As discussed in Part I, when to remove an inactive fiscally sponsored project from the books is a critical discussion for fiscal sponsors given the various liability risks they face by allowing defunct projects to fly under their radars. Here, we will address some key considerations for fiscal sponsors in exercising proper oversight of such projects from the beginning and removing such projects from their books when appropriate.
While many of these considerations should be further refined depending on the nature and model of the fiscal sponsorship relationship in question, some key principles remain constant under any model. First, directors have fiduciary duties to the organizations they serve. Thus, for example, a director of a sponsoring organization should be making decisions in the best interest of the sponsor, not the project. Second, fiscal sponsorship is created and defined by contract. Therefore, the fiscal sponsorship relationship does not cease to exist simply because a project has become dormant or defunct. The relationship must be terminated according to the terms and respective rights and obligations in the fiscal sponsorship agreement.
Contemplating when and how to end a fiscal sponsorship relationship should be considered before a fiscal sponsorship relationship even begins. Fiscal sponsors should consider project management issues at the outset and ask themselves certain questions, including:
- Are we requiring proposals for project sponsorship as a basis for accepting or rejecting sponsorship of a project? Furthermore, are we asking for the information we need to truly assess the viability and functionality of this fiscal sponsorship relationship (e.g., proposed project’s mission statement or purpose, proposed funding sources, and the goals and other strategies for the project’s accomplishment)?
- Can we effectively administer the proposed project given the scope, level of activity, geographic location, or other factors of the project and the organizational limitations of our organization as a sponsor?
- Does the fiscal sponsorship agreement outline what all parties expect of each other from this relationship (e.g., reporting requirements, procedures for distribution of funds)?
- Does the fiscal sponsorship agreement clearly outline an appropriate process for ending the contractual relationship (e.g., notice provisions, transfer of assets, suitable successor organizations)?
During the Fiscal Sponsorship Relationship
Even if a project gets the green light for fiscal sponsorship once all considerations are taken into account, a properly functioning fiscal sponsorship relationship requires ongoing “traffic stops.” In other words, there should be regular evaluations of many of the same or similar considerations throughout the project’s life cycle for determining whether the relationship should continue forward. As circumstances change with time, this may also be true of whether sponsoring a project continues to be in the best interest of the sponsoring organization. Ongoing evaluation can help sponsoring organizations see the early warning signs of a dormant project or identify a defunct fiscal sponsorship relationship. As part of such evaluations, sponsors may ask themselves questions such as:
- Is the project continuing to meet all of the terms provided in the fiscal sponsorship agreement?
- Are we conducting an ongoing analysis of the project activities and requiring regular reporting or conducting other methods of oversight?
- Are we conducting an ongoing analysis of the project’s progress with respect to the goals for which the project was approved to be fiscally sponsored?
- Are we keeping track of the current contacts and project manager(s) for the project?
- Are we requesting adequate information for evaluating the appropriateness of the expenses incurred by the project and withholding payment(s) when warranted (e.g., reason or purpose for expenditures, receipts)?
- Can we continue to effectively administer the project given the scope, level of activity, geographic location, or other factors of the project and the organizational limitations of our organization?
The fiscal sponsor is typically (but not always) in the driver’s seat in terms of defining the way the relationship will work both through its fiscal sponsorship policies and the parties’ respective contractual rights and obligations. Unfortunately, sponsors often leave many important considerations up to chance and good intentions. Establishing sound policies and fiscal sponsorship agreements at the outset can help reduce issues like a backlog of unmonitored dormant projects, which can be symptomatic of the larger issue of failing to exercise appropriate oversight as a fiscal sponsor.
Part I to this series, “Fiscal Sponsorship & Dormant Projects – Part I: Liability Risks” can be read here.
Adler & Colvin provides sample Fiscal Sponsorship Agreements for Model A and Model C fiscal sponsorships here.
A comprehensive list of our prior blog posts on fiscal sponsorships is accessible here.