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Chapter 2: Power of Resources

The Power of Financial Leverage

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In the children’s story “Stone Soup,” the morality tale goes something like this. A village was starving. The wise woman leader said she was making stone soup that would feed everyone. She placed a stone and water in a huge caldron in the middle of the city and started the fire.

Wouldn’t it be better if the villagers in the straw house would bring the carrots they were saving? What about the people on the corner, could they bring an onion? Could the children forage the countryside nearby and find some parsley, dandelion leaves, and fiddlehead ferns? Would the five families who had venison last night bring the trim edges that were left over? Could the teenagers bring more wood from trees that had fallen in the forest? Each family brought their meager provisions and placed it in the caldron. As the day went on, the soup bubbled and the smells of warm, nourishing soup brought the village together. At suppertime, every villager ate a hearty dinner until each person was full.

The story requires some basics. The wise woman owned a pot big enough to make the soup. There was fresh water and fire wood. There was a willingness to share, and to defer eating until the soup was done. The local environment provided additional nutrition in forms that had not been domesticated. The villagers believed in the soup enough to give their most precious food gift.

stone-soupThis little tale provides insight into the role of financial resources in Michigan’s philanthropy and charitable efforts. The state is home to several major international foundations – the W.K. Kellogg Foundation, the Charles Stewart Mott Foundation, The Kresge Foundation, and the Herbert H. and Grace A. Dow Foundation. These foundations have been funders and, importantly, leaders of the state. Three of the four have international grantmaking interests.

Michigan is a large, heavily-populated, and industrialized state with a cyclical business environment, great social diversity, and many urgent needs. The most these foundations could be expected to do is provide a “pot” for communities, and maybe a little fire and water. The foundations could offer the needed “basics” such as challenge grants, technical assistance support, and personal active participation to create an environment for communities to participate and to generate their own philanthropic resources. The story of Michigan philanthropy for the past 40 years is one of leverage.

This leverage took at least five forms. First, there was the process of providing seed money for a new idea and then nurturing the growth. Second was the partnership with government to achieve common social good. Third, there was investment in the creation and strengthening of community-based giving through community foundations. Fourth, the foundations had an ethic of combining their support for philanthropic ventures with far-reaching effects for the common good. Each contributed something toward a shared goal. Finally, new philanthropists were inspired to take action by the leadership of their peers.

Supporting Local Ideas with Seed Money

Today, fewer grantmaking foundations in the United States seriously consider and support new ideas that come to them “over the transom.” But, in the 40 years of Michigan’s philanthropic development, the major foundations supported the unsolicited creativity and passion of individuals with a personal mission to solve a problem. Sometimes the nugget of a good idea was handwritten on a piece of notebook paper. The foundation program officer would meet with the grantseeker and, not infrequently, had to tease out the framework for what could become a proposal.

It was not unusual for foundation staff to assist grantseekers in developing an initial small budget for a planning grant. Planning grants helped define what success would look like and how this success would be measured. There was a sense of adventure in receiving a “planning” or “seed money” grant. These were smaller investments made to test the ability of the grantee to build an organization, deliver on their promises, raise additional dollars, attract new donors, and prove that the idea was viable.

VideoVideo: See leaders discuss the process of implementing an idea.

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A common pattern was to move from a “white paper” outlining an idea to engaging key stakeholders, to the development and funding of a one- to three-year test of an idea. What was learned during the first three years, if successful, was then applied and expanded in subsequent cycles of grants that helped to grow the idea and organization.

The Michigan Community Foundations’ Youth Project began with a three-year pilot project grant to the Council of Michigan Foundations (CMF). The grantee then re-granted the challenge money to the community foundations once the terms of the project (raising matching funds on a 2:1 basis) were fulfilled. The questions to be answered by the pilot project were the following:

  1. Can teenagers be trusted to be responsible grantmakers?
  2. What preparation and training do teenagers need to succeed as grantmakers?
  3. Will a challenge grant help community foundations raise permanent unrestricted or field-of-interest endowment funds?
  4. Can local community foundations become strong enough organizations to serve as local partners for national foundation initiatives in their communities?

Historical_DocsHistorical Document: Read notes from a 1991 Council of Michigan Foundation’s board meeting when trustees discussed the W.K. Kellogg Foundation’s Youth Project.

Cultural anthropologists were hired as evaluators because the emphasis for the grant was on learning what worked and what didn’t. While there were some bright-line numerical goals, the main purpose was to understand and assess whether these ideas, in this form, had ongoing merit.

VideoVideo: See Jim McHale discuss the value of project evaluation.

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Similar “seed money” grants were used to launch other projects in Michigan, such as the funding for Campus Compact; Volunteer Center development; endowed funds for the environment; and the Michigan Community Foundation Tax Credit.

These following documents provide information about the mission, history, and development of the three programs:

Historical_DocsHistorical Document: Michigan Campus Compact

Historical_DocsHistorical Document: Volunteer Centers of Michigan

Historical_DocsHistorical Document: Michigan Community Foundation Tax Credit

Along with this proof of product, some seed money grants resulted in decisions not to continue with a project. For a relatively small amount of money, the stakeholders and funders realized that there were structural, intellectual, or outcome obstacles that would be too difficult to overcome. An example was the Direction Center, a collaboration among the Heart of West Michigan United Way, the Grand Rapids Community Foundation, and Grand Valley State University. The Direction Center was a management service organization, first funded by the W.K. Kellogg Foundation with a mission of providing technical assistance to Kent County nonprofit organizations. Although the services of the Direction Center were well regarded, it encountered a dilemma: most of the smaller nonprofits that needed its services were unable to pay for them, while larger nonprofits (that could afford to pay) had less need for the services. Consequently, the Direction Center could not find a path to sustainability and eventually went defunct. The Direction Center folded into the Dorothy A. Johnson Center for Philanthropy and its intellectual assets became a part of subsequent nonprofit support programs such as the online Nonprofit Good Practice Guide and the current Herbert H. and Grace A. Dow Foundation Nonprofit Services, which are offered by the Johnson Center.

Michigan’s philanthropic infrastructure was built through grantmakers who responded affirmatively to creative requests from passionate grantseekers with good ideas. Then, they assisted the grantseeker in creating the strongest model possible. Next, seed money was granted to try out the idea and to learn from the experience – the kind of learning that can only come through implementation.

Leveraging Additional Contributions

A second use of money was utilizing the power of leverage, as exemplified by the Michigan Community Foundation Tax Credit, the development of the ConnectMichigan Alliance (now a part of MNA) $20 million endowment fund, and the Great Lakes Environmental Protection Fund (to name three of many examples).

The Michigan Community Foundation Tax Credit brought together three partners in funding permanent endowment for community foundations: 1) the W.K. Kellogg Foundation http://wkkf.org challenge grant through Michigan Community Foundations’ Youth Project (MCFYP); 2) the state of Michigan through a tax credit for gifts from individuals and corporations; and 3) local donors. The credit benefited the community foundations and also those Michigan nonprofit organizations that took advantage of the credit by establishing endowment funds for their organization within their local community foundation.

The formula was magical.

From the local donor’s point of view – $2 contributed to their local community foundation generated $1 from the Kellogg Foundation, and $1 directly out of their state of Michigan tax bill… a 100% return on their gift. From the Kellogg Foundation’s point of view – $1 generated $2 from local donors, and $1 from the state of Michigan… a 300% return on the gift. From the state of Michigan’s point of view – $1 given in tax credit generated $1 from the Kellogg Foundation, and $2 from local donors… a 300% return on their investment.

Historical_DocsHistorical Document: Read the Council of Michigan Foundation’s Annual Report from 1994-1995 to see how many organizations were affected by the tax credit.

community foundation assetscommunity-foundation-grants

For the community foundation, there was a reason to talk with current and prospective donors about gifts to the endowment. In addition, local nonprofits realized they could interest their donors in giving to an endowment fund for their organization, placed at the community foundation, and use the tax credit as an incentive. This generated additional interest in giving and also started the process of smaller nonprofits creating permanent resources for the ongoing support of their missions. Note that the Kellogg challenge grant to community foundations did not match these restricted gifts.

Over the past 20 years of MCFYP, just the Kellogg investment in permanent field-of-interest youth funds has resulted in grants returned to Michigan communities that equal the value of the original gift, and the value of the youth funds held in Michigan community foundations now exceed the value of the original gift… such is the power of endowment. More impressive, these results were obtained during the worst economic climate since the Great Depression.

Another example of leveraging assets was the formula used by the Kresge Foundation in their capital giving programs. Typically, Kresge made a challenge grant in which they required that 80% of the building cost be raised before their grant (equal to 10% of the building cost) could be activated – and that 10% was conditional upon the grantee matching it 1:1. Thus, if an organization raised 80% of the needed funds, Kresge would use leverage to put the campaign “over the top” by challenging with half of the balance still needed. Thus, the match obtained through Kresge’s leveraging completed the project.

Creating Statewide Community Foundation Service

A third type of leveraging of financial assets was the strategic decision to create a network of independent, but interactive, community foundations as local pools of philanthropic dollars and community leadership. With multi-year, significant investments, the W.K. Kellogg Foundation and the Charles Stewart Mott Foundation seeded the creation of new community foundations, the geographic expansion of current community foundations, and strengthened organizational systems for all of Michigan’s community foundations.

Just as corporations develop strong networks of trusted suppliers for needed goods and services, major private foundations require strong networks of local intelligence, additional funding, and leadership in order to accomplish their institutional goals. The foundations might have waited for this network to grow organically; instead, they decided to help build their local partner community foundations.

VideoVideo: See leaders discuss the development of community foundations in Michigan.

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Strong community foundations are committed to solving local problems and therefore reduce some of the grantmaking burden on larger private foundations that have a grantmaking interest across the entire state. The community foundation can also serve as a vehicle to assure that grant initiatives of major private foundations go to responsible and effective community organizations to do the work “on the ground.”

The network of Michigan community foundations worked in collaboration with their major private foundation partners to create local endowed funds that were used to accomplish great things. Two examples follow: 1) the Great Lakes Environmental Collaborative, which supported the health of the Great Lakes; and 2) the W.K. Kellogg Foundation’s Access to Recreation project, which built playgrounds that are accessible to children with disabilities.

Major Foundation Participation in Joint Ventures

The fourth facet of the power of leveraging financial resources comes with the willingness of Michigan foundations to support common work with grants. The culture in Michigan has been that when there is agreement, often facilitated by the Council of Michigan Foundations (CMF), the Michigan Nonprofit Association (MNA), the Michigan Community Service Commission (MCSC), and/or the Dorothy A. Johnson Center for Philanthropy to take on a major strategic initiative – the funders in Michigan get behind the idea and support it at a level that is appropriate for the size of their foundation. Frequently, the W.K. Kellogg Foundation, the Charles Stewart Mott Foundation, or the Herbert H. and Grace A. Dow Foundation (to a lesser extent, the Kresge Foundation because of the specific nature of their charter during this period) would be the major contributor to a common cause. Other family, private, corporate, and community foundation funders would also “chip in” according to the scope of their resources to provide additional support and leadership.

During the period described, the Kresge Foundation focused its grantmaking mostly upon capital (erecting buildings) investments such as challenge grants to help nonprofits complete their capital fundraising campaigns. This specific focus made it more difficult for Kresge to fully participate in the grant partnerships that were designed to advance program goals.

To their credit, the major funders valued the investment of others and treated them as equal contributors to the effort. These were not considered to be “Kellogg” or “Mott” or “Dow” initiatives that others were helping them fund. These were Michigan philanthropy initiatives and each of the funders contributed as appropriate to their mission and scale. The lack of size distinction was critical to each shared initiative’s success.

Welcome Smaller Donations, Communities, and Foundations

Finally, Michigan did not ignore small donations, smaller communities, or foundations with more limited assets. All were welcomed. All supported. All contributed. All engaged. The myth that smaller communities (under 150,000 people) could not sustain a successful community foundation was challenged “head on” by the Council of Michigan Foundations. The prevailing wisdom (promoted by individuals living in major metropolitan community foundations) that small communities could not successfully establish their own community foundations was put to rest.

VideoVideo: See leaders discuss the movement to value all philanthropy.

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In 2014, Michigan had more than 60 community foundations, serving every community in the state, with total assets of over $3,000,000, according to the Council of Michigan Foundation’s 2014 Community Foundation Databook. Some of Michigan’s community foundations serving smaller communities are in the top 100 of community foundations in the nation, based on total assets. See this CF Insights report to see the full list. If the measurement of quality is assets per capita, the number of noteworthy community foundations in the state would be even higher.

What often goes unrecognized is that there are surprisingly large amounts of philanthropic capital in small and rural communities – the independent business owner; farmers; local licensed professionals such as bankers, lawyers, doctors, and accountants; the financially careful school teacher; or the independently wealthy outdoorsman, for example. While these individuals have chosen to live and work in a smaller or rural community, many have the means to become significant philanthropists/donors, and the love of their community can provide strong motivations for giving and service.

“It doesn’t have to be a $1 million grant to make a difference in someone’s life.”                                                                – Sandy Dobbins, Executive Director, Marshall Community Foundation and YAC Advisor

Michigan Community Foundations’ Youth Project (MCFYP) encouraged local gifts for youth. The Michigan Community Foundation Tax Credit had a cap on gifts set at $500 per year, per couple. Local family foundations, businesses, and individuals stepped forward with gifts to meet the $1 million W.K. Kellogg Foundation challenge by raising $2 million in matching funds locally. Often the challenge was taken in small “bites” in order to build confidence and reach out to new donors. A challenge of $100,000 successfully matched, was then followed by a challenge of $200,000, and so on… until the full $1 million (or, in some cases, less) was brought into the home community. The W.K. Kellogg Foundation remained flexible in how the challenge was implemented, focusing the design on how to achieve the desired goals – all the while, listening to what local leaders had to say about the most effective way to succeed. The funders were committed to provide local communities with enough time to introduce the community foundation idea, to organize, and to prove its viability.

Most of the state of Michigan is composed of townships, villages, and mid-sized cities. Michigan is known for its manufacturing (especially its auto industry), but its second largest economic sector is agriculture. There are vast areas of state forests, national forests, and recreational areas – areas with more deer than people. Yet, philanthropy thrives because of leverage and the power of many small gifts, all concentrated on common results.

When people consider the philanthropic environment in Michigan, the focus is often on its largest and international-grantmaking foundations. These are, indeed, very important to Michigan’s philanthropic ecology. While their financial ability to make grants to the state is significant, it has also been critically important that the foundations have leveraged additional financial resources toward common philanthropic agendas.

Seed money has launched almost all of the significant philanthropic projects. Challenge grants, and their matching funds, have leveraged local donations, as well as other foundation and government dollars. A statewide network of locally-based funding and program partners were created. Private philanthropic dollars were given from unlikely places.

Perhaps most importantly, the philanthropic “community” of foundations, corporations, individual donors, and government have each contributed to common efforts to the extent appropriate for their resources – they have made “stone soup.” Much of this common effort has been focused on investments that created permanent institutions and resources that will serve Michigan citizens well into the future.

VideoVideo: See leaders discuss permanent endowments.

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Money is an important ingredient of philanthropy. Michigan – through leverage, contributions, participation, and working together – has multiplied the benefit of the gifts provided.

Issues Involved with Leverage

Over the years, a growing number of challenge grant opportunities have been presented to local communities. These were attempts by the larger foundations to increase the amount of money working on a specific problem and to engage community leaders through a tangible financial investment. The number of these opportunities… The fact that the challenge has often been toward programming of the large foundations’ interests rather than a local community’s agenda… The amount of local match required, project after project… These issues can exhaust the human resources of local communities.

The word “leverage” itself helps to capture both sides of the challenge grant. Leverage can mean generating additional dollars. It also can carry the negative connotation of being used. As the number and size of challenge opportunities increased, CMF facilitated conversations between the local community foundations and the large private foundations to develop a more reasonable number of challenge opportunities. In addition, community foundations increasingly feel more comfortable in choosing to “opt out” if a local community is unable to take on additional fundraising matches or program responsibilities.

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