UPDATE on endowment possibilities at the end…
I may be late to the party on this discussion; many 2amt commentators were featured in today’s You’ve Cott Mail dispatch. But one risk of Chase Community Giving has gone largely unexplored: what effects would a huge financial windfall have on a small charity’s decision-making? Everybody obediently chasing the Chase money seems to assume it will be great. I do not.
I am the budget manager at Chicago Symphony Orchestra, so I spend most of my work time thinking about where our money is coming from and how we use it. I give my credentials so you might believe I’m not just an armchair quarterback making anxiety calls.
Most of the Chicago storefront theaters in the Chase Community Giving competition have annual budgets between $20,000 and $100,000. If and when some of these theaters win 20K they will reap financial windfalls of 20-100% of their annual budgets. And it is not renewable. How would you spend such a windfall?
Chase is giving the money, so Chase gets to tell you how you can spend it, if they wish. If they want the money to be annual operating support, that means you have to record it all as operating revenue in one fiscal year. And if they want you do spend it all this year, that’s what you must do. I’m going to assume that the folks at Chase are wise enough in the ways of philanthropy not to require such madness. We can glean from the official rules that the winners will have to complete a grant application within 10 days of notification they’ve won, and will have the opportunity to work out an implementation plan that includes incremental payments. That’s the vague good news. It would be nice to know more about the parameters of these mutually agreed upon implementation plans. But assuming the best, there will be some flexibility.
So if you win, how do you plan to use it?
If you have a budget of $40,000 for your next season, you could immediately bump your budget up to $60,000, but this would be really foolish. If you use the money to pay everybody more, which is a laudable goal, how are you going to attract talent next year, back at your normal budget? If you double your technical production and space rental budgets, are you ready to downsize again the following year?
And if you decide to increase your budget, it might be harder than you anticipate to spend it. Most storefront theater administrators are adept penny-pinchers, for good reason, and such habits are hard to break. If you find yourself underspending, then it will be tempting to cut yourself some slack on your existing ticket sales and fundraising efforts. This could slow your momentum, making the ever-present risk of revenue atrophy all the greater.
If you don’t spend it all on schedule, you will be in violation of your grant agreement, so the pressure will be on to spend to meet the grant requirements, rather than to the greatest benefit of your theater. I’ve seen this happen: a program ends up costing less than the budget that was provided to the grantor. In these cases, nobody gives back the money. Instead, program starts following money instead of the other way around. Not good.
Here’s a decent rule of thumb for spending grants at a small org: the benefit you get should last approximately until you can replace that grant with more contributions. Because this gift is not renewable, it is irresponsible to use the money for anything that doesn’t return long-term benefits. Many nonprofits put large non-renewable windfalls in their endowments and just spend the earnings, but if you don’t already have one, it will be difficult to set up an efficient endowment investment account with only $20K. And if you could, and you draw about 5% per year so the money could keep growing, you will only get $1000 per year. Who wants to risk all the audience annoyance so thoroughly discussed here on 2amt for $1000 per year?
If you have any debt, now would be a good time to retire it. You get long-term benefit from retiring debt. It would also be a good time to make capital improvements. If you have your own space, it might be a good investment to improve it in smart, not lavish, ways. Don’t call “red curtains” on me, I’m talking about decent bathrooms or A/C. If you’re not there, yet, maybe this is the time to computerize your box office. The common thread here is that none of these projects are terribly sexy. This is often the sad truth of long-term projects. Essentially, a good capital project should either improve your long-term revenue potential or reduce your operating costs. But hey, maybe Chase will let you use the money to seed a capital or other campaign to raise enough money for something fantastic.
Discipline in such things much harder when you know how much you’re limiting designers and underpaying actors (and yourselves as administrators) every day. If you win, it will be WAY easier to make short-term satisfying decisions to pay your talent more or improve your production values. But if you can’t maintain it, don’t do it. My finance job in the arts is all about sustainability, and if sustainability is not one of your goals, then I wasted your time with this. But if it is your goal, you might end up disappointing some of your friends campaigning so hard on your behalf. Mo’ money, mo’ problems.
There may be an efficient way to establish a $20,000 endowment, after all. Community Foundations (like the Chicago Community Foundation and Evanston Community Foundation) will often accept a small organizational fund into their invested assets, and distribute money out to the organization per their standard spending policy. Other communities may have similar foundations. If you won $20,000 from Chase, and are still trying to decide what to do with it, take a look at your local community foundation.
But you have to accept their spending policy and asset allocation, and, by extension, their risk profile. This means that you would certainly NOT want the $20,000 to be permanently restricted by Chase. Permanently restricted means you can never spend the $20,000 principal, not ever, and if the balance drops below $20,000, you will have to replenish it. But if $20,000 is a really big deal to your organization, that means it would probably be really hard to replenish any lost assets. Instead, you will want the Chase money to be considered Board-designated, unrestricted endowment. That means that the donor didn’t set limits, but the Board chose to do so.