Community foundations

What Are Community Foundations?

Community foundations are independent philanthropic organizations that pool charitable gifts from various donors to support a wide range of local causes within a specific geographic area. Operating as public charities under IRS Section 501(c)(3), they serve as a flexible vehicle for individuals, families, and businesses to engage in charitable giving. By aggregating many donations, large and small, a community foundation can create a significant financial resource that addresses diverse and evolving community needs, from education and the arts to social services and environmental protection.

Community foundations are distinguished by their broad charitable purposes and their commitment to serving a defined community, allowing them to respond to changing local priorities over time.

History and Origin

The concept of a community foundation originated in the United States in the early 20th century, born from a desire to make charitable funds more adaptable to future societal needs. Before their emergence, many philanthropic bequests were locked into specific purposes by legal trusts, which could become irrelevant or even counterproductive as communities evolved.

Frederick Harris Goff, a prominent lawyer and banker in Cleveland, Ohio, recognized this limitation. He envisioned a new type of charitable institution that would hold funds in perpetuity but allow for the distribution of grants to address current and future community challenges, guided by the "living hand" rather than the "dead hand" of past donors. In 1914, Goff established The Cleveland Foundation, widely recognized as the world's first community foundation.¹⁴, ¹⁵ This innovative structure allowed donated assets to be professionally managed and their income distributed flexibly to meet the changing needs of the Greater Cleveland area.¹², ¹³ The model quickly gained traction, with over 55 community trusts created across North America within 12 years of The Cleveland Foundation's inception, and more than 1,700 operating globally a century later.¹¹

Key Takeaways

• Community foundations are tax-exempt public charities that manage charitable funds for the benefit of a specific geographic area.
• They aggregate donations from various sources, allowing for a collective impact on local issues.
• Funds are often held in perpetuity, with income used for grantmaking to address evolving community needs.
• They provide a flexible and professional avenue for donors to support diverse causes within their community.
• Community foundations play a significant role in fostering local collaboration and addressing persistent civic and economic challenges.

Interpreting the Community Foundation

A community foundation acts as a permanent charitable resource for its defined region. The interpretation of a community foundation lies in understanding its flexible and responsive nature. Unlike private foundations that might focus on specific issues or have a narrow donor base, community foundations are designed to be broadly responsive to the needs of an entire community. This flexibility allows them to address emerging issues, support local initiatives, and act as conveners for collaborative efforts. Their impact is measured not just by the financial size of their holdings, but by their ability to identify and respond to critical local challenges through strategic grantmaking and by fostering local partnerships to drive positive economic development.

Hypothetical Example

Consider the "Prairie Plains Community Foundation" serving a mid-sized rural county. Sarah, a lifelong resident, wants to leave a significant portion of her estate to benefit the community after her passing, but she's unsure what the most pressing needs will be decades from now. Instead of earmarking funds for a specific, current charity, which might cease to exist or become obsolete, Sarah establishes a designated fund within the Prairie Plains Community Foundation.

She works with the foundation's staff to set up a donor-advised fund during her lifetime, allowing her to recommend grants to various local nonprofit organizations that address environmental conservation and youth education—two areas she cares deeply about. After her passing, her fund transitions to an unrestricted fund, managed by the foundation's board. This ensures that her legacy continues to benefit the community, with the foundation's leadership having the flexibility to direct her contribution toward the most critical needs as determined through their ongoing assessment of the community, aligning with her broad charitable intent as part of her overall financial planning.

Practical Applications

Community foundations are instrumental in various aspects of community life:

• Addressing Local Needs: They provide a consistent source of funding for local nonprofit organizations addressing issues like poverty, education, healthcare, and environmental conservation.
• Disaster Relief: In times of crisis, community foundations often serve as central hubs for collecting and distributing aid, quickly channeling resources to affected areas and individuals.
• Economic Development: Many community foundations actively engage in initiatives that foster economic development by supporting small businesses, workforce training, and community revitalization projects. F⁹, ¹⁰or instance, they might invest in local enterprises or provide grants that stimulate job creation.
  *⁸ Long-Term Community Building: Through strategic asset management and planned giving, community foundations build permanent resources that can adapt to changing community priorities over generations. The collective assets managed by community foundations are substantial, with many experiencing year-over-year increases in assets due to positive investment returns.

⁶, ⁷## Limitations and Criticisms

While community foundations offer significant benefits, they also face certain limitations and criticisms:

• Discretion and Donor Intent: Although community foundations provide flexibility, the broad discretion given to their boards can sometimes lead to questions about whether current grantmaking priorities align perfectly with the original intent of every donor, particularly for unrestricted funds.
• Investment Strategy: Like all endowed organizations, community foundations rely on investment returns to sustain their grantmaking. Fluctuations in financial markets can impact their ability to distribute funds. There can also be internal debate about whether to prioritize maximum financial return or mission-aligned investing, where investments are chosen based on their positive social or environmental impact in addition to financial gain.
  *⁵ Geographic Focus: Their inherent local focus, while a strength, can also be a limitation for donors interested in broader regional, national, or international issues.
• Administrative Costs: While generally lower than for comparable private foundations, community foundations do incur administrative costs for managing funds, processing grants, and providing donor services.
• Regulatory Compliance: As 501(c)(3) organizations, community foundations must adhere to strict IRS regulations to maintain their tax-exempt status, including restrictions on political lobbying and ensuring that no private interests benefit from their earnings.

⁴## Community Foundations vs. Private Foundations

Community foundations and private foundations are both types of charitable organizations that facilitate philanthropy, but they differ significantly in their structure, funding, and regulatory requirements.

The primary distinction lies in their funding source and public support. Community foundations receive contributions from a wide array of donors and are therefore classified as public charities by the IRS. P², ³rivate foundations, conversely, typically derive their funding from a single individual, family, or corporation and are subject to stricter regulations, including rules on minimum annual distributions and limitations on self-dealing. C¹ommunity foundations offer donors the advantage of immediate tax deductions with fewer administrative burdens, while private foundations provide greater control to the founding donor over their philanthropic activities.

FAQs

What is the main purpose of a community foundation?

The main purpose of a community foundation is to improve the quality of life within a specific geographic area by pooling charitable assets from many donors and using the income for grantmaking to address the community's most pressing and evolving needs.

How does a community foundation get its money?

A community foundation receives its money through various forms of charitable contributions, including outright gifts, bequests, and establishment of specialized funds like donor-advised funds, from individuals, families, businesses, and other organizations in the community. These contributions form the foundation's permanent endowment and other funds.

Is a community foundation a nonprofit?

Yes, a community foundation is a type of nonprofit organization. Specifically, most community foundations are classified by the Internal Revenue Service (IRS) as public charities under Section 501(c)(3) of the Internal Revenue Code, which grants them tax-exempt status.