Program-Related Investments Can Boost the Impact of Foundation Dollars
Program-related investments (PRIs) are experiencing renewed popularity with private foundations across the country. Traditional grants are still the main form of foundation giving, and billions of dollars are channeled to worthy causes through grants every year. But as philanthropists seek to heighten the impact of every dollar, PRIs are getting more attention. As they do, foundation finance professionals might want to become familiar with specific accounting guidelines for PRIs to see how investment policies might need to be updated.
Developed in the late 1960s, traditional PRIs are often structured as loans or loan guarantees between foundations with similar missions, or to nonprofit organizations or charities with causes the foundation would typically support. Housing, education, and social services are often the beneficiaries of PRIs, but arts, the environment, and cultural initiatives are also popular recipients of this type of funding.
“A common misconception about PRIs is that they can only be loans to nonprofit organizations. In fact, foundations can make PRIs using any financial instrument and to any recipient entity, including public agencies, individuals, and even businesses that are helping advance their charitable mission. PRIs are incredibly versatile.” — Jeff Ochs, CEO, Venn Foundation
Raising the profile of PRIs
Even as some foundations are embracing PRIs and adding them to their portfolios, many others know little or nothing about how this versatile investment strategy can stretch foundation dollars.
Saint Paul, Minnesota-based Venn Foundation, a nonprofit whose mission is to advance charitable impact through PRIs, set out to raise awareness by undertaking research into the use of PRIs by Minnesota private foundations over the past 20 years. Published in a special report, The PRI Pulse, the study found that PRI activity in the state was higher than expected, but the tool is still underutilized.
To get their results, Venn Foundation researchers took on the Herculean task of manually examining data submitted by Minnesota private foundations on IRS Form 990-PF. They then called upon CLA professionals to help them vet the numbers and conclusions. Together, they found:
- Only 39 out of more than 1,600 private foundations (2.5 percent) in the state made at least one PRI over a 19-year period from 1998 to 2016.
- From 1998 to 2016, private foundations invested more than $164 million in 554 PRIs.
- For every $1,000 in charitable grants, private foundations and corporate grant makers deployed just seven dollars in PRIs (0.7 percent).
A national report from the Lilly School of Philanthropy at the University of Indiana drew conclusions that are similar to the single-state study. It shows that a miniscule percentage of private foundations use PRIs nationwide. In 2004, the peak year for PRIs between 2000 and 2010, only 137 of approximately 66,000 U.S. private foundations (0.2 percent) made one or more PRIs, according to the report.
“PRIs are a powerful tool to advance charitable goals,” said Jeff Ochs, CEO of Venn Foundation. “A common misconception about PRIs is that they can only be loans to nonprofit organizations. In fact, foundations can make PRIs using any financial instrument and to any recipient entity, including public agencies, individuals, and even businesses that are helping advance their charitable mission. PRIs are incredibly versatile.”
How PRIs work
As long as a PRI is made primarily to advance a foundation’s exempt purpose, is structured with below-market financial terms, and is not designed to influence legislation or political campaigns, almost anything is possible.
The PRI Pulse illustrates the diversity of PRIs with five different real-life examples, two of which are shared here:
- In 2016, the Jeanne M. Voigt Foundation made a $60,000 PRI loan with warrant to Minnepura Technologies, a start-up company developing a unique bio-filter for swimming pools that has the potential to save billions of gallons of fresh water each year.
- In 2015, The Labrador Foundation made a $250,000 PRI loan to Level Up Academy to upgrade its charter school facilities before opening day.
Unlike with a grant, the recipient of a PRI sometimes makes some type of a commitment to provide a financial return to the foundation. As the PRI principal is repaid to the foundation, those dollars are recycled and redeployed into new PRIs or as traditional grants to other organizations. And because PRIs can make money, there is also the potential for the foundation to generate even more investable dollars for its endowment. Another option is for the PRI to become a deferred grant, in which the foundation reviews the organization’s use of the funds and ultimately forgives the loan and treats the original PRI as a grant.
Regardless of how they are structured, new PRIs, along with grants and program support costs, count toward the 5 percent minimum payout that is required by the IRS for private foundations annually.
Financial basics for PRIs
All of this is not to say that PRIs are a bandwagon that every organization can or should jump on. There are numerous considerations, not the least of which is the accounting for an instrument that has characteristics of a loan and a grant but is actually neither.
The American Institute of Certified Public Accountants (AICPA) devotes a chapter to what it calls programmatic investments in the AICPA Audit and Accounting Guide for Not-for-Profit Entities. Released on March 1, 2018 it provides guidance on how to record PRIs at issuance, either as a loan receivable, a grant, or a combination of both. If the PRI is considered a loan receivable, AICPA provides direction on:
- How to discount loans in situations where the interest charged is not the market rate
- How to record a potential impairment of the loan receivable or ultimate forgiveness of the loan receivable
- Recommended financial statement disclosures
While the PRI is not initially a traditional grant expense for the foundation, giving plans should be formulated to ensure that the number of investments converted to grants in any single year does not hinder the foundation’s grant budget.
When a PRI is issued, a private foundation can determine whether it wants the investment to count toward its IRS-mandated distribution number, similar to a grant in the year it is issued, or if and when the loan is to be forgiven. The PRI balance is not included in the asset base used to calculate the distribution requirement (even though it is considered an investment).
Keep in mind that if a private foundation counts a PRI in its distribution requirements the year it is issued; the repayment of principal is considered a negative distribution in the year it is repaid. As a result, the foundation may need to issue additional PRIs or grant those funds in the year the principal is repaid.
In addition, a foundation should implement policies and procedures to monitor program-related investments and perform due diligence prior to issuance and throughout the life of the investment.
How we can help
Overall, PRIs are useful instruments to diversify investment portfolios and further the mission of foundations, while also providing tax benefits. Whether your foundation already issues PRIs or is looking to further understand them as they relate to investment, granting, and the overall goals of your organization, CLA’s nonprofit and foundation professionals can help. You may wish to engage experienced outsourcing professionals to assist with the complex accounting and recordkeeping.