A Case Study in the Risks of Fiscal Sponsorship
Nonprofit Quarterly recently covered an interesting case of fiscal sponsorship gone wrong. As originally reported by a local news website, Baltimore Brew, the case involves an organization called Strong City Baltimore. This situation is an unfortunate reminder that fiscal sponsorship presents many risks if not done correctly. In particular, the case exposes an often-overlooked reality that fiscal sponsorship cannot work if the fiscal sponsor does not have the capacity and experience to handle the immense responsibility of administering funds for a variety of sponsored projects.
Strong City Baltimore reportedly sponsored over 120 charitable projects, with rapid growth of its fiscal sponsorship portfolio over the past 6 years. The organization had recently received numerous complaints from sponsored projects that have been unable to access grant funds, receive financial statements, or get invoices from project vendors and contractors paid. It appears that this fiscal sponsor commingled funds from different projects and generally failed to be a responsible steward of charitable funds. As a result, the reputations of all involved have been damaged and many well-meaning charitable endeavors have been put at risk.
At its best, fiscal sponsorship is a win-win. It can help jump-start philanthropic efforts that might not have been tackled on their own, cut down on duplicative administrative costs, and serve as a source of revenue to fiscal sponsors. However, the details of the fiscal sponsorship relationship are often misunderstood, and it is important that all parties are well-versed in the basics of what fiscal sponsorship is.
We in the nonprofit community tend to focus on making sure that fiscal sponsorship arrangements provide the desired tax results for donors and grantors and protect the interests of the fiscal sponsor. We work to ensure that the sponsored projects act responsibly and are subject to the oversight of the fiscal sponsor.
The Strong City Baltimore case demonstrates that responsibility is a 2-way street. Fiscal sponsors must also be accountable to donors, grantors, and sponsored projects. While fiscal sponsors are required to exercise oversight, control, and discretion over funds received for the project, this power is not a license to avoid transparency and divert funds from the purposes of the project. The nonprofit community should probably do more to ensure that the people running sponsored projects understand the nature of the fiscal sponsorship relationship and have some measure of accountability from their fiscal sponsors.
Planning Tip – If you are exploring fiscal sponsorship as a (temporary or permanent) alternative to operating your own 501(c)(3) organization, it is tempting to accept fiscal sponsorship from any willing organization that has 501(c)(3) status. Don’t rush this process. Do the due diligence necessary to ensure that your prospective fiscal sponsor has the capacity to sponsor your project and be actively involved in its oversight role. Inquire about the prospective fiscal sponsor’s processes for accepting sponsored projects, receiving grants and donations, communicating with grantees, and disbursing funds (if there are no clear processes in place, this may be a red flag). Check with other organizations that have worked with the fiscal sponsor to get a sense of how their experience has been. Lastly, try to ensure that the fiscal sponsor will commit to sending periodic financial reports regarding the project funds.
We will be further addressing best practices in fiscal sponsorship in future posts on this website.
