April 19, 2019
Variance – The Community Foundation Super Power
Ann Casey
Often when we open a new endowment fund – especially for a nonprofit organization – we are asked about what will happen if something changes with anything related to the purpose of the fund or the organization. This is when we will explain a unique aspect of a community foundation: variance power.
Every fund we hold is governed by a fund agreement between Madison Community Foundation and the fundholder, i.e. the person or organization that creates the fund. The most important role of the fund agreement is to describe the purpose of the fund and how distributions from it will be made. For example, the agreement may state that all distributions will go to a specific nonprofit (a designated fund), be granted at the discretion of MCF for a defined purpose (a field of interest fund), or give the donor the ability to recommend grants to a variety of nonprofits (a donor advised fund).
The MCF trust agreement – our governing document – and all of our fund agreements contain a provision that allows the MCF Board of Governors to modify the restrictions on distributions from that fund if it “should ever determine that those restrictions have become unnecessary, incapable of fulfillment or inconsistent with the charitable needs of our community.” A community foundation is required to have this ability to vary from the terms of a fund agreement (“variance power”) in order to be considered a tax-exempt entity under federal tax law.
So, does this mean that MCF can simply disregard a fund agreement? Not at all. MCF’s goal is to always fulfill donor intent and the goals of our fundholders, so as much as possible we will carry out the terms of these agreements. But circumstance change and variance gives the community leaders on the MCF Board the power to assess and respond to those changes in an efficient and effective manner.
The most common way variance power is needed is when a nonprofit organization goes out of existence. Sometimes the organization is acquired or merged with another nonprofit and its programs are carried on by the surviving entity. In that case the decision may be fairly obvious: The endowment fund that MCF holds for that organization would best be redirected to the successor nonprofit. Our fund agreements also give the liquidating entity the ability to give advice on what nonprofit should receive future distributions from the fund, though the final decision always rests with the MCF Board.
But what happens when there is no identified “successor” nonprofit? A good example of that is when the Madison Repertory Theatre liquidated ten years ago. Its operations were not assumed by any other theater organization and the board that filed dissolution papers did not identify one. MCF held two sizeable endowment funds for the Rep, as the result of the Great Performance campaign that had been conducted in the preceding years. The MCF Board considered the Rep’s role as the resident professional theater company in Overture Center, and the intent of the donors to the Rep endowments to support performances of that nature. The MCF Board then exercised its variance power to redirect the assets of the Rep endowment funds to create the Great Performance Fund for Theater, a field of interest fund that supports local professional theater in Overture Center. It grants approximately $160,000 per year to a variety of local theater organizations.
Variance power is a win-win all around. It allows the MCF Board to continue to honor donor wishes even as nonprofit organizations come and go, and to respond to changing community needs and priorities for future generations.