Another Issue to Address – Capital Campaigns
During the past year, The Foraker Group focused on trends impacting Alaska’s nonprofits. One of those is a “funding crisis” that we predict will occur in Alaska in large part because of federal budget cuts. Alaska’s nonprofits depend far more heavily on government, as well as institutional funding, than organizations in other states. Both these sources are less sustainable than other options like earned income and individual contributions.
A few weeks ago a group of funders were considering the future of capital projects in Alaska. Unfortunately, they identified yet another challenge to confront as a result of these new funding realties.
Fundraising professionals have long understood that in order for a capital campaign to succeed, 90% of the total goal should be raised from 10% or fewer of the donors – leaving less than 10% of the campaign to be raised from small donations, those under $2,500.
Economists have now researched these long-held practices and proven them to be true. They found that a lead gift level of 50% or more of the campaign from one or two very large donors was required to build the foundation for success. The next third of the goal would need to come from fewer than 20 donors – leaving the remainder to be raised from as many small donors as needed.
In the past, capital campaigns in Alaska most often secured the lead gift through appropriations – primarily from Senator Stevens. It has also been the norm that with that large support from the federal government, local institutional and state funding could raise most of the remaining amount. Quite frankly, local communities did not have to do too much in order to build a new library, clinic, nonprofit office, or arts center.
While our Congressional delegation continues to do everything possible to find funding for needed projects, the new reality is that those funds are much harder to secure – especially with the shift in priorities and the proposed budget cuts in Washington D.C. That means that in Alaska we will need to find new sources for lead gifts if we are to continue to build new facilities. In fact, there are only so many lead gifts our significant institutional funders like the Rasmuson Foundation, BP or ConocoPhillips can provide.
Let’s assume a group wants to build a facility that costs $3,000,000. Based on the research, they would need one or two (three maximum) lead gifts equaling at least 50% of that amount – or a minimum of $1,500,000 for the campaign to be successful. Therefore, one donor would need to give at least $1.5 million – or two give $750,000 – or the worst case, three give $500,000 each. Before “bridge to nowhere,” federal earmarks provided many of those lead gifts, leaving the next level of support to other donors.
For some perspective: Rasmuson rarely contributes a seven-digit capital grant – the oil industry has been even less able to contribute at that level.
To continue with our scenario, the campaign would need to raise at least the next third of the goal — about $1,000,000 – from 20 or fewer donors. That would mean it would require 20 gifts averaging about $50,000, or ten that averaged $200,000 to raise the goal.
More perspective: Grants in the $50,000 to $200,000 level are not easy to secure in Alaska.
Then the group would need to raise the remaining amount from small donors.
Final perspective: Raising even $500,000 from small donors in many communities is not feasible.
Now do the math for a $4 million, or $6 million dollar campaign – see the problem?
Bottom line: We need a new source for lead gifts so the limited number of funders can do as much of the remaining amount as possible.
One option open to nonprofits is to secure a loan as the lead gift. United Way of Anchorage bought and rehabilitated two properties this way. However, in order for that strategy to work, the organization would need the right board, staff, and business plan to secure a loan. Some banks provide below-market loans for such projects. USDA Rural Development provides construction loans. But the fact is that most nonprofits don’t even consider loans because in the past, capital funds were so easy to secure.
Another option to consider is to advocate that the state re-think how it develops its capital budget. If we assume the state budget does not crash as a result of depending too much on one industry, or because it lacks a fiscal plan, then maybe the lead gift for many capital projects could come from state funds. The state already contributes millions for construction. But the legislature would have to establish priorities. In other words, not as many elected officials could bring home a project each year. The political fallout from that may be more than many would tolerate.
Part of our legacy from the past few decades was to believe that we are entitled to capital projects. Some organizations do not feel like they have arrived if they don’t own a building. One of our internal phrases for that phenomenon is “edifice complex.”
However, for most capital projects, that’s not the case. Most have been very important for the communities and organizations that sacrificed to build them. And maybe as important, they have helped fuel the economy by providing lots of jobs for architects, engineers, contractors, and suppliers.
In this new day of fiscal restraint at the federal level, we will need to re-think how we do business in Alaska. At Foraker we have had many discussions about the sustainability of organizations. We have wrestled with our role when it comes to leading nonprofits to become more strategic and work collaboratively – perhaps even merge. Now we add another dilemma to the collective consciousness – what do we do about the need for physical infrastructure in a state with limited options for funding?
If you have any thoughts on this subject, we would like to hear from you through our blog – or send us an email through our website.