Thursday, April 16, 2009

Thoughts on Overhead Costs versus Programmatic Investment

The Endowment’s commitment to openness and transparency is often a challenge. We get some tough questions. Among those we’ve received recently, was a rather direct one about the ratio of our overhead or administrative costs as relates to the funds that we get to the ground to address our mission. Here’s a quick summary of some of what we shared with our questioner.

Compare us with Peers – Start-ups; Not Long-running Organizations
It shouldn’t be surprising that a start-up foundation would have an “upside down” ratio for a while. As the only non-profit chartered as a totally new entity to receive funds under the Softwood Lumber Agreement (SLA), one would expect a period of time to get our feet on the ground. The Endowment took a very deliberate approach to determining how best to achieve the mission that was assigned as part of the SLA – sustainable forestry and forest reliant communities. While we were “legally chartered” in September 2006, our Board didn’t have its first meeting until late November. Perhaps more importantly we didn’t get our full corpus funding until nearly May 2007.

Thus, the first few months of our existence – December 1, 2006 – March 31, 2007 – were spent in things such as getting an office in place, interviewing staff, building governance policies, developing an investment policy and selecting a fund manager … all with a single staff person. By April 1, 2007 we had our full staffing identified (a total of only 3), to dig deeper into programmatic planning processes and strategic program direction. In total we took about six months to build our organizational foundation and a first-cut at a program. The Endowment board then decided to vet broadly the proposed programmatic plan. Those processes, which were designed to reach out to all interested parties, took an additional six months. Thus, by early November 2008, we publicly announced not only our direction but our plan for programmatic investment – an anticipated $10 million annually beginning in 2009.

The Endowment is a “True Endowment”
In a university setting most endowment funds are sequestered for an average of three years to allow time to build earnings that can be paid out for missional purposes. The U.S. Endowment didn’t have such a luxury. Our one-time infusion of funds – a single $200 million corpus – had to provide for administration as well as program … immediately. Administration costs started on day one. While the Board crafted a very modest plan for overhead costs – just 0.375% of corpus – adequate for a lean staff model with the full corpus … it isn’t when one experiences a significant market decline. Fortunately, being initially chartered as a public charity, we were not bound as are private foundations with the requirement of spending 5% of corpus regardless of the situation.

Investing in Real Change vs. Spending Money
The Endowment Board has taken a very thoughtful and constructive approach to our work. Spending money is easy. Just chip in a few bucks to hundreds of causes. But, the Endowment’s Board wanted to be “systemic, transformative and sustainable” in the change we sought. This requires a very different programmatic investment strategy – one that often means doing a very few things rather than lots of little things and investing with our partners for a longer period of time. Thus many of our grants are for multiple years.

From 0 to 60 in __ Seconds
The Endowment Board adopted a “ramp-up” plan to go from $0 -- our starting point on May 1, 2007 (when funds were in place and invested) -- to full programmatic engagement which we expected to take 2-3 years. We have done this in the face of the greatest market declines and uncertainty since the Great Depression. Our ramp-up strategy has allowed us to stay the course and make several multi-year, multi-million dollar programmatic commitments when some other organizations are being forced to renege on previous commitments. That said, we are doing so in the face of losses to our endowed base in excess of 30% -- thus, in reality we have NO earnings to invest in program. Yet, our Board is navigating the balance between missional focus and fiduciary responsibility in a way that makes us all proud.

Building the Fire Truck on the Way to the Fire
We’ve already touched on the fact that we had to do everything from scratch -- no small task. Thus, when one looks at our first two years of operation – we are clearly upside down on administrative costs vs. programmatic payout. That said, we’ve taken such a conservative approach to showing these numbers that we perhaps do ourselves a disservice. Our Form 990 shows a much truer picture than does our annual report in that two of our three staff members also have heavy roles in program content. If we perhaps more appropriately showed those costs as “program investment” vs. administration, the picture would look much better. But, we chose not to do that. Instead we urge those interested to look not in the rear-view mirror; but ahead. The Endowment’s 2008 Annual Report clearly notes nearly $9 million in programmatic commitments with significant additional leverage that will quickly bring the Endowment’s overhead vs. program ratio into a much more favorable position. In fact, we expect that when fully “at speed” our ratio will be among the lowest of our peer group.

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