Building Equity in the Arts

From Financial Equity to Access Equity

Published in: GIA Reader, Vol 27, No 1 (Winter 2016)

Elisa Callow, James E. Herr, and Leslie A. Ito

Over eighteen months, the California Community Foundation (CCF) provided seed grants as incentives for five small and midsized arts organizations to build capital reserves through its pilot program, Building Equity in the Arts (2012–14). The program’s goals were for these organizations to raise a reserve fund, to create a cash reserve policy, and to evidence an increase in their fund balance. While a seemingly straightforward challenge, the building of cash reserves required a great deal more than simple development and reallocation of resources. It required whole shifts in organizational culture, priorities, and commitment on the part of organization leadership and boards. At the conclusion of the grant period, most of the organizations fell short of meeting the program’s goals. However, the program outcomes were a great deal more nuanced than simple questions of metrics or compliance.

This article describes two stories: the how and why of and lessons learned from building a grant program that invests in organizational financial capacity, and, perhaps more importantly, what it means for a foundation to take a risk on a grant program that is not a “sure thing.” The distance between vision, theory, and implementation required CCF to balance grant requirements and goals with its own capacity to learn and respond to unforeseen challenges while building on its own depth of sector understanding. The consequent and hoped for outcome is more authentic and effective grantmaking.

Context

While the establishment and effective use of reserves are now understood to be critical to nonprofit organizations’ overall financial health, reserve building has not been a significant priority for the nonprofit sector. Philanthropic support has played a substantial role in affirming other priorities, as grant making historically has focused on program outcomes to the detriment of nonprofit organizational capacity and stability.

In 2010, CCF conducted research that revealed an alarming lack of available cash reserves among small to midsized organizations. Although some nonprofit arts organizations had successfully built and maintained cash reserve funds, these reserves were limited, and there was a lack of understanding about structuring or managing these funds as effective working capital. Many compromised their financial stability by focusing on one of two extremes: allocating most or all resources to direct services, or creating overly restrictive endowment funds. With weak financial systems and the lack of access to unrestricted revenue, these organizations were unable or at least severely challenged to build sufficient working capital to support their mission and increase their services to the communities that most need them. Building on its experience with the initiative Strengthening Our Capacity: Building Culture in Los Angeles (a two-year capacity-building project), CCF believed that a cash reserve project focused specifically on fiscal management and building capital for small and midsized community-based arts organizations could benefit the sector.

Building Equity in the Arts

CCF piloted the Building Equity in the Arts (BEA) grant program exploring the crossroads of capitalization and cultural equity with a cohort of five small to midsized arts organizations, whose missions, programs, and services focus on underserved communities in Los Angeles County. The Nonprofit Finance Fund (NFF) provided technical assistance that was designed to be customized and comprehensive. Each organization received grant support to develop or increase reserve funds. An external advisor cofacilitated the meetings, interviewed cohort leadership, provided ongoing feedback to the cohort and CCF staff, and authored the final report. The program combined technical assistance, the opportunity to access matching funds for a cash reserve, formative evaluation, and ongoing facilitated connections among the organizations over an eighteen-month period. Projected outcomes were (1) increased financial capacity for small and midsized community-based arts organizations, and (2) increased ability to produce local, affordable, and relevant programming for underserved communities. A CCF commissioned companion report provides insight into both the outcomes and processes of the BEA program.1

Baseline description of cohort and proposed strategies for building a reserve fund

Organization Reserve status pre-BEA Alignment with strategic plan Strategies Board involvement
Organization 1
Culturally specific museum
$800K budget
No unrestricted reserves but restricted funds, i.e., for acquisitions. Yes Hire external consultant: to raise 30K–90K. Diversify funding streams. Yes
Organization 2
Ensemble-based theater company
1.8 million budget
Three funds, two with restrictions, one surplus from a prior year Yes Upgrade development staff to focus on donor development. Yes
Organization 3
Senior adult programming and development
$1.1 million budget
Small board-controlled rainy day fund. Additional larger reserve without policy. Not described Upgrade finance and development staff. Yes
Organization 4
Community arts center
$400K budget
Small reserve used 3 to 4 times a year, paid back. Yes Hire external fund development specialist to increase individual donor support. Yes
Organization 5
Literary arts center and bookstore
$300K budget
$100,000 donor loosely restricted reserve for building acquisition. Not described Focus on internal capacity, business structure, staffing, program, and budgeting. Yes

Results

At the conclusion of a pilot grant period, it is typical to evaluate a program’s successes and failures. In this case, CCF had the foresight to meet frequently with the cohort and the consultants. If the increase in the organization’s fund balance indicating the presence of a reserve fund and development of a reserve fund policy were the criteria for success, the program’s cohort would receive a low grade, as only one organization met all three of these criteria. However, a more subtle narrative has emerged — one that looks surprisingly successful, as it is a story of emerging organizational commitment to financial literacy and capacity and a critical grant strategy that was essential for organizational resiliency and maturation.

Without the BEA program, two of these organizations might have failed financially. Both sustained extraordinary organizational stressors internally, and both turned to their newly developed reserve fund to maintain their programmatic capacity. In a recent interview, Organization 1’s executive director remarked, “We didn’t lose a beat — the programs went on as promised. I know that I suffered, my staff suffered, but we met our commitments.” Although both organizations were compelled to use the reserve fund raised through the BEA program, both are committed to repayment, and as of this writing, Organization 1 has already done so.

Despite sustaining significant staffing losses, Organization 2 developed a successful strategy to increase donor support and exceeded their BEA goal. While these donors were reluctant to allocate their gifts to reserves, program support freed up other funds to be allocated to reserves. One of the original donors, after speaking to CCF staff, now understands the importance of reserve funds and has shifted support from program to reserve funds. CCF staff took on a meaningful advocacy role in this instance.

Organization 5’s financial bottom line is no different than before, but they have increased their capacity in other, less visible ways. While the BEA program deliberately selected arts organizations varied in terms of budget size and maturity, there was not an explicit plan for integrating understanding of an organization’s readiness with CCF’s criteria for success. Although Organization 5 met only one of the program’s three goals, it traveled the furthest in terms of holistic organizational growth. It is now more functionally staffed, has effective accounting support, develops budgets based on program needs rather than opportunist grants, and has extended its program planning to quarterly rather than weekly. Its leadership now feels ready to focus on development of a reserve fund.

Four of the organizations describe a distinct shift in their boards’ level of activity and leadership during the BEA program period that continues today. For some, the staff attrition may have been at the root of the change, but the BEA program provided not only coaching and technical assistance during these fragile periods but a sturdy set of financial goals to aim toward. In Organization 2’s case, the entire board participates on the finance committee. Organization 5’s board involvement ratcheted up to the point where one member took a leave from the board to work as a staff member.

For Organization 3, the most stable of the cohort, the changes had more to do with letting go of controls by the executive director. He now recognizes that there is opportunity loss in doing everything and has hired more sophisticated financial staff. The biggest hurdle was giving up control of reserves by restricting their use. The NFF’s counseling in this area allowed him to develop with his board a comprehensive reserve policy tailored to its needs.

Another BEA program goal was to develop a cohort of peers, all working together to develop organizational capacity. To this end, three meetings were scheduled, and some incentives were created for leaders to meet outside of these structured situations. Yet, very few actual connections were made.

There are a number of possible reasons why the cohort did not gel, the key one being leadership attrition. After the first meeting, the same group of people never met again. Other reasons tie more into program design than program circumstance, as the diversity of organizations (budget, purpose, and community) left some wondering what they had in common. Changes in leadership at CCF, the cohort, and the NFF made it nearly impossible to create an unbroken thread of communication. Nevertheless, this program goal was met in some areas, including the sharing of materials and knowledge, development of relationships, and understanding the various supportive roles of the foundation and its partners.

A clear indication of communication gaps was the failure of some organizations to develop a reserve policy by the end of the BEA program. At program’s end, desire to receive the final grant payment became the motivation for some organizations to finalize a policy rather than internally driven commitment.

Program Recommendations

The challenges of developing a complex grant program can lead to greater sector understanding and possibly a more effective, responsive strategy if a foundation has the patience and perseverance to continue. Future programs may benefit from the following recommendations, drawn from cohort leadership interviews, organization reports, and multiple meetings among CCF leadership.

1. Extend project timeline to three years.

Extension of the program timeline would allow for the development of organizational readiness and provide a more realistic time frame for cultivating existing or new donors, integrating a regularized focus on longer horizons and the importance of the development of reserves, and involving board members.

The former executive director of Organization 4 said, “Considering that the goal of the grant was a culture change within the organization, this can’t happen in eighteen months — that feels too temporal and project focused. If this were a three-year grant and you are really talking about building new revenue streams, a realistic time frame could include: plan, implement, flesh out and make changes, refine measurements of success.”

A sample scenario identifies how a longer timeline might play out, highlighted by a preparatory year prior to the full program launch and release of the majority of the grant support.

  • Year One: Readiness
    • Assessment of systems
    • Understanding of baseline finances through the CCAT (Core Capacity Assessment Tool)
    • NFF basic training and a small grant for any of the following:
      • Financial accounting: Are the internal systems prepared for the development of a reserve fund?
      • Provision of referrals to nonprofit accounting resources.
      • Board development: What does the board need to succeed?
      • Goals, strategies, and feasibility: Is it business planning review, more money, board engagement, and donor cultivation? How do we know that these strategies are meaningful?
      • Co-vetting plans with cohort and financial and development experts.
      • Tailoring the range of small grants to organizational readiness.
      • Creating and approving a reserve fund policy: This recommendation is key but cannot be achieved without some contextual learning, as described for the readiness period.
  • Years Two and Three: Launch and Completion of Goals
    • Make allowances for different “starting points” for an organization: size, maturity, and legacy.
    • Evaluate the extent of overarching organizational change as well as achievement of a reserve and an increase in the fund balance.
    • Providing co-learning by the organizations and consultant technical and “perspective” support.
  • Ongoing: Pathway to Success
    • Insure that the foundation checks in with the cohort to assess their level of stabilization, including reserve fund and policy, board involvement, staff continuity, and mission and program consistency.

2. Require consistent participation and involve board leadership in the cohort.

Whenever possible, grant agreements should require that the same people participate in the cohort meetings. Within reason, the board president or treasurer should participate in any training-focused meetings.

3. Consider the challenges of whole organizational change, and be prepared for different outcomes.

Foundations should assume from the outset that the people — on all sides of the table — may change. During the project duration every key player changed in a short span of time. Unexpected financial issues may also come up. Changes in what the organization can or needs to deliver to the community will occur that affect the expected outcomes. Because changes can ripple through an entire organization, maintaining the consistency of board membership is especially important (see recommendation 2 above).

  • Institute comprehensive documentation and record keeping so that consistent communications is maintained among those involved through the lifetime of the project.

4. Consider the opportunities for sharing learning with other foundations.

Many in the cohort saw CCF as a field teacher, acting as an ombudsman between the reality of this sector (small and midsized organizations) and the field of philanthropy.

  • Maintain the practice of an external advisor and evaluator whose role is to witness, record, and provide ongoing feedback to the cohort and CCF staff.
  • Continue to have CCF staff focus on coaching and advocacy more than compliance. This orientation was particularly helpful at the conclusion of the pilot BEA program.
  • Include NFF or other financially sophisticated resources in the development and assessment of BEA program goals.

5. Assure understanding of all roles and responsibilities of the various participating resources and consultants for benefit of the cohort and CCF leadership.

  • Define the purpose and limitations of the NFF or any other technical assistance consultancy.
  • Be prepared to revise and expand upon support if necessary.
  • Plan for orientation if staffing changes occur within the BEA time frame.

Coda for the California Community Foundation

At the final BEA cohort meeting, a different group of people sat around the table as a result of leadership transitions among the grantees, foundation leadership, and its technical assistance partners. Now that the individual strategies and stories had been told, some overarching questions emerged:

  • What does organizational readiness look like, and what do organizations need to develop a reserve fund?
  • What does progress and success look like, and how does a foundation communicate this to its leadership and its peers?
  • What lessons are learned from the cohort’s stories?
  • What would matter in asset mapping along with actual dollars? People, staff longevity, board maturity and awareness, reliable delivery on mission?
  • What has the foundation learned about itself and its capacity for understanding and accepting a range of outcomes?
  • How will the foundation attend to the unfolding story of these organizations given that the program has a longer timeline for “completion” than do more traditional project-based grants?

Building Equity in the Arts focused on two beneficiaries of capitalization: the organization (internal strengthening) and their communities (external strengthening). The strategies to be employed were described as a three-legged stool: teaching and technical assistance, board development, and seeding a reserve fund. Given this context, was BEA a success or failure? The answer is that it was a qualified success.2 Its successes can be seen in organizational resiliency and learning, board development and responsibility, foundation responsiveness and flexibility, and, perhaps most importantly, the community benefit resulting from these organizations’ missions and programs, which are only strengthened by BEA, an investment that should continue to yield benefits for years to come.

NOTES

  1. To access a copy of this report, Building Equity in the Arts: A Story beyond Metrics, please visit the California Community Foundation resource library at http://calfund.org/wp-content/uploads/BEA-Final-Report-Web.pdf.
  2. The question of impact is complex. How do larger budget organizations evidence impact from a relatively small cash grant? What is the link between internal and external capacity? The connection between changes in organizational culture and external benefit should be viewed as a work in progress understood and tracked over time as these organizations develop greater resiliency.

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