On October 1, 2009, I joined two esteemed exempt organization attorneys, Greg Colvin and Jill Dodd, in a panel discussion on fiscal sponsorship for the National Network of Fiscal Sponsors (NNFS) Annual Gathering. This is a fascinating area that holds great promise for philanthropy and social entrepreneurs, but first there are hurdles for the field to overcome.
A poorly defined term.
Fiscal sponsorship is not a legally defined term and describes a number of varying contractual relationships that have through custom and practice developed between "sponsors" and "projects." There is, however, a prevailing myth that fiscal sponsorship is just financial management. See BTW Report (referenced below). And by using definitions that seek to simplify or market fiscal sponsorship to potential projects, the field has not done a good job of dispelling this myth.
NNFS, in its Guidelines for Fiscal Sponsors, provides the following definition: "Fiscal sponsorship means a nonprofit organization - a 'fiscal sponsor' - assumes legal and financial responsibility for the activities of groups or individuals engaged in work that furthers the fiscal sponsor's mission and their own respective purposes." While the definition appears slightly awkward, it does not omit the critical fact of the sponsor's responsibility, not necessarily limited to financial management. In the most common form of fiscal sponsorship, Colvin's Model A or Direct Project model, the sponsor has ultimate responsibility for the project's legal, financial, and programmatic activities.
Lack of understanding and expertise of many organizations that act as sponsors.
The Tides Center Field Scan (referenced below) revealed some troubling data. Regarding challenges of being a fiscal sponsor, the Field Scan reported: "On average, fiscal sponsors do not rate any of the issues we presented to be challenging." The most challenging issues on a scale of 1-5 (not challenging to most challenging): orienting new projects and staying current with the law (each scoring 2.6). Next most challenging: risk management (2.4). But in a self-assessment of their own knowledge, fiscal sponsors did not consider themselves to be knowledgeable about the legal and regulatory requirements of being a fiscal sponsor (2.8). So, fiscal sponsors on average don't feel they're knowledgeable but aren't too worried about compliance or risk management.
Failure to emphasize importance of monitoring a project's programmatic impact.
The BTW Report provides that "an effective and responsible fiscal sponsor monitors program impact as a first order priority in meeting its legal obligations." Yet the Field Scan reported that only 55 percent of sponsors require documentation of programmatic accomplishments for all projects. And the NNFS Guidelines do not explicitly refer to programmatic oversight or to programmatic reporting to the sponsor.
Evaluating programmatic impact is an extremely challenging task for many nonprofits and beyond the scope of this post. Nevertheless, it is a critical component for increasing the effectiveness and efficiency of charitable programs and for making it possible to take a successful program to scale. But an important consideration for sponsors (and foundations): failures of innovative and/or experimental projects may be important and valuable lessons for the field (i.e., a programmatic failure may be an advancement of the charitable purpose). Reporting failures may be just as valuable as reporting successes.
- "Advisory Committees" that are delegated with management duties and that sign the fiscal sponsorship agreement have more than advisory responsibilities. Another name should be used to describe such bodies (e.g., "Project Committees").
- "Memorandum of Understanding" (or MOU) is not an appropriate term to describe a binding agreement or contract. An MOU commonly refers a nonbinding letter of intent containing agreed upon terms while other terms get negotiated. It certainly sounds more friendly than a "contract," but when we're creating fiscal sponsorship relationships, we need to treat and identify them more seriously.
Great cautionary words from Jan Masaoka, one of the most influential thinkers in the sector. I should reiterate that Jan is an advocate of responsible fiscal sponsorship and disclose that I am a board member of Community Initiatives, the organization that Jan co-founded.
The problem that Jan refers to as a "gift" to scoundrels must be taken seriously by the sponsor's board. Indeed, a "Model A" project may not be described, and its financials not separately provided, in the sponsor's information return. This may allow a project to operate under the radar.
Accordingly, the regulators and the public must rely upon the due diligence of the sponsor to help ensure that the project is operating consistent with a charity and in a reasonably effective and efficient manner. This is one of the main reasons we need to "professionalize" the practice of fiscal sponsorship. And while it might be an administrative burden, providing a description of more than just the top 3 projects in Form 990 might be a best practice for this subsector.
Posted by: Gene Takagi | October 10, 2009 at 11:00 AM
In addition to the potential benefits, fiscal sponsorship also offers a great opportunity for scoundrels to hide information from the public, to avoid accountability, and for government agencies to do business without the peskiness of either the public sector unions or a real community nonprofit contractor.
I am not against fiscal sponsorship; in fact I was the founding board president of Community Initiatives, the fiscal sponsor organization that came out of the San Francisco Foundation. In addition to the benefits, we should realize this is also a gift to those who want to avoid accountability.
Posted by: Jan Masaoka | October 09, 2009 at 07:16 PM