Balancing the Mission Checkbook

One of the hidden gems in foundation grant guidelines is a type of funding that is too often overlooked. Program-related investments (PRI) are essentially loans from a foundation, but with terms that are very flexible and preferential. PRIs are a great option for nonprofits that are able to generate cash in the future from capital campaigns or program income. The name program-related investment refers to the requirement in IRS rules that PRIs must be primarily intended to serve the foundation’s charitable mission rather than to generate market-rate income. Because of this requirement, PRIs usually have low interest rates, few fees, and no requirement for collateral. The foundations do evaluate both program plans and financial information carefully for quality of planning and repayment ability. To learn more about PRIs, read the resources available from the PRI Makers Network or the guide from Grantcraft.

An example of a good use of a PRI is an organization that received a $250,000 PRI to renovate a building to expand their jobs training program. Because the program generates program income from the sale of furniture built by the participants, they have the ability to repay a PRI over a period of time. While a capital campaign for the renovation would have been great, the time and expense would have slowed down the project unnecessarily. A PRI application was submitted and approved within a few months compared to the year or so required for the fundraising effort.

Between 1990 and 2001, US foundations advanced 2,900 PRIs totaling $1.7 billion. PRIs are used by nonprofits in all fields, dominated by community development organizations. Nonprofits Assistance Fund, for example, uses PRIs as a source of capital for our loan funds. The foundations that have been most active in PRI funding include the John & Catherine T. MacArthur Foundation, The Ford Foundation, and Minnesota’s own Otto Bremer Foundation. There is growing interest from other foundations of all sizes in learning more about PRIs and developing PRI programs in their grantmaking.

I’ve had several discussions lately with board members of nonprofits on financial management topics that had an odd, disconnected feel to them that I couldn’t pinpoint at the time. One was about operating reserves and how much was the ideal amount to have in reserve – 3 months, 6 months, or a full year’s expenses? Another was about how to determine the best mix of income sources for a nonprofit that has grants, government contracts, and fee income. In both conversations I asked the board members my favorite question: Why? This is a set up, of course, since I think that reasonable reserves are valuable to have, and that understanding the sources of income is a key to financial health. The “Why” question has to be asked when financial matters are considered without any connection to the nonprofits’ mission - that’s the disconnect. The purpose of these particular queries had more to do with creating a financial model and satisfying the board members’ perception of their role than with improving the nonprofit’s ability to serve its community. Finding the balance is very hard, though, and we have few guides.

Nonprofit Quarterly has been one of those guides recently with their spring issue titled “Revenue is Destiny”. I enjoyed reading a preview of the summer 2007 issue, especially this excerpt from an interview with Richard Brewster, executive director of the National Center on Nonprofit Enterprise. NCNE “helps nonprofits make wise economic decisions”.

NPQ: What should boards focus on if they are concerned about long-term sustainability?

RB: This may be counterintuitive, but the central question is the quality of the program. In other words, the worst threat to nonprofit sustainability is if your program is crap. A nonprofit’s only reason for keeping going is to change people’s lives, communities, the environment, and so on for the better. If a nonprofit is not making the biggest difference it can with the resources available, it is being wasteful. From an economist’s perspective, it is not putting its resources to best use and is inefficient. I’d find it odd to apply the word sustainable in any really meaningful way to such an organization.

I love the directness of this comment. Why should nonprofit directors and board members be concerned about their financial and economic condition? As a tool to deliver good programs to change communities and lives, both today and in the future.