who serve on grant, scholarship and board committees.