By Wayne Heuring —
Fiscal sponsorship is a useful tool for community foundations, but there can be pitfalls, and nobody knows what to look out for better than attorney Gregory Colvin, whose presentation on the subject at the 2011 Fall Conference for Community Foundations could help some fiscal sponsors avoid problems.
Colvin, whose book is considered the standard on the subject, will talk about “Fiscal Sponsorship: The Legal Rules” at the Council on Foundations conference, to be held Tuesday, Sept. 20, at the San Francisco Marriott Marquis from 4 to 5:30 p.m.
“Greg is the leading expert on fiscal sponsorship and is best positioned to offer the legal and practical advice needed by our members,” said Janne Gallagher, Council senior vice president and general counsel. “In addition, his book, ‘Fiscal Sponsorship: 6 Ways to Do It Right,’ is popular among our membership and is one that we often recommend.”
Colvin’s session will lay out various fiscal sponsorship models and the legal rules a community foundation should consider before deciding to serve as a fiscal sponsor.
He recalls presenting a session at a 1995 Council on Foundations conference in San Diego.
“It was very well attended,” he said, “because many community foundations were worried about whether their fiscal sponsorship activities were following the rules.
“By the end of the session,” he said, “some people were crying as they became aware they were using a method of sponsorship that was far out of compliance and could expose them to considerable risk, both from the IRS and also from liability to third parties on projects that were not well supervised.”
For example, Colvin explained, community foundations are typically focused on donor services, working more with people who are giving rather than those who get the grants and operate the programs. Donors often want to finance high-impact, high-cost projects that are short-term and don’t really need a 501(c)(3). So, to handle the project administration in-house in order to be cost-effective for the donors, a community foundation may try to shoehorn fiscal sponsorship into its business model, and it might not be a good fit.
Bob Small, associate director of Pike’s Peak Community Foundation in Colorado Springs, an 11-year veteran of fiscal sponsorship with 85 projects, suggests keeping it simple.
“It’s important for our projects to have a good match with our mission,” he said in a phone interview. “We restrict our fiscal sponsorship to projects in our area instead of across country.” — Bob Small, associate director of Pike’s Peak Community Foundation
Bob Small of Pike’s Peak Community Foundation of Colorado Springs, suggests keeping fiscal sponsorship simple and recommends selecting projects that are a good match with a sponsor’s mission
Colvin also says a community foundation might set up its projects as donor-advised funds. This gives donors their tax break, but, because the donation is no longer their money, they can’t instruct the community foundation on what to do with it. The necessary separation of roles and responsibilities of community foundations and their donors can be a pitfall if not understood by all.
Colvin says community foundations can get into trouble with ERISA compliance on their pension plan if they don’t treat all their employees the same when it comes to benefits. Fiscal sponsor office staff and the people running the sponsored projects must be treated equally in all respects, or that can result in personnel problems ranging from bad feeling to lawsuits. This is a potential pitfall for other fiscal sponsors as well.
The Council on Foundations says there’s no data on how many community foundations are also fiscal sponsors, but “It is our belief that it is a common practice, particularly by community foundations in smaller and rural communities,” Gallagher said.
Fiscal sponsorship is a cost-effective tool for community foundations that is no doubt underused, Colvin says, but better do it right. His session will lay out the legal rules governing the process.
Colvin is a principal in the law offices of Adler & Colvin, San Francisco.
Wayne Heuring is a former copy desk chief of the San Francisco Chronicle and the San Francisco Examiner. Geoff Link, executive director of the Study Center, contributed to this report.
Originally posted September, 2011