Innovative practices of Colorado foundations

Grantmaking is the primary tool used by non-operating foundations to further their respective missions. Foundations also use a number of other approaches to improve effectiveness of grantmaking or leverage assets to enhance grantmaking. Here, some of these approaches are briefly described and the prominence of each practice or tool among Colorado’s largest foundations is reviewed. Such efforts are especially important as foundations have come under increasing criticism from a broad range of stakeholders – most notably the public, charities, and members of Congress – for seeming to embrace the 5 percent distribution rule as a ceiling rather than a floor for annual giving. The COVID-19 pandemic and social justice movements spurred calls, as well as pledges, to change foundation grantmaking practices by, for example, reducing restrictions on the use of grant funds and lessening the compliance burden on grantees.[1]

Time-Limited or Spend-Down Foundations

Foundation managers experience tension between giving now or giving later. Traditional payout rates allow a foundation to exist in perpetuity as long as the compounded growth of invested assets exceeds the spending on payouts. One way to increase current impact is to aggressively make grants in excess of the sustainable payout rate. Some foundations choose this approach and are referred to as “time-limited” or “spend-down” foundations, meaning that the foundation will deplete all assets in a given time period. In Colorado, there are examples of time-limited foundations including the Gill Foundation (reportedly to cease operations twenty years after the death of the founder)[2] and Mighty Arrow Family Foundation (formerly New Belgium Family Foundation), which declares that “together with her sons, Zak and Nick, Kim has committed to donating the entirety of Mighty Arrow’s fund by 2040.”[3]

Matching Grants

Matching grants have long served as a strategy to incentivize charitable giving by lowering the relative prices of desirable activities. Corporate foundations, in particular, frequently use matching grants as an employee benefit, allowing employees’ giving to go further with the employer’s support. Some of Colorado’s largest foundations use matching grants for both of these purposes. The Fort Collins-based Bohemian Foundation, for example, operates the Give 10 program to encourage higher levels of charitable giving in Larimer County. Each year, the program connects with up to 10 members of the public, referred to as Give 10 Emerging Leaders, who commit to grow their giving to Larimer County nonprofits over three years from $5,000 to $10,000. The Bohemian Foundation matches the successful giving achievement by providing a one-time matching gift of $10,000.[4]

As a corporate foundation based in Lone Tree, Colorado, the Charles Schwab Corporation Foundation did not appear among the state’s largest foundations based on assets despite its significant annual giving. Rather than holding large amounts of assets like most private foundations, the corporate foundation serves as a conduit for the charitable giving by the company (corporate philanthropy) and matching gifts requested by employees (employee giving) so the ratio of grants to assets is quite high. The foundation’s matching gift policy provides a dollar-for-dollar match for up to $1,000 of employee giving per year, as well as another $1,000 match for employees serving as a nonprofit board member.[5] Based on the 2018 IRS filing, the foundation made 1,319 grants with more than half given to organizations in California, Colorado, Texas, and Arizona where Charles Schwab has large concentrations of employees. The average grant is over $5,000 reflecting the corporate philanthropy focused on financial literacy and general grants, while the median grant is $500 and more reflective of employee giving.

Diversity, Equity, and Inclusion (DEI) Considerations in Grantmaking

Foundations’ missions guide grantmaking decisions and those missions often focus on promoting DEI goals. That said, foundations also receive criticism at times for not doing more with their assets to make foundation operations and grantmaking more representative. A number of activities supporting DEI stood out during the review of grantmaking by Colorado’s largest foundations, although a more systematic effort at documenting the practices is warranted. The close connection between mission and supporting DEI efforts is apparent in the Gill Foundation’s vision of “a world where all people have equal opportunity regardless of sexual orientation or gender identity” and the foundation’s decades of giving have helped fund “efforts to secure full equality for lesbian, gay, bisexual, transgender, and queer (LGBTQ) people.”[6] The mission of the Colorado Springs-based Sachs Foundation is to “provide educational opportunities and to improve and support the lives of Black residents of Colorado.”[7] The foundation’s mission and activities were inspired by the experiences of the foundation’s namesake in Colorado Springs during the 1920s. The foundation continues to award scholarships and support programming in the Pikes Peak region, as well as a recent initiative to increase the number of Black teachers in Colorado.[8] Beyond missions, the following briefly details examples of Colorado foundations taking steps to embed DEI principles into the organization’s operations (The Bonfils-Stanton Foundation) and elevate the community’s role in grantmaking (AJL Foundation).

The Bonfils-Stanton Foundation focuses on elevating art and culture in Colorado. The foundation, according to its President and CEO since 2013, embarked on an effort “to weave our commitment to diversity, equity and inclusion into all our work and operations.”[9] The Bonfils-Stanton Foundation has taken a number of actions including creating and publicizing an Equity/Values Statement alongside the more traditional mission and vision statements, making available a 2021 Equity Culture and Climate Report that includes a racial equity survey, supporting the creation of an artistic land acknowledgement, and presenting the details of the foundation’s “Racial Equity Journey” online. A sample of programmatic actions promoting DEI include improved diversity among Board members, commissioning a study on “Enhancing Arts Engagement with Diverse Communities,” establishing a dedicated DEI Committee as part of the Board governance structure, creating a DEI Opportunity Grant Program, and putting in place rules to reshape giving including a ceiling on general operating grants and a shift away from making “large multi-year capital grants to large Eurocentric organizations.” These actions, along with others, have more than tripled the share of grants to “organizations led by and serving people of color and other historically marginalized communities” between 2013 to 2018 (from 2.4% to 8.3%). Changes to the foundation’s Livingston Fellowship Program resulted in greater equity, with the average diversity of selected Fellows reaching 50% of the classes during the 2014 to 2020 period.[10]

Participatory grantmaking represents one approach to integrate more diverse community-based perspectives into a foundation’s giving. With a vision “that all Colorado youth and families have opportunities to thrive,” the Denver-based AJL Foundation asked themselves a fundamental question in 2019: “What is the most equitable and effective way to distribute AJL's grantmaking dollars to best support Colorado youth and families?” In response, the foundation adopted a participatory grantmaking process guided by community members for a portion of its giving. Specifically, AJL’s Grantmaking Committee comprises “families and youth, community organizers, professionals working within education and human services, and AJL Board and staff” to select 20 nonprofits for general operating grants of $20,000. The Committee’s consideration of nonprofits is driven by the following criteria, organizations should “1) support Colorado youth and/or families, 2) working within education and human services, 3) that are community-led or heavily community-driven, 4) serve Metro Denver or the San Luis Valley, and 5) have an operating budget under $5M.”[11] The participatory grantmaking process begins with recruitment of representative community members to serve on the grantmaking committee.[12] The committee members receive compensation for their time either directly or as a donation to a selected nonprofit. Once formed, the committee meets quarterly and members propose nonprofits to be supported following the introductory meeting. Staff contact nominated organizations for an application and to ensure that the nominees fulfill the funding criteria. The members then receive the applications and vote for their favored organizations. The final meeting for the grant cycle hosts the selected nonprofits and is also open to other interested foundations.[13]   

Foundation Giving to Donor Advised Funds (DAFs)

Donor Advised Funds, or DAFs, have emerged as an alternative approach to philanthropic giving and, in some cases, an alternative to creating new private foundations. Donors contribute funds to a DAF, housed at a charity, and then recommend grants from the funds over time. A general concern with DAFs is that, while the donated funds provide an immediate income tax deduction for the donor, a requirement that the funds are distributed to the ultimate charitable recipients in a timely manner is lacking. From a foundation perspective, concerns exist that a foundation might give to a DAF to either circumvent payout requirements (since the funds can remain in the DAF indefinitely) or avoid the transparency required by the IRS Form 990-PF for grantmaking (a grant to a DAF might ultimately be directed to an organization that the foundation does not wish to publicly disclose).[14] The latter is the more immediate concern for foundations. In Colorado, these concerns over foundations and DAFs appear generally unfounded. The review of grants for the largest 100 foundations found only three foundations made grants to DAFs, including $1.2 million to DonorsTrust, more than $900,000 to a DAF named after a foundation’s officers, and nearly $800,000 to a DAF at the Denver Foundation.

Program-Related Investments (PRIs)                  

Making grants represents the primary mechanism by which foundations provide support to partners and beneficiaries. Alternatives to grantmaking exist, but receive much less use and attention. Foremost are program-related investments, or PRIs, established by the 1969 Tax Reform Act and more recently revisited by the Obama Administration. For foundations, PRIs present an alternative to direct grantmaking with the foundation using its assets to provide loans, loan guarantees/credit enhancement, or equity investments with beneficial terms. As the name implies, the investments must be tied to the charitable program of the foundation and the financial return from the investment cannot be the main reason for taking the action. The logic behind PRIs is compelling, since supporting lending and investment can crowd in other sources of funds, count as part of annual distribution requirements, and generate modest returns, all while preserving a foundation’s corpus for future grantmaking and investments. That said, foundations use PRIs sparingly. One account suggests that “less than 1 percent of all foundations invest using PRIs” with cost and risk representing the most commonly cited barriers to use.[15] A study from 2017 tells us that foundations with more capacity, both financial and human resources, as well as younger foundations are more likely to utilize PRIs.[16]

Of the largest 100 foundations in Colorado, only 10 report outstanding PRIs in the IRS Form 990-PF filings. While this does not mean that other foundations have not used PRIs in the past or since these filings, it is evidence that such use is uncommon even among the foundations with the most capacity. In all cases, the reported outstanding PRIs represent less than 2% of assets (see table 10 for details). For the 10 foundations with PRIs, the average total assets are $473 million and 4 of the 5 largest foundations are represented. All but 2 of the 10 foundations using PRIs rank in the top third of Colorado’s largest 100 foundations. 

Despite the limited use of PRIs, meaningful investments are being made by Colorado’s foundations primarily through lending at below market rates with favorable terms. The following represent examples of the PRI activity. The Colorado Health Foundation directed $4.75 million “to help finance a comprehensive behavioral health clinic in Fort Collins that will provide a new hub for prevention, intervention and treatment services.”[17] Gary Community Ventures (formerly The Piton Foundation) lent $2.6 million to the Urban Land Conservancy with an annual interest rate of 2% and quarterly interest-only payments and principal repayments in 2021 and 2026.[18] The Colorado Trust made a series of loans with interest rates ranging from 1% to 2.5% and amounts from $58,000 to $1.5 million for terms of up to 6 years. Another example comes from Gates Family Foundation in 2019, which lent more than $1 million to Colorado Charter Facility Solutions “to support the launch of a Colorado Charter School Facilities Fund.”[19] The use of PRIs reflects one alternative to foundation grantmaking, but there are others including efforts to align investment choices with mission.

Mission Related Investments (MRIs)

Mission related investments, or MRIs, represent investments from a foundation’s endowment aligned with the organization’s mission.[20] While PRIs are explicitly designated in the tax code as a means of satisfying a foundation’s annual required minimum distributions, MRIs are a conscious choice to invest endowment funds in a manner that supports the foundation’s mission rather than to solely maximize risk-adjusted returns. Essentially, MRIs connect a foundation’s programmatic focus with investment decisions and are seen as a means of activating the endowment funds whose returns are depended on for annual payouts. Nationally, the F.B. Heron Foundation (now Heron) pioneered a holistic approach to MRIs in an effort to “conceive a broader philanthropic ‘toolbox’ capable of greater social impact than grant-making alone.”[21]

Visibility into MRI activity is less clear than for PRIs, since no formal reporting is required by the IRS. Regardless, a number of Colorado’s foundations engage in a range of MRI efforts although an exact number is unclear. On one end, The Colorado Health Foundation limits its MRI activity to providing non-cash loan guarantees, like a $3.5 million loan guarantee to support indieDwell’s efforts to expand a modular housing factory in Pueblo.[22] On the other, Gary Community Ventures employs what they refer to as “Mission Investments” and “Sustainable & Impact Investments” to build “an endowment that is 100% impact-focused.”[23] Mission Investments represent a portion of the foundation’s portfolio and align with foundation goals supporting School Readiness, Youth Success, and Family Economic Mobility. Impact Investments reflect investment decisions intended to generate “positive social and environmental impact.” Based on financial statements, some of these include private equity investments in microfinance institutions, alternative investments to acquire and operate renewable energy projects and sustainable infrastructure assets, and investments in real assets through an affordable housing fund. Some other foundations engaged in MRI activity include Gates Family Foundation, Mighty Arrow Family Foundation (formerly New Belgium Family Foundation), and AJL Foundation.

While not synonymous with MRIs, some foundations screen investments for environmental, social, and governance (ESG) considerations. For example, the Mighty Arrow Family Foundation notes that the share of the endowment not “committed to impact-oriented private investment vehicles…is held in public equities and bonds that have been screened for Environmental, Social, and Government performance. Our portfolio is 100% fossil fuel free.”[24] Such screening of endowment investments for alignment with a foundation’s goals is often part of a broader portfolio of mission-supporting activities. AJL Foundation reports how the organization’s investment portfolio “is invested for impact” including grantmaking, PRIs and MRIs, thematic investments, screened investments, and even mission-oriented cash investments (through CNote and Native American Bank). Figure 12 provides the foundation’s impact portfolio allocation as of the first quarter of 2022, which effectively demonstrates a series of approaches to move beyond only grantmaking in the use of foundation assets. AJL Foundation also secures an ESG rating through MSCI Analytics for its investment portfolio that is made public and can be used to compare the portfolio to various benchmarks.[25]

Credit Enhancement and Loan Guarantees

While the flow of foundation resources into the nonprofit community is typically conceived as an annual grantmaking exercise, the provision of credit enhancement or loan guarantees operates differently and is one specific type of program-related investment (PRI). By pledging foundation assets to enhance a charity’s credit or guarantee debt repayment, the foundation can reduce the ongoing cost of capital for the beneficiary, help establish a borrowing history, improve access to capital, and potentially draw in more capital for the supported purpose.[26] Although there are risks, the foundation provides the enhancement or guaranty without liquidating or gifting investments. In the case of default by the benefitting organization, the foundation’s pledged resources are lost but shift to grants from a payout perspective. Nationally, the Kresge Foundation and Walton Family Foundation (the latter in the charter school space) use credit enhancement and loan guarantees to leverage their foundation balance sheets.

In Colorado, credit enhancement and loan guarantees by the largest foundations appear to be uncommon. Although such activity is difficult to identify based on IRS filings, Gary Community Ventures received national attention when it joined with six other foundations in 2020 (led by The Kresge Foundation) to participate in the Community Investment Guarantee Pool (CIGP), which offers more than $30 million in credit guarantees backed by unfunded commitments from foundation assets.[27] An especially salient example of how foundations can use loan guarantees comes from the Gates Family Foundation during the COVID-19 pandemic. In 2020, Gates Family Foundation guaranteed a $12.5 million loan from FirstBank to nonprofit lenders. The loan facilitated Paycheck Protection Program (PPP) loans to Colorado small businesses with the backing of $3,167,000 in Gates Family Foundation assets.[28] Governments, including the State of Colorado, have long taken advantage of existing permanent funds and ongoing funding sources to provide credit enhancement for school districts, colleges and universities, and nonprofit charter schools.[29]

Debt

Historically, private foundations borrow infrequently and any long-term debt is typically used for capital investments like the construction or renovation of a headquarters. Short-term debt, including lines of credit, provides a source of valued liquidity to avoid untimely unwinding of foundation investments. Nationally, the Ford Foundation and a number of peers – including the Doris Duke, Kellogg, MacArthur, and Mellon foundations – grabbed headlines when announcing a plan to substantially boost short-term payouts to support charities over two years financed in part by the issuance of “social” bonds totaling $1.2 billion.[30] To some, borrowing to support philanthropic giving is a game changer. To others, the move is an aberration only to be seen during a generational crisis. It is unsurprising that a growing financial sophistication among foundation leaders accompanies an effort to leverage balance sheets. While not without risk, borrowing by foundations represents an arbitrage strategy where invested assets are expected to grow at a rate exceeding the costs of borrowing. Historically low interest rates coupled with foundations’ long-term investment returns made borrowing an appealing approach to boost current spending for some especially sophisticated foundations.

Based on the review of Colorado’s largest 100 foundations, only 3 foundations report mortgages or notes payables in IRS filings. This is despite reporting average assets in the form of Land, Buildings, and Equipment before depreciation (based on IRS 990-PF, Part II, Line 14) of $1.75 million. There is no evidence of Colorado foundations issuing debt to supplement funds available for grantmaking.

[1] https://www.cof.org/news/call-action-philanthropys-commitment-during-covid-19

[2] For a list of time-limited foundations, see: https://cspcs.sanford.duke.edu/time-limited-foundations-sorted-spend-down-date

[3] For details, see: https://www.mightyarrow.org/

[4] To learn more about the Give 10 program, see: https://www.bohemianfoundation.org/community-programs/give-10

[5] https://www.aboutschwab.com/giving-back

[6] https://gillfoundation.org/about/

[7] https://www.sachsfoundation.org/history.html

[8] Elizabeth Hernandez. “To retain more Black teachers, new Colorado higher ed program supplements their salary up to $20K.” The Denver Post, February 7, 2021.

[9] https://bonfils-stantonfoundation.org/about-us/presidents-letter/

[10] See the details of The Racial Equity Journey of the Bonfils-Stanton Foundation at: https://bonfils-stantonfoundation.org/bsf-racial-equity-journey/

[11] See the following link for details and participatory grantmaking resources: Dianne Myles. Shared Power, Shared Impact: AJL’s New Grantmaking Process. January 31, 2020. Accessed at: https://www.ajlfoundation.org/article/shared-power-shared-impact-ajls-new-grantmaking-process

[12] Information on the committee members for 2021 can be found here: https://www.ajlfoundation.org/article/meet-2021-grantmaking-committee

[13] Dianne Myles. “Behind the Scenes: AJL's Participatory Grantmaking Process.” September 20, 2021, Accessed at: https://www.ajlfoundation.org/article/behind-scenes-ajls-participatory-grantmaking-process

[14] For more information, see: Carl D. Holborn and Britany E. Morrison. (November/December 2019). “Can Private Foundations Make ‘Qualifying Distributions’ to Donor-Advised Funds?” Taxation of Exempts.

[15] Jeff Chidester. “Impact Investing: Time to Unleash PRIs.” Stanford Social Innovation Review, February 24, 2015.

[16] Heng Qu and Una Osili. “Beyond grantmaking: An investigation of program-related investments by US foundations.” Nonprofit and Voluntary Sector Quarterly 46, no. 2 (2017): 305-329.

[17] Details of PRIs come from the IRS Form 990-PF Summary of Program-Related Investments (Part IX-B) or audited financial statements. In this case, see the 2018 IRS Form 990-PF for The Colorado Health Foundation.

[18] Audited financial statements typically disclose PRI details in the Notes to Financial Statements. Note 4 addresses PRIs in The Piton Foundation’s financial statements covering the period ending December 31, 2019.

[19] See the 2019 IRS Form 990-PF filing for Gates Family Foundation (Statement 17).

[20] For more background and cases on MRIs, see: Steven Godeke with Doug Bauer. (2008). Philanthropy's New Passing Gear: Mission-Related Investing: A Policy and Implementation Guide for Foundation Trustees. Rockefeller Philanthropy Advisors.

[21] Michael Swack. (2009). Expanding Philanthropy: Mission-related Investing at the F.B. Heron Foundation. School of Community Economic Development, Southern New Hampshire University, p. 29. Accessed at: https://www.heron.org/wp-content/uploads/2015/05/Expanding_Philanthropy_Mission_Related_Investing_at_the_FB_Heron_Foundation.pdf

[22] For details, see: https://coloradohealth.org/grantmaking/35mm-mri-loan-guarantee-allow-indiedwell-scale-its-pueblo-factory

[23] The approach is described at: https://garycommunity.org/how-we-use-our-capital/

[24] https://www.mightyarrow.org/our-work-to-date

[25] The recent MSCI ESG ratings are available at: https://www.ajlfoundation.org/article/ajl-foundations-q1-2022-impact-and-financial-performance

[26] For more information on leveraging foundation assets through credit enhancement and guarantees, see: Hannah Schiff and Hannah Dithrich. (2017). Scaling the use of guarantees in US community investing. The Global Impact Investing Network.

[27] The CIGP is detailed in the following press release: https://kresge.org/news-views/u-s-sees-launch-of-first-guarantee-pool-for-community-development-investments/

[28] Gates Family Foundation. Colorado Enterprise Fund – FirstBank PPP Credit Facility. Accessed at: https://gatesfamilyfoundation.org/grant/colorado-enterprise-fund/

[29] A review of state credit enhancement programs can be found in: Todd L. Ely. “Indirect Aid for Uncertain Times: The Use of State Credit Enhancement Programs.” Municipal Finance Journal 33, no. 2 (2012).

[30] For a detailed discussion of the Ford Foundation’s social bonds, see: Todd L. Ely and Thad D. Calabrese. Borrowing for impact: Leveraging foundation endowments with debt. Report Number 2020–1. National Center on Nonprofit Enterprise (2020). https://nationalcne.org/2020/07/16/borrowing-for-impact-leveragingfoundation-endowments-with-debt/