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Excerpted from "An Agile Servant: Community Leadership By Community Foundations," Richard Magat, ed. (Washington, DC: Council on Foundations, 1989). Reprinted with permission from The Foundation Center.

What assurance is there that each of the institutions calling itself a "community foundation" is worthy of the public's trust and support? The answer is none.

So, I believe that the time has come to develop "industry standards": for community foundations—outlining the characteristics that, taken together, distinguish us from other funding organizations such as private foundations and the United Way—and to use that set of standards as the basis for some form of accreditation or self-regulation.

Why should we go beyond the "Principles and Practices for Effective Grantmaking" to which members of the Council on Foundations subscribe? Quite simply because we ask more of the public than do other types of foundations. We and our donors enjoy the maximum tax benefits that our society bestows. We ask the public to entrust to us its money and, increasingly, a critical leadership role in civic life.

Whatever standards may be set should not be immutable, because community foundations are, after all, predicated upon the certainty of change. The process will require a light hand, for community foundations must themselves remain free to innovate. But they should recognize our obligation to be exemplars of our core values. The process of building consensus must itself reflect these values of representativeness by including community foundations of all sizes, developmental stages, geographic regions, and programmatic emphases.

Why Now?

The enormous growth of the community foundation movement raises the very real possibility of competition among foundations whose service areas abut or overlap. Industry standards would be helpful in devising a process for resolution of disputes arising from competition.

Further, it is almost inevitable that an organization calling itself a community foundation will become involved in a public scandal. In all likelihood we could not stop anyone from using the name, and accreditation would not prevent incompetence or abuse, any more than a license to practice medicine guarantees a physician's competence. But a rigorous accreditation process would allow us to distance ourselves from disreputable organizations and to articulate to the public what we expect of community foundations.

Significant pressure for a definition or standards comes from community foundations themselves. Demand on the Council on Foundations to provide training opportunities for members of our staffs and governing bodies is tremendous. Yet training on any significant scale presupposes some common understanding about a community foundation's functions, sound practices, board-staff relations, and job descriptions.

Finally, many professionals in our field anticipate that in time it will be necessary for community foundations to seek from the Congress or the Treasury Department an exemption form the public fundraising requirements for public charities. This task will be far easier if as a field we have developed and tested standards that protect the public interest—if we can, in short, say how we are different and why we should be accorded special treatment. But even if the public-support test endures, standards would permit us to embrace foundations that cannot or do not wish to meet the public-support test but are in all other respects recognizable as community foundations.

The Formal/Legal Framework

The law is not particularly helpful in guiding us toward an operating definition. Except for a passing reference in the 1940s, federal statutes have never even mentioned community foundations! Until the enactment of the Tax Reform Act of 1969, there was no major distinction between private foundations and public charities.

In fact, a community foundation is defined more by its own governing instrument than by any laws. The laws and regulations concerning tax exemptions and deductibility gifts may influence the form of community foundations, but they do not dictate it.

The "Cleveland Plan," the basis for the Cleveland Foundation's governing instrument, embodied certain key elements: (1) separation of investments (managed by the trustee bank) from charitable disbursements (authorized by a distribution committee); (2) a distribution committee appointed in part by public authorities; (3) formation of an open-ended, permanent endowment; (4) service to a well-defined geographic area; and (5) public disclosure of operations and grantmaking.

Although most of the community foundations established in the two decades after 1914 followed the Cleveland Plan closely, slight variations in form began to appear almost immediately. For example, the Indianapolis Foundation, established in 1916, pioneered the multiple trusteeship concept, with several banks receiving and administering funds on its behalf. Likewise, the corporate form (as distinct from the trust form) had emerged by 1920, according to Council on Foundations documents, and gained tremendously in popularity after the Great Depression made banks less likely sponsors of community trusts. Today the vast majority of community foundations are incorporated or, in the case of those in trust form, have corporate affiliates that may receive nontrust gifts and engage in other legal transactions not available to pure trusts.

Federal tax policy shaped the next major formal innovations in the field. The 1969 Tax Reform Act made it less attractive, from a tax standpoint, for individuals or families to establish and operate private foundations, but made it possible for such funds to become supporting organizations or component funds of community foundations or other public charities so long as they were controlled by the governing body of the parent public charity. The Act stimulated the creation of supporting organizations within community foundations and donor-advised funds.

The 1969 Act and its implementing regulations also augmented the preexisting public-support test for public charities, further distinguishing community foundations from private foundations. Most community foundations qualify as public charities, thereby allowing their donors maximum tax deductions, and they prize that status as a symbol of their public nature. As such, these community foundations, like United Ways and Jewish community federations, must derive one-third of their new funds over a given four-year period from government sources and/or a representative number of donors, or they must meet a "facts and circumstances" test that sets a 10 percent minimum on such donors and imposes additional minimum requirements as to the board's composition and authority, public accountability, and mechanisms for attracting new funds.

Community foundations organized in trust form must also meet the so-called entity test embodied in additional Treasury regulations adopted in 1976–77 concerning treatment of component funds. It will be a surprise to many in the field that a community foundation organized solely in corporate form—that is, one that is not an aggregation of trust funds—and that satisfies the public-support test need not comply with this set of regulations in order to be tax-exempt. Nonetheless, these regulations are useful in that they contain general language meant to define community foundations. In brief, these regulations lay out four structural elements necessary to qualify a community foundation in trust form as a single entity for tax purposes: (1) a name conveying the concept of a capital or endowment fund to support charitable activities in the community or area served; (2) a common governing instrument to which all funds of the foundation are subject; (3) a common governing body with certain specified powers; and (4) periodic common financial reports.

Even where the laws and regulations are relatively prescriptive, I believe that they represent only minimum standards and that we should aspire to more.

On the basis of my experience, reading, and discussions with colleagues, I offer eight hallmarks that, taken in combination, add up to the beginnings of a definition: service to a geographic area of natural cohesion, permanence, flexibility, commitment to diversity (reflected, among other ways, in limited terms of service for board members), public accountability, independence, multiple donors, and breadth of programmatic activities.

Let us examine some of the more difficult issues that will inevitably arise in the quest for common standards.

Geography

Customarily set up to serve cities, community foundations have grown along with metropolitan areas and, in some cases, now serve portions of two or more states. Some, such as the Arkansas and New Hampshire community foundations, serve entire states that are low in wealth, sparsely populated, or geographically compact. But this adaptability is beginning to pose some problems. How should we mediate the conflicts that are certain to arise from overlapping, particularly in the area of asset development? What are acceptable criteria for a foundation's geographic reach? And under what conditions should the Council on Foundations encourage mergers or the formation of new community foundations?

Changing notions of "community," too, are posing challenges, as Paul Ylvisaker details in Chapter 2 [in his essay titled "Community and Community Foundations in the Next Century"]. For example, if a community foundation's purpose is to benefit people in its area, does that suggest involvement in global issues with local impact, such as arms control or the environment?

Donor Relations

Services to donors have expanded and now may include holding endowment for nonprofit organizations such as museums and the United Way; managing corporate giving programs; receiving the assets of private foundations; acting as fiscal agent for projects involving community-wide collaborations; and providing vehicles for living donors who wish to retain some involvement in disbursement decisions.

Community foundations of all sizes are seeking more living donors, and some younger community foundations have little or no permanent endowment. Since permanence and flexibility are usually considered hallmarks of community foundations, should standards for community foundations encourage the creation of permanent endowment, or even set percentage goals?

A second area of concern is donor control over donor-advised funds. The 1977 Treasury regulations require that the community foundation's governing body, and not the donor, have final authority over disbursements. In practice, governing boards rarely override donor recommendations. But it seems prudent to develop standards for staff and governing body review of donor-recommended grants to ensure that they are consistent with the foundation's own mission.

Scope of Program Activities

This is the area in which community foundations probably are most readily distinguished from the United Way, Jewish community federations, and other public charities.

First, community foundations are dedicated to the broadest possible charitable purposes within their service areas. Also, community foundations have often created new organizations to meet emerging needs. United Way, Jewish Federations, Catholic Charities, and like organizations, in contrast, were formed as federations and continue to distribute funds to member service agencies.

Second, in disbursing discretionary funds not subject to donor recommendation, community foundations generally eschew operating support in favor of project grants that seek to address the underlying causes of community problems or to support research and demonstration projects.

Third, their public nature demands that community foundations be prepared to play multiple roles in their communities—as neutral convenors around important local issues, as catalysts to influence public policy or private investment, as partners with other funders, as coalition builders seeking to mobilize community resources around critical issues.

Public or Private

The Council on Foundations estimates that some 80 percent of all private foundations concentrate their grantmaking within a defined geographic area. If there is validity to the growing concern about the public-support test, we may begin to see some established community foundations lose their public charity status. Some think the effect of this would be disastrous, particularly for younger foundations seeking to earn their place in the community, but others believe it would amount to no more than a relatively small expense in the form of the 2 percent excise tax on investment income. Whichever is the case, I can see no reason to exclude these foundations from the accredited ranks of community foundations.

A First Step Toward Standards

It seems clear that if our profession does not act to reach some common standards, someone else will.

I propose that a process be inaugurated within the next two years, under the auspices of the Council on Foundations, to reach some consensus around standards for community foundations. Community foundations of all ages, sizes, legal forms, geographic regions, and programmatic emphases should be represented in this process. A small but representative working group should report periodically to a larger and even more diverse advisory committee, with reports to the entire membership at predetermined intervals.

Professionals and volunteers in our field have much experience and wisdom to bring to this process. Although there is not single source of ideas and information, it might be useful to begin with what might be called the "body of literature" in the field: applicable federal and state laws and regulations and legal memoranda interpreting them; Council on Foundations guidelines for all members; the Council's "Common Characteristics of Community Foundations," the revealing work of the Community Foundation Fiscal and Administrative Officers' group on accounting standards; common practices developed by affinity groups in grantmaking fields; and the governing documents, mission statements, and operating philosophies of a variety of community foundations.

This project should produce a detailed framework from which the following may be developed:

• A set of model polices and practices—covering governance, geographic focus, asset development/donor relations, and program practices.  
• A procedure for site visits and formative evaluations by accrediting teams.  
• A process for resolving territorial disputes.  
• Criteria for Council on Foundations technical assistance to community foundations and standardized function descriptions to inform the Council's staff training for member foundations.  
• An acceptable definition of a community foundation that could form the basis of a new and more detailed "facts and circumstances" test should an attempt be made to exempt community foundations from or otherwise modify the fundraising requirement of the public support test.  
• The development of a network of accredited community foundations that could have reciprocal relations in grantmaking and donor relations.

To say the least, this effort will not be without controversy, but I hope my colleagues will consider it worth the struggle to establish standards with some meaning. At the age of 75, the community foundation movement still has to explain every day what it is all about. By developing, enforcing, and publicizing standards, we can enable our public to "know it when they see it."