Bookmark and Share

Ethical Quandary

by admin, posted January 22nd, 2009 at 9:02 am

scales

Multiyear Grants: To Commit or Not to Commit?

By: Kelly Shipp Simone

Can we back out of a multiyear commitment we made in a prior year because our foundation’s assets have declined?

The answer in many cases is “no.”  That is, unless your grantee is willing to release your foundation from its obligation.

Generally, an unconditional, multiyear grant is considered a pledge to the grantee organization. In many states, a pledge is a legally binding obligation. Therefore, your grantee could seek to take you to court should you stop paying the grant.

Even where state law does not initially provide grounds for enforcing the pledge, you could still be obligated, under certain conditions. Suppose your grantee relied on that commitment to start a project (e.g., begin construction on a building) or to leverage other dollars. You could become legally obligated to honor your pledge. (Consult with your local legal counsel about your specific situation to determine your obligations and course of action.)

Looking to the future, consider adding a condition to your initial grant commitment, stating clearly—and specifically—the terms under which you might suspend payments. On the other hand, by imposing significant conditions on future grant payments you could negate some of the benefits grantees enjoy from a multiyear commitment.

Our foundation has fewer discretionary grant funds for the upcoming year because of prior multiyear commitments. Should we avoid awarding multiyear grants in the future?

You are not alone in your quandary. The swift economic decline has caused some foundations to rethink making multiyear grant commitments. Here’s why: when endowments dip quickly—and significantly—any prior year commitments consume a greater percentage of dollars available to make grants.

One example:

In 2007, a foundation with an annual grantmaking budget of $500,000 made a three-year commitment to fund a food bank project in the amount of $200,000 each year. With a $500,000 grant budget for 2007, the foundation still had $300,000 from which to make other grants.

By 2009, the foundation’s endowment has declined 30 percent—as has the amount of money available to make grants—down to $350,000. After paying $200,000 to the food bank for the final year of its multiyear grant, the foundation now only has $150,000 to grant to other organizations in 2009.

Like others you probably have fewer dollars to go around, yet more requests pouring in. So, should you stop committing to multiyear grants for the sake of greater flexibility in the future? Not necessarily. Instead, carefully weigh the benefits of a multiyear grant as opposed to having fewer funds available for other potential grants.

A multiyear grant provides your grantee with a guaranteed income stream that it can use to launch a long-term program or start construction on a building. And that guaranteed income allows it to focus more on providing services—and less on raising funds.

Another bonus: your grantee can record the promised funds as assets on its financial statement. By demonstrating increased financial strength, it is in a better position to attract new donors or leverage dollars through matching gifts or other programs.

Even if your foundation finds itself with fewer funds for grantmaking, you have other options. Consider making program-related investments (PRIs). Through a PRI, you could serve as a guarantor, and let another organization or bank provide a loan to a charity. Or, you could serve as the lender and loan the money directly. For more on program related-investments, read this interview about using PRIs as a strategy during the economic downturn.

Multiyear commitments can also help your organization meet its own organizational goals. Let’s say you want to reduce homelessness. With a multiyear grant, you can allow a grantee to build a facility that provides transitional housing, counseling, and other services to individuals without homes. And, multiyear funding saves you administrative costs. You can support projects that are important to your organization without having to review new proposals or enter into new grant agreements with the same grantee each year.

Kelly Shipp Simone is the senior staff attorney at the Council on Foundations.

About EQ: This column focuses on the ethical dilemmas grantmakers grapple with in their daily work. If you have an idea, question, or a comment, please write to us at taijournal@cof.org.

Leave a Comment