By Dr. Kevin Dean, President & CEO, Tennessee Nonprofit Network
*Partially adapted from Engaging and Retaining Black Philanthropists in Donor-Advised Funds by Dr. Kevin Dean
Community foundations are woven into the fabric of American philanthropy, serving as vital threads that connect local communities with the resources they need to thrive. They act as grantmaking organizations, but their purpose extends far beyond simply writing checks. This blog post traces the history of community foundations in America, starting with the visionary leadership of Frederick Harris Goff in Cleveland, Ohio, back in 1914. We’ll explore how their role has transformed over the decades, delving into the rise of donor-advised funds (DAFs) and the ongoing debate surrounding their regulation.
The Genesis of the Community Foundation
Frederick Harris Goff was more than just a prominent lawyer and banker in Cleveland; he was a keen observer of the social and economic currents shaping his city in the early 20th century. He saw a city undergoing rapid transformation – industrialization, urbanization, and a surge in population. But amidst this progress, Goff also saw challenges: poverty, lack of education, overcrowding, and new public health concerns emerging. He recognized a critical disconnect between the existing systems of charitable giving and the evolving needs of his community.
Traditional charitable trusts and bequests, often established with the best intentions, were becoming increasingly irrelevant. Locked into specific purposes by the “dead hand” of the past, they lacked the flexibility to adapt to the dynamic realities of a changing world. A trust established to combat a specific disease, for example, might become obsolete as medical advances rendered the disease less threatening. Goff saw these trusts as relics of a bygone era, inefficiently managed and failing to address the pressing needs of the present.
Goff, a true visionary, sought a more dynamic and responsive approach to philanthropy. He imagined a system that could harness the generosity of donors while ensuring that their charitable dollars were used effectively to address both current and future community needs. This vision materialized in 1914 with the establishment of the Cleveland Foundation, a pioneering model that would forever change the landscape of American philanthropy.
Goff persuaded the Cleveland Trust Company to create this new entity, designed to pool charitable gifts from various donors into a single, enduring endowment. The income generated from this endowment would be used to address the community’s most pressing needs, guided by a distribution committee composed of civic leaders and experts. This committee would ensure that funds were allocated strategically, based on a deep understanding of current community conditions.
The Cleveland Foundation model was revolutionary. It offered flexibility, allowing for grantmaking to adapt to changing needs. It brought expertise to the table, ensuring that funds were used wisely and effectively. And perhaps most importantly, it fostered a sense of community ownership, inviting everyone to participate in shaping a better future for Cleveland.
The Rise and Spread of Community Foundations
The success of the Cleveland Foundation ignited a spark that spread rapidly across the nation. By 1930, over a dozen community foundations had taken root in major cities. The Great Depression, with its devastating social and economic consequences, further fueled the growth of community foundations. Communities sought innovative solutions to widespread poverty and unemployment, and community foundations, with their deep understanding of local needs and their ability to mobilize resources, were uniquely positioned to respond.
The postwar era witnessed continued expansion, driven by the rise of organized philanthropy and a growing middle class. The Tax Reform Act of 1969 further incentivized charitable giving, bolstering the assets and influence of community foundations. Today, these organizations are a ubiquitous presence in the American philanthropic sector, with over 750 foundations serving nearly every corner of the country, including Community Foundation of Greater Memphis, Community Foundation of Middle Tennessee, and East Tennessee Foundation existing in Tennessee, among others.
The Emergence of Donor-Advised Funds (DAFs) and the Call for Reform
In recent decades, donor-advised funds (DAFs) have become a popular vehicle for charitable giving. These funds, housed within sponsoring organizations like community foundations, offer a compelling combination of convenience and tax benefits. Donors contribute to their DAFs, receive an immediate tax deduction, and then recommend grants to their chosen charities over time.
Community foundations have embraced DAFs, recognizing their potential to expand their donor base and increase charitable assets under management. DAFs have enabled them to attract a wider range of donors to increase their grantmaking capacity and encourage long-term giving.
However, the rapid growth of DAFs has also attracted scrutiny and calls for legislative reform. Critics argue that the lack of mandatory payout requirements allows funds to languish in DAF accounts, delaying their distribution to working charities. Concerns have also been raised about the potential for DAFs to be used for tax avoidance or to support controversial causes anonymously. These concerns have led to various legislative proposals aimed at introducing mandatory payout requirements and increasing transparency.
Community foundations are navigating this complex landscape, balancing the needs of their donors with the broader public interest. Many are actively engaged in discussions about DAF reform, seeking to ensure that these funds are used effectively for charitable purposes while maintaining the trust and confidence of the public.
The Evolving Role of Community Foundations
The role of community foundations has evolved dramatically since their inception. While grantmaking and donor services remain central to their mission, they have adopted a more proactive and multifaceted approach to community development. Though the private foundations of tech billionaires like Bill Gates and Mark Zuckerberg receive the lion’s share of press coverage in the United States, community foundations are one of the fastest growing and most quickly evolving philanthropic institutions in the country. Grants from donor-advised funds totaled $23.4 billion in 2018, the highest ever recorded at the time. Meanwhile, the number of donor-advised funds in the United States has tripled since 2014. Community foundations have been able to offer new funding streams to nonprofit organizations through the expanded donor-advised funds while leveraging corporate, individual, and government funds for collective action. The modern community foundation is now no longer only a repository for wealthy donors’ charitable funds but a as a convener and capacity builder. They bring together diverse stakeholders to address complex challenges, conduct research and gather data to inform decision-making, advocate for policy reforms, and invest in social enterprises that generate both financial and social returns.
The community foundation business model’s elasticity isn’t simply required for self-preservation, though competition is increasing as donor-advised funds have become more popular in identity-based foundations, commercial gift funds, United Ways, and universities. The institutions must constantly respond to the shifting definition of “community” that relies less on geography than on the collective identity of a population. Community foundations must now define who their “communities” are, as the traditional “all for one and one for all” mantra may have become too simplistic in a world marked by rapidly shifting demographics, priorities, and economic disparities. The fluidity of demographics and geographies as well as the complexity of modern social issues can make strategic long-term visioning for community foundations seem like a moving target. Community foundations have begun to purposefully address these shifts through segmentation of donors and engaging in more community dialogue, offering themselves as a convener of important discussions around community needs and solutions. Hearing from the community is, after all, the best way to determine what that community needs. Government safety net programs have historically been a main source of support for the United States’ most marginalized communities, but expectations about private philanthropies’ role in supporting communities have increased exponentially in recent decades as government support continues to evaporate. Asset building will always be a priority for community foundations, but studies have shown that the roles community foundations play expand as they mature, especially in this quickly changing environment. At some point in a community foundation’s life cycle, the priorities begin to transcend asset size to focus on community impact. In the last two decades, this evolution has gained traction. Rather than an organic natural step in the life cycle of a community foundation, transcendence into a community hub and philanthropic leader is now fundamental to its continued existence. Because of the dexterity of the business model and the catalyzing ability it has to bring together multiple stakeholders, community foundations have the opportunity to be models of co-creation, democratized giving, innovation, and responsiveness. No longer are community foundations constrained by one instrument of philanthropy, whether that be donor-advised funds or general grantmaking. Instead, community foundations are incorporating multiple methods of donor engagement through small giving circles, general grantmaking, managing endowments and scholarship funds, and traditional donor-advised funds.