Less Pain, More Gain? Fiscal Sponsorship as an Alternative to Nonprofit Mergers

When the venerable Center for Law in the Public Interest saw its funding dwindle after 35 years of service, they thought they had two choices:  close down entirely, or merge with another organization. Instead, they did something easier, faster, and cheaper:  they took their most viable program and relaunched it as The City Project – under fiscal sponsorship.

The City Project maintained substantial programmatic and fundraising autonomy, while Los Angeles-based Community Partners, its new fiscal sponsor, took on all back-office functions (bookkeeping, insurance, payroll and benefits, audit, tax filings, etc.) for nine percent of revenues. Both The City Project and its employees enjoyed the advantages of a large organizational umbrella – economies of scale that resulted in savings on health plan costs, and deluxe employee benefits such as 403(b)s and flex spending plans – while retaining their independent identity and flexibility. And rather than being pushed out, several former board members from Center for Law in the Public Interest became advisory board members of The City Project (the Community Partners board became the legal board).

Eight years later, The City Project is flourishing and has no plans to become an independent 501(c)(3). The lower cost and greater convenience of having a fiscal sponsor handle their financial and administrative functions is well worth the occasional inconvenience of having to explain to potential donors and funders what the term “fiscal sponsorship” means.

And they are not alone. Community Partners has seen several groups adopt this model over the last few years, as reporting and oversight requirements have increased while available funding has dropped. In the last five years in particular, we have received applications from multiple 501(c)(3) organizations with strong programs and fundraising ability, but limited capacity for, or interest in, finance and administration. For these organizations, the cost savings and lower “headache factor” of having a CFO and team of finance experts handling their accounting, tax filings, contracts, and HR outweigh the benefits of being an independent 501(c)(3). Most – including the Chaka Khan Foundation, Educate California, and Jewish Women’s Theatre – have retained their organizational names, logos, identities, and board members while coming under fiscal sponsorship and officially closing down their 501(c)(3) corporations.

Mergers seem like a good idea for a sector that needs to consolidate – but they are challenging and expensive to implement in practice.

Fiscal sponsorship can be an attractive alternative, because it consolidates back-office costs without requiring the organization to upend its fundamental identity or battle over which board members and executives will be pushed out. Typically, organizations under fiscal sponsorship:

  • Retain their name, programmatic identity, brand, and logos (although they inform donors, funders, and the public that they are now under fiscal sponsorship
  • Retain key staff, including executive director and program managers, while lowering costs on services such as bookkeeping, accounting, and audit – many of which were previously contracted out
  • Retain some or all board members, albeit in an advisory capacity rather than as a legal governing board (some board members actually prefer this, as this also removes their liability)

Can fiscal sponsorship save an organization with no funds, no prospects, and no hope? Nope. But for many organizations – large and small – it’s a great way to reduce back-office costs and improve the quality of finance and administration services without the pain and trauma of merging with an entirely different organization.

It’s the difference between getting a highly competent guardian and trying to blend your family with another family across town.

So when the need for cost savings comes up and the talk of mergers begins, consider fiscal sponsorship as a potential tool for your technical assistance toolbox.

Interested in finding a fiscal sponsor? Check out the National Fiscal Sponsor Directory. Make sure any fiscal sponsor you consider working with has adopted the best practices in the Guidelines for Comprehensive Fiscal Sponsorship developed by the National Network of Fiscal Sponsors.

- by Cynthia Freeman, program director, Community Partners 

Note: This article originally ran as a blog post for Olive Grove, a consultants' network.