Community or county foundations can help plug the local monetary gap as federal and state funds continue to shrink. The foundation can help provide financial support for
community development efforts and assist charitable organizations. The money stays within the community and supplies funds for improvements and repairs that otherwise fail to happen when tax monies and other government funds are not available. In the long term, a foundation provides some assurance that improvements can be made, making a more attractive quality of life for its community residents.
A community or county foundation also can have a positive influence on bringing people
together in a common cause. If a county foundation exists, all parts of the county and its communities benefit.
What is Community Foundation
A community foundation is a nonprofit organization that receives monetary contributions to
be distributed in the form of grants to nonprofit organizations within the community.
In this publication, community means either an incorporated entity or an entire county. In most
cases, distributions are made from the proceeds received from investment of the contributions.
The Internal Revenue Service specifies certain requirements for an entity to be defined as a foundation. The organization must name itself after the community/county it serves and make grants within that entity. The foundation must also have a governing board made up of various representative members of that community.
Creating Economic Opportunities
The qualifications and guidelines must be in accordance with Section 501 (C)(3) of the Internal
Revenue Code of 1986 on Corporate Exemptions. Section 170 (C)(2) of the Internal Revenue Code refers to corporate contributions which are deductible.
Cash gifts by individuals are deductible for income tax purposes up to an annual limit of 50 percent of the donors' adjusted gross income for the year of the gift. Five carry-over years, if needed, are allowed.
Two Ways to Achieve Charitable Status
Community foundations can attain charitable status by the "mechanical test" or by the "facts
and circumstances test." It is necessary to achieve charitable status by one of the two methods so
contributions remain tax deductible to donors.
The mechanical test "allows a community foundation to obtain status if at least one-third of its support comes from public or government contributions every year." This often becomes a non-passing test because only 2 per-cent of the contributions to the foundation over a period of four years can be attributed to any one individual. As an example, if one person contributes a million dollars in a four-year period, only $20,000 can qualify as public support.
Under the "facts and circumstances test," a community only needs to show a minimum of 10 percent support from the public or government. The foundation must show it is a publicly supported entity.
To document that it is publicly supported, it can carry out a variety of activities. Examples of some of the documentation needed are public relation efforts to attract public support, preparation of annual reports and proof that the governing body is truly representative of the community and/or county.
Representative Governing Body
According to IRS definition, a governing body can be comprised of public officials or people
having a specific skill or knowledge related to the foundation. Some foundations include home-makers, members from low income areas, as well as representatives of various organized groups.
Basically, anyone representing the views of the community can be on the governing board.
Professionals Can Help
Many community foundations are run by volunteers. However, a foundation needs to have its assets managed to obtain maximum growth potential. A trust officer at a bank can help in making investment decisions. A trust officer also has contacts with people who may be potential contributors to the foundation. The trust officer or foundation manager should be able to manage the funds in relation to investment objectives, but the decisions about distribution of funds should remain with the foundation board.
A lawyer should be retained when writing bylaws and setting up the foundation. Correct wording
of Articles of Incorporation, bylaws and setting up the foundation so it stays within the legal
description is important. However, the bylaws and how they are set up still remain the board's re-sponsibility.
A certified public account ant is another important professional necessary in setting up guidelines. Staying within the tax laws and making sure that donations are handled and distributed according to IRS statutes is a primary task that an accountant can help the board with.
Cost of a Community Foundation
Communities, no matter how big or small, will incur some costs. Articles of Incorporation must be filed with the state, resulting in a filing charge. Appropriate tax forms and status also must be obtained. Legal work, services of an accountant, and fees to manage the funds through a financial institution are some immediate costs that may result.
In some communities, professionals and financial institutions may volunteer their services as part of their contribution. In other situations, some or all fees must be paid up front when the foundation is being established.
Financial institutions have various procedures or rules in dealing with foundations. Some donate their services to the community. Others require a service fee, a percentage of the monies that are placed in their institution. This fee can range from « percent of the assets held in the institution by the foundation. Other institutions require a standard dollar amount, while others figure the fee on a prorated schedule, based on the amount held and invested for the foundation.
Obviously, a foundation needs someone to deal with the daily routine tasks of running a foundation. A volunteer(s) from the community may be able to handle the tasks, particularly in the beginning stages, or if the foundation is small. In other situations, however, the board may
determine that a hired professional staff is necessary to attain the desired results. Many boards hire a professional staff to handle fundraising, daily operations, personal contacts with potential donors and publicity campaigns. Large foundations also may retain or hire a lawyer and a certified public accountant.
Obviously, having a full-time staff with a full-time job of working for a community foundation should result in continued support. However, small communities may not have enough money
for a paid staff, particularly in the beginning. In this case, fundraisers, bake sales, publicity campaigns and the support of local organizations can help develop the financial basis for starting a foundation. In small communities, these efforts can bring people closer and allow everyone to contribute and take ownership for its success.
Defining a Foundation
Over the years concerns have arisen that may cause difficulty on how various gifts can be
handled in a foundation. Answering these questions and setting policies for many situations in
advance will help the organization run more smoothly. Here are several concerns that should be
addressed before setting up the foundation.
Most gifts come with good intentions. However, over a period of time, the cost of maintenance
or management may become a burden rather than a help. Criteria should be setup to cover this. An example would be the cost of managing a stock portfolio outweighing the income. Another example would be leaving a building as a gift, where the cost of maintenance and utilities becomes a burden.
In some situations, those who donate monies to a foundation want to earmark it toward a
specific group or area, such as a senior citizen center or park. Again the board, when forming the foundation, needs to decide if it wants to keep the money in a general fund or if the major portion or all of it can be given for specific purposes.
The positive in this situation is that at least part of the money can go toward a specific need in the community. On the other side, an area that really needs funding may go begging because all funds have been earmarked. The foundation becomes an organization to run money through and defeats the purpose of serving many community
Initiators should consider whether they will accept gifts that have all or a portion of the gift going to another entity already having a foundation.
Generally, if the donor gives a portion of the gift to such an entity and the community foundation is the primary receiver, it is acceptable to receive the gift.
Policies should be written and specific guidelines drawn up through the bylaws as to how, to whom, and under what circumstances money will be granted. A foundation may grant money to more than one nonprofit organization. With several organizations competing for grants, criteria need to be established to select the most beneficial projects in the community. In some situations, the number of volunteer hours and matching
money may be used. In other situations, cost-effective proposals and designs may be needed.
In addition, when giving grants, guidelines that are enforced help to eliminate discrimination and back those projects that are most cost-effective or needed. A solid record is also established as to why one group received a grant while another group did not. All groups need to have a clearly stated written proposal when asking for a grant.
Keeping the Economic Base
The board, keeping in perspective the Internal Revenue Code, should determine how much principal must be maintained to continue building interest. Perhaps a portion of the interest may be distributed. Or a community/county foundation may need to reach a
target amount to generate enough interest before distributing grants. Overtime, these amounts may need to change. Bylaws should reflect the amount of principal kept as a
base and how much interest is to be granted. Foundations should distribute grants based on the amounts they actually have rather than basing decisions on potential income that may not be received.
Conflict of Interest
In some communities, especially
smaller ones, conflict of interest
may arise. A board member
could be the direct or indirect receiver
of a grant. An example would
be improving a sidewalk where a
board member owns a cement plant
and would receive income.
This issue should be addressed
within the organization's
bylaws. There are two schools of
thought in dealing with this concern.
Some bylaws state that if a
community foundation board
member or contributor benefits
from the foundation directly or indirectly,
this should not preclude
them from voting on the distribution
of the grant.
Conversely, the purpose of a
foundation is to make the community
better for everyone. In addition,
those who have businesses
within that community should be
awarded the contract in order to
keep the money within the community and promote local businesses.
A bid process might be used. As
long as the contract is given honestly
and fairly there is nothing
wrong. It must be emphasized that
this decision needs to be made in
the beginning as the organization
is set up.
The conflict issue may not
be a problem if only one business
exists in a particular area. However,
if five businesses are involved
and the jobs are awarded
to board members only, this may
cause unwelcome conflict and
ridicule and taint the entire
Variance of Power
A "variance of power" clause
should be included in the establishment
of a foundation. This
clause allows the transfer of foundation
funds, if necessary, to another
organized entity with a similar
purpose if the original purpose
of the foundation no longer exists.
An example would be a foundation
established to help WWI
Veterans. Eventually, WWI Veterans
will not exist, but the funds
could be transferred to WWII Veterans.
The "Variance of Power"
clause can allow the transfer of
funds without having to go
through a long, costly court procedure.
Publicity about the foundation
is probably one of the best
ways to make residents aware of
its existence. Potential donors can
be anyone from someone contributing
$5, to a fund raising campaign,
to those making substantial
Many foundations have been
established simply by doing
fundraising campaigns, soliciting
donations from individuals and
having local events with proceeds
donated to foundations.
and financial institutions often
contribute to community foundations.
This is their way of addressing
their civic responsibility
to the welfare and quality of
life that the community contributes
to their employees.
The board should certainly
make attorneys, bankers, accountants
and others dealing in
financial matters aware of the
foundation, since these professionals
may be asked about
leaving money or property to a
worthy organization. Alert funeral
directors, too, because
people often want a memorial
established for loved ones.
Recognition of Donors
Many individuals, corporations,
etc., contribute to foundations
without expecting recognition.
However, recognizing contributors
with formal thank yous,
publishing donors' names or using
other recognition, shows appreciation.
This also helps to give
the foundation credibility when
others see that their neighbors
and residents have supported it.
Communities can be innovative
in their recognition. Some
have had special bricks made
with the donors' name on them
and use them to pave a park
area. Others plant trees in their
honor, place names on plaques,
or give out recognition certificates.
Unless the donor wishes
to remain anonymous, a little
recognition goes a long way.
A community/county foundation
is one tool which can meet
expenses, needs or repairs and
make improvements in the face of
shrinking local, state and federal
revenues. The foundation also
serves as a vehicle for people wanting
to donate money to a community
without personal expense. It
is a fund where the person who
wants to contribute, but does not
have large amounts of money, can
give and feel some ownership and
pride in the community/county.
Everyone can be a part of helping
the community/county grow.
The following material provided background for this
publication and could be helpful for those interested in starting a
Community Foundations Responding Today, Investing for
Tomorrow, Council on Foundations, 1828 L Street, N.W., Suite 1200,
Washington , D.C. 20036.
Community Foundations, A Growing Movement in Philanthropy
Has Sprouted From a Long Dormant Idea: Foundations of, by and
for Local Communities, Jack Shakely, Reprinted from The
Grantsmanship Center News, 1976, The Grantsmanship Center.
The Lincoln Foundation - a community trust, The Lincoln
Foundation, Inc., 215 Centennial Mall South Lincoln, Nebraska
Lincoln Foundation, Inc., A Guide to Effective Giving, The Lincoln
Foundation, 215 Centennial Mall South, Lincoln, Nebraska 68508.
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Martha L. "Marty" Leibhart
Community Development, Northwest
COOPERATIVE EXTENSION SERVICE, MANHATTAN, KANSAS