The OAF Blog

Dialogue on Capitalization

October 08, 2014



South of the border, a US based organization Grantmakers in the Arts undertook over the last four years research on the important topic of the role of capital in an arts organization. This can summarily be described as “having the capital to execute strategy” or perhaps a little more elegantly, “Capitalization is the accumulation and application of resources in support of the achievement of an organization’s mission and goals over time. A well-capitalized organization has the ability to access the cash necessary to cover its short and long term obligations, to weather downturns in its external operating environment, and to take advantage of opportunities to innovate”.


As we all remember, the recession and market decline in 2008 resulted in significant challenges and financial stresses for arts organizations. The original research work undertook to build knowledge about funding practices and how to achieve financial sustainability. The research and reports in great detail are available on the Grantmakers website.

 

Stimulating Discussion
In 2014, the organization surveyed arts organizations to see how the fruits of the research are being put to work by arts and cultural organizations. If nothing else, the research stimulated many organizations to have a conversation about their overall financial strategy – how to strategically secure and use resources to do their work over time. Key elements of capitalization are beginning to find their way into board/staff discussions, such as:

• The different kinds of capital required by an organization
• Distinguishing between regular revenue sources ( fund current operations/programs ) and capital  ( funds that provide for liquidity, adaptability and durability of the organization )
• Importance of building liquidity for any organization and to create it by saving
• Understanding how the behavior of funders can impact the organization’s finances

Good Business Practice
A key outcome of the original research, which is increasingly accepted by funders, was that good capitalization of an organization begins with the generation of operating surpluses to be used as capital the organization may access to successfully achieve their mission/vision. Past views that an organization generating an operating surplus does not require funding is in decline – the understanding has grown with funders and Boards that achieving surpluses and cash reserves are a critical part of good business practices. Capital should be viewed as a strategic asset that enables an arts and culture organization to take a risk, adapt its mission/vision and change to be financially viable over the long term.

Good Capital Management
Change is occurring to improve the capitalization of arts organizations. The report does say that some Boards are still reluctant to provide change capital or other forms of unrestricted funding, continuing an older view that an arts and culture organization should operate with very low overhead and run at a deficit. Shifting to good capital management practices ( e.g. establishing reserves ) involves all dimensions of an organization – education of board members as well as arts management staff is a continuing need. The work to better understand the role of capitalization will continue. The work of Grantmakers in the Arts is important as it frames the issues, opportunities and possible solutions in a way that is easily understood.

The Value of Unrestricted Funds

July 01, 2014

Imagine this, a man walks into a bakery and says to the baker, “I need a gluten free cake, but I can only pay you 20% of the cost, and you can only spend my money on eggs, but not butter and not on electricity for the oven; you have to find someone else to pay for the oven’s electricity!”  Nonprofit funding: Ordering a Cake and Restricting it Too asks the question what it would be like if a bakery operated with the same funding restrictions as not for profit organizations.


Multiple Revenue Sources

Arts organizations, like most not for profits, require multiple revenue sources:  government operating and project grants, public and private foundation grants, corporate donations and sponsorships, individual donations, gifts, legacies as well as box office revenues.  Applying for a grant can be a time-consuming and a rigorous process. Grants are typically annual, and deadlines and grant applications will vary depending on the funder.  Fundraising donations, which in addition to grants are the lifeline of an organization’s financial wellbeing, may come with stipulations where the donor attaches terms to their gift.

Capital and endowment fund income is a welcome addition to an organization’s revenue sources.   Endowment income is unrestricted - the management and board of the organization make the decision where best to apply this resource.  Endowment income is stable, reliable and not subject to an application process, filing deadlines or donor restrictions.


Ontario Arts Foundation Endowed Funds

The Ontario Arts Foundation manages endowment funds established under both the provincial Arts Endowment Fund and the federal Canada Cultural Investment Fund – Endowment Incentives Component.  Arts organizations benefit from matching grants where privately raised funds can be doubled or even tripled, greatly increasing the value of the fund.  Organizations can breathe easy knowing they will receive an annual payout of unrestricted income, that they need not apply for or is restricted by donor’s wishes. 

One of the OAF’s fund holders recently told us, “Our struggle is to find sufficient, sustainable operating revenue, while keeping our fees affordable to the communities we serve. The endowment fund income is critical and helps us make up the shortfall in our operating costs, particularly at a time of year when cash flow is stretched.”

Unrestricted Funds
General operating funds, admin expenses, and why we nonprofits are our own worst enemies speaks to the value of unrestricted funding.  The blog post offers the following suggestions to not for profit organizations on the value of unrestricted donations/funding:

    • At a fundraising event, don’t say that 100% of your donation goes to programming, rather say that your donation will be used to support the organization and its work
    • Publicly recognize funders who support general operating funds – “Without unrestricted funds, our organization cannot run all of our programs – thanks to  this funder, we are able to deliver our mission”
    • Rather than use words like ‘overhead’ or ‘administrative’, which seem unattractive to some funders,  use words like ‘core support’ or ‘critical infrastructure’
    • Create a line item for reserve funds in your organizations’ operating budget. The presence of some form of reserve protects your organization during times when revenue sources may not be stable

Organizations recognize the importance of revenue from multiple sources, and know that donors may have a particular area of interest.  However, don’t overlook the value of a stream of unrestricted revenue, which can be critical to an organization’s ability to adapt and deploy resources wisely  for long-term sustainability.

 

Ontario Arts Foundation - 2013 Was a Good Year for Investing

May 28, 2014


The Foundation holds two types of capital funds:  endowment funds where capital is held permanently and only income is available to be disbursed, and restricted funds where capital can be disbursed, depending on the agreement with the donor. Our investment objectives are long term, with the goal of achieving investment returns which allow for annual income payments to arts organizations together with preserving capital and maintaining the purchasing power of income over the rate of inflation. We strive to achieve at least a 5% real rate of return over a five year period. This allows the Foundation board to make sustained income payments each year in the range of 3 to 5 %.

Fiscal Year Ending March 31, 2014
At the end of March 31, 2014, Foundation assets under management were $67 million (subject to year-end audit review), up from $61.2 million in 2013. The asset growth is a combination of new contributions and matching funds received during the year of $850,000 and strong investment returns. This allowed us to make award and payouts and distribute just under $3 million in income to the 273 arts organizations across Ontario for whom we hold endowments for.

Over the years, the Foundation’s investment strategy has allowed for continued growth in income paid out year over year. This unrestricted income is an important resource for arts organizations in Ontario.


Strong Investment Returns
Investment returns for the year ending December 31, 2013 were very positive and the Foundation portfolio achieved 14.9% for one year. Five year returns were 10.2%,which supports our long term goal of achieving long term absolute capital appreciation, with a focus on capital preservation. Investments are made in high quality companies with trusted management teams who have a long term focus. To achieve our investment objectives, the Foundation believes it is prudent to have the assets managed by professional investment managers on a discretionary basis. Active management, where the portfolio managers make decisions regarding asset classes, industry sectors and individual security selection allows the Foundation to structure a risk managed portfolio that is expected to achieve long term positive returns.

In 2013, the Foundation employed three investment managers. During the first quarter, we consolidated investments allocated to the ‘alternatives’ sector from two managers to one, where performance results were stronger and aligned with our long term investment objectives.

What the Future May Hold
Despite considerable political uncertainty, and volatility in security markets worldwide, investments returns to March 31, 2014 continued to be positive. Investment performance for the quarter ending March 31, 2014 was 4.0%.  Although it is difficult to predict, all signs are pointing to a market correction in 2014.  Our focus will be strongly directed to managing the downside risk in the face of market instability and avoid losing capital over the longer term. 

 

 

BLOG: Supporting Arts Organizations with Operating Funds.... Read more »