Stabilizing Exempt Organizations through Fiscal Sponsorship - Tools for a COVID World

Why work with established organizations?

• Lend a stabilizing hand to organizations struggling with the economic impacts of the pandemic or other challenges.

• Provide a strategic strengthening and capacity building hand to organizations poised for growth and/or pivot.

• Grow and diversify your community of projects (“portfolio”) as a fiscal sponsor: collective capacity building affords strength in numbers.

• Provide a platform for transformation or wind-down, preserving valuable resources that may continue to benefit communities.

The economic and social repercussions of the COVID-19 pandemic are destabilizing the nonprofit sector. Of the nearly one million nonprofits nationwide, 88% operate below $500,000 and according to the Nonprofit Finance Fund’s annual survey, 50% had no more than 30 days of cash on hand--and that was before the pandemic. Candid, a nonprofit data firm, estimates that at least 11% of all nonprofits will go out of business, and 13% of all nonprofit staff were laid off by the end of July. But these organizations, despite being the most vulnerable, do the lion’s share of the work for our sector and represent the most local reach and greatest diversity in mission and communities served.

We may be only beginning to feel the impact of pandemic, which will likely set in more acutely as 2020 winds to a close. The federal Payroll Protection Program (PPP) expired in July, just over two months ago. And smaller organizations are often slow to declare a state of emergency. For better and for worse, the operation of smaller organizations remains predominantly driven by passionate people, who work tirelessly for meagre (frequently below-market) compensation, owing to the cash-strapped nature of the sector. This tremendous human drive is a strength: nonprofit workers likely contribute as much or more value in sweat equity than all philanthropic giving combined. As long as there is someone willing to get up in the morning and carry the flag for one more day, the work goes on, regardless whether there is money in the till. Grassroots initiatives and smaller nonprofits don’t fail when they run out of money. They fail when they run out of will. This economic reality allows organizations to hold on longer than they should in the face of economic challenges. Often, when the alarm sounds, it is too late for a rescue or the cost of recovery is simply too dear.

Fiscal sponsors can help our sector restructure for greater resilience and sustainability. While it’s not a new practice for fiscal sponsors, in particular Model “A” providers, to share their infrastructure with established nonprofits, it’s not exactly a widespread practice or well understood. Moreover, our sector is still focused on conventional mergers and acquisitions (“M&A”) between single-mission nonprofits as the approach to restructuring; fiscal sponsors are rarely included in the repositioning conversation. M&A may be a great solution for two or more larger organizations, say above $5 to $10 million in budget. But for smaller organizations, the emotional and financial costs, as well as the burden of the process may be prohibitive, in particular in a state of diminished capacity. As our community confronts the economic fallout of COVID, it’s time to re-examine the role that fiscal sponsors can play in providing structures for greater resilience and impact, focused on the 88% of organizations operating at small but impactful scale.

Fiscal sponsors have a number of ways in which they can support the needs of established, tax-exempt organizations in uncertain times, offering the same backbone support that they provide to “informal” projects that have never incorporated or sought their own tax exemption. These shared services include accounting, financial management, insurances, compliance, risk management, legal, HR, project management, and other capacity building support, such as marketing and fundraising.

The Models

Following Gregory Colvin’s taxonomy, the approaches best suited for supporting exempt organizations span Models “A”, “L”, and “F”, (and variations thereon), as well as a “new” Model “O”, described below. Though different in nature, structure, and impetus, these four models have a common value proposition for organizations: they are means of sharing critical back-office support. Below is a brief overview of these four models and how they can be used to provide shared resources to nonprofits. More details on the specific structures, as well as pros and cons of each model and what might drive the choice of one over another will be the subject of a forthcoming primer from Social Impact Commons, “Working with Exempt Organizations: A Field Guide for Fiscal Sponsors”. An overview deck with more details and schematics of the models described below is available for download here.

Model “F” Technical Assistance Relationship is an arm’s-length relationship between sponsor and sponsee in which any number and amount of services may be delivered to the organization (sponsee) by the sponsor for a fee. Both organizations remain completely independent, with a basic service agreement defining the relationship. This is of course a widespread service arrangement and not unique to fiscal sponsorship. In this relationship the both organizations maintain separate insurances, HR, and compliance obligations.

Model “A” Comprehensive or Direct Project Relationship entails the operations of an organization being transferred, in whole or in part, into the sponsor and then run as a project of the sponsor. The organization’s legacy entity (its original legal formation) may be left in place in a minimal operating state (filing an IRS Form 990-N), and thus carries little to no compliance or insurance costs, allowing all of these expenses to be assumed and managed by the sponsor. A percent of revenue or expense is allocated by the sponsor to the new “project” to cover the costs of core back office support, including such things as insurances, compliance, etc. In this structure the insurance, compliance and all back office staff supports are the responsibility of the sponsor, just as in any Model “A” relationship.

Model “L” Disregarded Entity or Sole Member LLC Relationship entails the operations of an organization being transferred, in whole or in part, into a wholly owned subsidiary LLC (“disregarded entity) under sponsor and then run as a project of the sponsor. The legacy entity can be treated in a similar fashion to the Model “A” case above. In most cases, the service suite and financial (cost allocations) mirror those of Model “A”, leading this model to sometimes be called Model “A-L”: it’s Model “A”, just with the project housed in a separate entity under the sponsor. This structure is useful for segregating liabilities and transactional relationships, and other benefits, but still taking advantage of the share compliance, insurance, and HR infrastructure. The LLC’s finances are operated separately, but consolidated into the sponsor from a reporting and compliance standpoint.

Model “O” Sole Member Organization Relationship entails a very similar structure and concept to Model “L” above. Except instead of using a sole-member LLC and having to transfer assets from the legacy nonprofit into a new LLC controlled by the sponsor, the entire legacy nonprofit corporation is simply brought under the sponsor by adjusting the bylaws and corporate articles to allow sole or majority member control by the sponsor. This is a change in legal (governance) control, not a transfer of assets. This model, which is relatively new and not part of Colvin’s current taxonomy, is being practiced increasingly in the healthcare field, as it has undergone great consolidation in recent years. Like Model “L”, the services and “business” arrangement are often essentially that of Model “A”, so one could also call this Model “A-O”.

Important Considerations

• Establish sound due diligence, risk assessment, and a clear strategic framework for wanting to work with established organizations.

• Assess your internal capacity as well as the readiness of your team, key partners, and vendors before entering into this work.

• Define a clear stance on how equity considerations will influence the choice of which organizations to work with and how to structure the relationship.

• Develop a strategy for what kinds of organization cases you want/can take on: i.e., stabilization may be more labor intensive than strategic growth.

Despite the practical utility of these approaches as triage responses to a crisis, there are substantial considerations and perils when one considers the needs of culturally specific and BIPOC organizations. These are especially critical considerations, if the origins and majority leadership/constituent base of the sponsor are not of the community being served. Such considerations include:

Maintain community “ownership” and control while satisfying legal and practical needs to share authorities as part of sharing resources. Perhaps the most critical potential barrier for BIPOC organizations in working with fiscal sponsors is the importance of independent formation and exemption for many organizations of color. Even though there is no nonprofit concept of “ownership” in the private sense, forming and receiving exemption for a nonprofit organization is often imbued with particular meaning for founders of color: it marks a moment of triumph over a system that is largely stacked against them. And if the organization holds any major assets: real estate, equipment, intellectual property, there may be strong hesitation to transfer these just to enter into a fiscal sponsorship relationship.

So to ask a founder of color to entertain sharing any authority or responsibility over what they’ve built, as in the case of Models “A”, “L”, or “O” (moreso than Model “F”), may understandably be a non-starter. But there are ways to address these concerns in the cases of Models “A”, “L”, and “O”, such as carefully balancing authorities, approvals, and exit provisions in sponsorship agreements, such that organizations do not cede too much control. Using trust forms (in the legal sense) as opposed to corporate forms to house program activities can take advantage of unique capabilities in trust law that provide for more control by the project than corporate law affords. Finally, allowing for retention of the organization’s legacy formation and exemption (or providing for clear legal detachment of the corporation under Model “O”) while under fiscal sponsorship provides a path to exit. Maintaining the legacy organization, while having programs operate under the fiscal sponsors allows certain assets (real estate, collections, or intellectual property) and liabilities to remain in the legacy formation and thus not under the direct control of the sponsor.

Be open to concepts of “capacity building” that may not be core to fiscal sponsorship or conventional management practices. Understanding that many conventions of management are Western and adopted from for-profit, corporate culture. These may not often translate into the immediate needs of nonprofits working in communities of color, which may be struggling with very specific traumas of disenfranchisement or culturally specific capacity needs beyond “business” interests defined by Western management practices.

Build trust and honor different cultural practices and values while working to ensure compliance with historically white systems and institutions. If imbued with sufficient trust and understanding, fiscal sponsor relationships can be “translators” of culturally specific organizational practices that may not be seen as “best” or even compliant with Western notions of management--allowing an organization to meet funder, legal, or other demands and accessing resources while not relinquishing identity or values. For example, the frequent importance of family relationships and involvement in the leadership of organizations of color can run afoul of conflict of interest laws if not managed carefully. A fiscal sponsor can help navigate such issues without requiring the organization to give up an essential cultural approach to management or deeming that approach “incorrect” or “inappropriate”.

Finally, there are a number of operational considerations in using any of the above models to support established organizations. Chief among them is capacity to deliver. Established organizations often come with greater (or different) complexity and capacity demands than start-up or younger initiatives. And the transition into supporting an existing organization may require a significant increase in staff and capacity needs for the sponsor. Closely allied with this is added legal complexity and acumen, as well as the risk management due diligence required to restructure and co-manage nonprofit assets, if you are working with Models “A”, “L”, or “O”.

In closing, there are caveats that we should offer, as we encourage closer consideration of the role that fiscal sponsors can play in stabilizing our sector amidst the tumult of our times.

Restructuring to stave off failure is a moral and practical imperative, not necessarily a best practice. We would be remiss if we didn’t point out that highlighting this opportunity for fiscal sponsors does not necessarily mean we’re defining a “best practice”, but rather a practical response to a likely and unfortunate period of crisis in the sector. We have observed that smaller nonprofits consider repositioning (mergers/acquisitions, joint ventures, and other solutions) most often in the face of some looming failure or organizational weakness. It is a way out of trouble. In contrast, larger nonprofits and the for-profit sector view repositioning more as a strategic response to opportunity--a way to augment impact, market share, or positioning. It is far more constructive and healthy to view restructuring in this way, instead of as a path of last resort. Fiscal sponsors need to be realistic and set clear criteria in helping to stabilize other organizations in their community; we can’t save everything.

We must challenge and decry the Darwinian “thin the nonprofit herd” response to economic moments like this. In every moment of crisis, as we witnessed the wake of the 2008 market crash, many leaders in our sector (in particular funders) are quick to point out that times of trouble present great opportunities to “thin the herd”. The weak will fall away and the strong will prevail. The application of this biological metaphor, describing a tough but ultimately “healthy” practice, is not just wrong, but profoundly oppressive, if you consider the full implications of our national reckoning with social injustice. BIPOC organizations may be strong in will and vision, but are more likely to be financially weak, owing to decades of neglect, disinvestment, and systemic racism, largely on the part of the institutions and systems that support nonprofits. To invoke Darwin today in the nonprofit sector is an unabashed gesture of racism and white supremacy. Stabilization must be rendered through the lens of equity.

In the end, our sector will make it through this crisis. We always do, but at what cost? The vast ecosystem of small organizations that drive our sector are both resilient and vulnerable. We will need to bring as many resources to bear as we can in the coming months to ensure that resilience prevails and our sector continues to grow as a force for social change in our country.

Breaking through Boundaries: Fiscal Sponsors & Equity in Fundraising

A “Reimagining the Sector” Conversation Reflection

On September 17 we held our first “Reimagining the Sector” conversation with a group of our members concerning the topic of equity, diversity, and inclusion in fiscal sponsorship practice. The previous post of September 16 was shared as a provocation prior to the convening.

The subject is all-encompassing and complex, infusing all aspects of our work and conversation today. And since inequity pervades the nonprofit sector at the systems level, it resists reduction to a set of tasks or tools. There is no checklist. However, within the narrow scope of fiscal sponsorship, we can gather and share patterns of practice (frameworks) and questions which can guide equity-based thinking and decision making for fiscal sponsors.

Our conversation about equity on the 17th quickly turned to fundraising and overall resource development for projects, as fiscal sponsors have stepped up during the pandemic to be more involved in active fundraising with and for their projects. For example, Local Color discussed targeted fundraising support with their artist partners, and Seattle Parks Foundation shared successes they have had with cohort-based fundraising among projects, in particular those with less capacity to do this work themselves. Though not in attendance on the call, we had heard the day before from Rainier Valley Corps (RVC) that their projects are thriving despite the pandemic, in large part because of direct fundraising work RVC has been undertaking with their constituents. RVC has been leaning into active fundraising with their projects, well beyond their own direct fundraising efforts as a sponsor. And this is one of the ways in which they actively foster greater equity of opportunity and access for their community.

Fiscal sponsors generally draw a clear line when it comes to fundraising for their projects: it’s the projects’ responsibility to generate resources (engage in prospecting and cultivation and being the “face” of the ask”), with the back-office, administrative support of the sponsor. To act otherwise--to step from behind the curtain and prospect or cultivate relationships for particular projects or to sit across the table from the funder during the pitch--is to step over a line in which the sponsor starts to “become” the project. In that moment, a fiscal sponsor starts to “own” key resource relations as opposed to serving as a connector or capacity builder.

This is about where critical relationships are built and held. Fiscal sponsors try to remain behind the curtain with the projects out front. The boundary can get fuzzy at times, but is generally pretty clear. Relationships with funders, donors, clients, beneficiaries, and other key project stakeholders are held by the project. The sponsor provides guidance and assurance that basic management and compliance processes are being well executed. At least that’s convention.

Three reasons for this convention stand out. First, sponsors want to honor the sense of autonomy in purpose, vision, and constituent relationships that projects demand. This means keeping out of key decisions and relationships. Second, sponsors need to be careful about their own capacity. In “becoming” the project, it’s easy to get sucked into a vortex of work well beyond the core responsibilities of a fiscal sponsor. This might jeopardize the health of the sponsor or create friction among projects that think they are receiving less attention. Third--and perhaps most cited--is the matter of equal treatment for all projects. Many (not all) sponsors try to maintain an equal standard of treatment of all projects, though in proportion to size and operating demands. Making sure that there are no “favored children” helps ensure stability and a sense of fair treatment within the community of projects. This is accomplished, for example, through maintaining fixed cost allocations (fee rates), such as a 10% base cost allocation for all Model A supports; or policies that may be uniformly applied to all projects, regardless of age or size.

But equality and equity are wholly different ideas. Equal means equal--the same portion given to each constituent. Equity is actually the opposite; it often entails unequal action or apportionment. It means giving some projects more support than others (not equal amounts) in order to lift them up to a level of capacity enjoyed by projects that may enjoy greater privileges, such as better-connected leadership. This idea is famously captured by the image below which was first developed by Interaction Institute for Social Change with the help of the artist, Angus Maguire. It also likely means that in the face of limited capacity, fiscal sponsors today might accept a project by and for a BIPOC community to the exclusion of another project that is white-led, regardless of the good intent or worthiness of the latter’s mission and purpose.

Image created by Angus Maguire for the Interaction Institute for Social Change

With the tremendous battle for racial and economic equity in our country, it’s certainly time to break barriers and conventions. To advance equity in our work as fiscal sponsors, we need to consider how our support should be allocated to leaders and projects that, for example: do not have funds (or access to funds) when then show up at our door; do not conform to received (white) notions of impact, excellence, professionalism, etc.; or may not hold traditional “business” or “management” practices as key to their success.

Below is an initial (not comprehensive) set of self-assessment questions and incitements that center equity and begin to chart a path toward great diversity and inclusion for fiscal sponsors.

Equity

• Do new projects have to have a certain amount of funding, experience and a fully developed model day one, or do we provide space to test assumptions, explore new solutions, and learn?

• Are we open to management practices and approaches to support, impact, and change that challenge largely white, established norms and standards?

• Do we actively and intentionally allocate more of our resources as a fiscal sponsor to BIPOC-led projects over white-led projects?

Access

• Are we developing our internal staff and board, both in diversity and skill set/awareness to reflect and be welcoming to BIPOC leaders and innovators?

• Do we actively assess our intake and management processes, program offerings, pricing, tools, and other resources to ensure the broadest access while ensuring the vitality of our community?

• Do we communicate, externally and internally, in ways that are culturally sensitive and accommodate diverse languages, cultures, and learning/cognitive processes?

Authority

• How do we foster a greater sense of intentional community and social cohesion among projects, sharing values with constituent program leaders and the people we serve?

• To what degree is project leadership involved in or even leading intake/spin out decisions, as well as active and empowered participation in policy making/governance?

• How do we manage shared risks (legal, financial, social), knowing that we need to support projects that must engage in extraordinary risk to further social justice?

Attunement

• Do we embrace empathy and sympathy in our orientation to our projects and orient our team and projects in trauma-informed and culturally attuned practices?

• Is communication and “rapid candor” (opportunities for regular, frank feedback) welcome among our team members and in our relationships with our projects?

• Are communication opportunities regularly offered in both formal and informal ways, and how do we show up when things go wrong: corrective/punitive or restorative?

Again, the above is not a definitive or comprehensive list of questions. But these are questions we have encountered, thankfully, with greater frequency in our field. We welcome additional points and provocations in the comments below, or feel free to contact us otherwise.

Fiscal Sponsors & The Question of Equity

The field of fiscal sponsorship, from its origins in the late 1950s and Civil Rights Movement, has had a strong grounding in equity, inclusion, diversity, and social justice. For example, Philadelphia’s Urban Affairs Coalition (UAC) was founded in 1969 by the city’s Black and Brown leaders in response to the assassination of Dr. Martin Luther King in 1968. It’s purpose: to build the strength, access, and the resources of Philly’s communities of color. Today, UAC serves a wide array of community, health, and human service missions, largely of, by, and for BIPOC communities. 

In more recent years, Local Color was established to support the needs of artists and cultural organizations embedded within the diverse communities of San Jose, CA. Local Color offers an array of artist supports, including studio and workspace, and actively commissions and facilitates public art projects. Fiscal sponsorship has always been among the supports offered, but on a more informal and occasional basis. Over the past year, Local Color has been working with Social Impact Commons on developing a more robust and sustainable fiscal sponsorship program to complement its legacy programs and further support its community.

Fiscal sponsors, like their close cousins, cooperatives, are approaches to building and sharing resources among an intentional community. As tax-exempt organizations and cooperative-like business models, fiscal sponsors can offer an alternative economic and social structure to the alienating and disenfranchising forces of market-driven capitalism and the private sector. 

Economic historian Jessica Gordon Nembhard maintains in her book, Collective Courage: A History of African American Cooperative Economic Thought and Practice, that in times of extreme social and economic disparity, marginalized communities reach for alternative economic models. This trend has marked the history of African American cooperatives in the U.S., which blossomed during the Jim Crow era, and are witnessing a renaissance today for frighteningly similar reasons. It may not be a coincidence that we are seeing increased interest in fiscal sponsorship as a means of combating current economic inequities and social injustice.

Despite this history, how is fiscal sponsorship sizing up today, in particular amidst the perfect storm of our country’s social justice reckoning and the Covid-19 pandemic? 

Fiscal sponsors are tax-exempt 501(c)(3)s, and justifiably, nonprofits are under intense scrutiny today for their replication of many oppressive structures born of white corporate and management culture: top-down governance and management; favoring optimization and efficiency; Euro-centric concepts of “excellence” and “quality”; privileging of white workplace cultures and practices; and so on. Even fiscal sponsors of and for BIPOC communities are not immune to replicating negative structures inherited from the Western systems at the foundation of the nonprofit sector. A recent post by Vu Le in NonprofitAF discusses the “Highlander Syndrome”--how people of color can become complicit in perpetuating white supremacy.

So if fiscal sponsors are to chart a path toward equity, inclusion, diversity, and social justice, they need also to be agents of change for the sector as a whole and ask...

• How do we practice equity in the design and development of everything from our management and governance to day-to-day practices, processes, and programs?

• How can we foster a greater sense of intentional community and share power and authority with constituent program leaders and the people we serve?

• How do we show up when things go wrong? Is our approach corrective/punitive or restorative?

• How do we incorporate equity at the discernment stage with new projects? When selecting projects to join our community, does practicing equity mean intentionally welcoming certain projects and missions to the exclusion of others?

• How do we balance compliance, shared risks and services with diverse needs of the communities we serve?

To provide a starting framework for thinking about many of these questions, Social Impact Commons has grounded its work in commoning. This is the act of stewarding shared resources that benefit a defined (but open) community. There are three core tenets of commoning, which relate broadly to fiscal sponsorship. These alone do not guarantee equitable practices, but they provide a foundation upon which equitable practices may be built and flourish.

1. Clear definition of the resources being shared and how they are shared.

2. Fostering social connectedness, intentional community, and ongoing learning.

3. Bottom-up, shared governance and authority over resources held in common.

Social Impact Commons has been tracking a few focus points (by no means definitive) that offer paths to implementation for the above general framework. These have surfaced in some of our conversations with fiscal sponsors about the practices or frames that can lead to greater inclusion and diversity, as well as equitable access to resources in the nonprofit space. 

• Accessibility - not just in the sense of Americans with Disabilities Act (ADA) related practices related to language and physical condition, for example, but designing to eliminate or reduce barriers related to cost, lack of knowledge, negative emotional states, over-expenditure of time, such as requiring lengthy applications, burdensome management processes, etc. 

• Empathy, Sympathy, & Affordance - not only engaging in active understanding and compassion for project leaders and staff, including trauma-informed practices, but also thinking about affordances--how the environment we create empowers our projects. Simply providing a resource or solution to someone who does not have the knowledge or experience to engage with the solution provides no benefit.

• Listening & Responsive Communication - engaging in appreciative listening, dialogue, and active learning about the resources and systems that are being shared. One of the striking elements of the history of African-American cooperatives is how essential “learning circles” have been in keeping stakeholders actively engaged with the ideas behind the cooperative structure, not just allowing them to be passive beneficiaries.

• Implicit Bias Awareness - building awareness for and processes to challenge implicit bias in its many and ever-changing forms, in particular considering the inherently oppressive aspects of traditional management practices.

• Discernment - the delicate process of remaining open to new people and ideas entering our community while avoiding conventional or pre-defined assessment criteria (such as received concepts of “excellence” and “impact”). Especially today we are faced with the hard decision--much like funders--about who we accept to share resources that at any given time are finite. 

As we think about measures of impact for fiscal sponsors, we invite our members and the broader community to share thinking and practices that promote greater equity, inclusion, diversity, and social justice.

Fiscal Sponsorship - A Brief History and Possible Future

A Brief History

Fiscal sponsorship is a “new-old” field, just beginning to attain maturity as a field. There are approximately 300 self-identified fiscal sponsors according to a directory maintained by the San Francisco Study Center. Many have achieved notable scale, and there is a large and ever-growing knowledge base of practice. This progress aside, the field of fiscal sponsorship--the ecosystem as a whole--has only recently begun to develop its own collective and capacity building infrastructure.

Fiscal sponsorship dates to 1959, when the Boston organization known today as TSNE MissionWorks started a practice of sharing backbone support with multiple semi-autonomous missions--what would become called comprehensive “Model A” fiscal sponsorship. During this time the practice spread, largely to afford access to smaller, nonprofit, organizations serving marginalized communities that were frequently excluded from government funding and institutional philanthropy. Tides in San Francisco, Urban Affairs Coalition (UAC) in Philadelphia and others with now multi-decade histories started in this formative era.

In 1993 Greg Colvin published the first edition of his landmark book, Fiscal Sponsorship: Six Ways to Do It Right. His text has enjoyed several new additions and remains a go-to resource, but there is still not an extensive literature on the field.

It would be more than 40 years before the field’s trade association, the National Network of Fiscal Sponsors (NNFS), was founded in 2004 with support from the W.K. Kellogg Foundation. The first (and still only) field scan of the fiscal sponsorship landscape was commissioned in 2006 by Tides Center from LaFrance Associates, “Fiscal Sponsorship Field Scan: Understanding Current Needs and Practices”. The IRS issued its first ruling concerning fiscal sponsorship in 2012. Despite these advances, most other areas of human activity today, from dairy farming and social investing to knitting and model train collecting, have vastly more supporting resources for practitioners than the fiscal sponsorship field.

A Possible Future

Collectively, fiscal sponsorship as a field is poised to be a platform to help solve some of the most pressing problems of our time. As hubs for diverse, independent missions, fiscal sponsors can be a vanguard for the change our sector so urgently needs.

Yet we estimate that fiscally sponsored activity represents less than 2% of the nearly $2 trillion dollars spent annually by the nonprofit sector. According to the Study Center’s data, most sponsors today are located in major metropolitan areas, and predominantly on the East and West coasts. Rural areas and most of the interior states appear woefully underserved.

A map of the organizations listed in the San Francisco Study Center directory.

The opportunity to expand the field today lies in the potential for fiscal sponsorship, if practiced well, to move the nonprofit sector along two principal paths of transformation.

(1) Equity, Diversity, and Social Justice: Fiscal sponsors can remove many of the barriers to engaging in social purpose missions, creating more immediate and affordable access to nonprofit infrastructure. A fiscally sponsored project that has yet to raise a single dollar can plug day-one into a sponsor and enjoy the benefits of experienced managers, tax-exempt corporate infrastructure, insurance, and professional administrative staff. Inherent in the fiscal sponsorship model is a kind of pay-for-success approach that lessens or eliminates financial barriers to entry and fixed costs. Projects allocate a fractional percent of each dollar they bring in to the resources they share with their sponsor--paying as they go in proportion to their need. Fiscal sponsors can also be a forever solution to sustaining these backbone resources, allowing the keepers of mission and vision more time to do their vital work.

Otherwise, the barriers to entry and ongoing operation of nonprofits are substantial, which is why more than 80% of all nonprofit leaders today are white. Traditional, independent nonprofit infrastructure is designed for the privileged. If we are to make significant progress on the many urgent fronts of social, racial, and economic justice in this country we must make the tools and resources of the tax-exempt sector available to all. Fiscal sponsorship can place us more firmly and aggressively on that path.

(2) Efficiency, Sustainability, and Impact: Fiscal sponsors can offer greater efficiency and “savings” in back-office operations, allowing more financial and time resources to be tasked to programs and services. Recently Social Impact Commons conducted a study of 475 arts and culture organizations operating below $2 million in budget in Southeastern Pennsylvania using the robust longitudinal data set of SMU Data Arts. We found that the organizations in this cohort spent between 17% and 27% of revenue on the same support that a comprehensive fiscal sponsor, such as CultureWorks Greater Philadelphia, can offer for between 9% and 12% of revenue--a savings of roughly 10%. This may seem like a small number, but on volume, it represents about $5 million in administrative savings just for this study group alone.

Concerning sustainability, our sector is fragmented and fragile, which presents a constant threat to sustainability and impact. There are about one million independently formed nonprofits in the U.S. today. Eighty-eight percent of them operate below $500,000 in budget; 97% operate below $5 million. It is arguable that organizations don’t start to attain optimal efficiency until they reach between $5 million and $10 million in budget. It’s a matter of ratio, proportion, and scale of overhead costs to program delivery. This means that 97% of the sector is likely spending more on back office than it needs to (at least 10% more!), leaving billions in program and service dollars sequestered. Moreover, we know from the Nonprofit Finance Fund’s annual nonprofit health surveys that between 40% and 50% of the sector has less than 30 days cash on hand, which means that a large portion of our sector is very fragile. Contrary to popular assumption the 88% of organizations that are small, perform more than 85% of the overall program delivery for the sector. (It’s not the 12% that are doing all the lifting.)

So, in sum, the organizations doing the most work are the least efficient and most threatened with insolvency on a daily basis. Fiscal sponsors, as engines of resource sharing and collective capacity building, can help us reposition the vast landscape of small organizations for greater efficiency, sustainability, and impact.

Reimagining the Sector - A Call to Action for Fiscal Sponsors

Fiscal sponsors are well positioned to lead our sector to reimagine and reconstruct a more sustainable, impactful, and equitable social good community in the aftermath of the COVID-19 pandemic. Yet the fiscal sponsorship ecosystem is under-built, poorly understood, and struggling with lack of capacity.

In recent weeks, we have heard calls in the nonprofit sector for reimagination and reconstruction, not recovery from the COVID-19 pandemic. “Recovery” implies returning to a previous state. Our sector has long been hobbled by the stress and strain of needless fragmentation and lack of capacity. Even if we could, why would we want to return to that state? It’s likely no longer a choice. It’s time to reimagine. 

As the COVID-19 crisis and its economic aftershocks continue, we know our most vulnerable and marginalized populations are more at risk than ever before. Continued failures in government and resource allocation systems are perpetuating inequity when we need equity and justice to prevail. We see new nonprofit missions emerging--many we may have never imagined to be necessary--and many smaller, but invaluable community-based nonprofits threatened with closure. 

Conservatively, we are likely looking at hundreds of thousands of nonprofit organizations reaching insolvency or closing within the coming months. There are nearly one million registered nonprofits in the U.S. today, of which 97% operate below $5 million in budget, and more significantly, 88% of which have budgets of less than $500,000. And this vast landscape of small-scale, locally acting organizations is responsible for roughly 80% of the expenditures and related activity of the entire sector: childcare centers, homelessness groups, community theatres, legal aid groups, food pantries, and countless other missions.

Before the pandemic, these organizations were fragile, starved for resources, and overwhelmed by demand from their communities: according to the Nonprofit Finance Fund, 86% reported increasing demand for services, yet 57% were unable meet demand; 62% reported that financial stability is their top challenge; and 50% had less than one month of reserves. It is time for us to understand fiscal sponsors not just as a temporary path to independent formation or home for a short-term project, but rather a permanent restructuring solution for the sector, in particular the vast expanse of organizations operating below $500,000 per year.

Fiscal sponsors have always been models for sharing essential backbone resources, such as management staff, policies, systems, expertise, and more. As such, fiscal sponsors are engines for collective capacity building. It is a time for our field to shine. This will mean, however, addressing the capacity strains that fiscal sponsors themselves navigate regularly, now with greater frequency and amplitude. It will also mean reaching out and embracing fiscal sponsors appearing in new corners of our sector. 

Fiscal sponsors are risk managers at heart, helping projects navigate risk, failure, and success. We are expert repositioning technicians, designers of efficient systems. We are trusted intermediaries who can leverage networked relationships and scale.

We can be the vanguard of long-overdue change in our sector. It’s no longer an option. It’s urgent and imperative.