Securing Our Rotary Foundation's Future: The Rotary Foundation's Funding Model
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Securing Our Rotary Foundation's Future: The Rotary Foundation's Funding Model
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Rotary International supports our Rotary members, clubs and districts in continuing with all of their good work throughout the world. To do that, we need to secure our Foundation’s future by taking some steps to ensure we have the necessary resources to continue our mission. (Updated September 2014)
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Securing Our Rotary Foundation's Future: The Rotary Foundation's Funding Model
- 1. OUR FOUNDATION’S FUNDING MODEL September 2014 September 2014 Our Foundation’s Funding Model 1
- 2. DOING GOOD IN THE WORLD September 2014 Our Foundation’s Funding Model 2
- 3. FUNDING OUR OPERATING EXPENSES Operating Expenses = Fund Development & General Administration Annual Fund investment earnings Endowment Fund spendable earnings 5% of Annual Fund contributions 5% of cash contributions for global grants September 2014 Our Foundation’s Funding Model 3
- 4. SHARE SYSTEM EFFECTIVE 1 JULY 2015 World Fund $1,000 contribution $500 $500 Earmarked DDF World Fund September 2014 Our Foundation’s Funding Model 4
- 5. 5% CASH CONTRIBUTIONS FOR GLOBAL GRANTS September 2014 Our Foundation’s Funding Model 5
- 6. OUR LONG-TERM STRATEGY Ensure that we have sufficient funds to operate our Foundation Maintain a fully funded operating reserve Transfer surplus funds to the Endowment Fund September 2014 Our Foundation’s Funding Model 6
- 7. Resources: Our Foundation’s Funding Model presentation Top 10 Things to Know blog Foundation Funding Model Q&A fundingmodel@rotary.org September 2014 Our Foundation’s Funding Model 7
Editor's Notes
- Since 1947*, our generous Rotarians have contributed over $3.2 billion that was used to fund over $3 billion in programs throughout the world. Our organization has committed more than $1.2 billion to global polio eradication, Funded more than 37,000 club and district projects in over 200 countries, Awarded scholarships to nearly 42,000 scholars from over 130 countries, and Sent more than 72,000 people from 106 countries on volunteer exchange programs. We want to support our Rotarians, Clubs and Districts in continuing with all of their good work throughout the world. To do that, we need to secure our Foundation’s future by taking some steps to ensure we have the necessary resources to continue our mission. Note: info above taken from 2013 Facts. * Date noted in Fact Card.
- What resources do we currently have to secure our Foundation’s future? (or some other segway from prior slide) When you (Rotarians) make contributions to the Annual Fund – they are invested for 3 years before being made available to fund programs. Those investment earnings (shown in dark blue) are the primary source of funds used to pay for our Foundation’s fund development and general administration expenses (hereinafter referred to as operating expenses). A small portion of Endowment Fund earnings (shown in yellow) also help pay for our Foundation’s operating expenses. There is a misperception by some Rotarians that investment earnings also pay for program operations expenses – those expenses associated with planning, managing, evaluating and reporting on the programs of the Foundation and the costs associated with supporting the Rotarians who implement the specific service activities. While those expenses were paid from investment earnings prior to 2002, they have been paid in part or in full from the World Fund since 2002. .
- This chart shows how much investment earnings can vary from year-to-year. The blue line shows the annual investment returns on the Annual Fund, while the blue bars show the operating expenses. You will note that, in some years, investment earnings have been much more than what was needed to pay for operating expenses. When that happened, the excess earnings were included in our Foundation’s operating reserve. In other years – notably, 2009, investment earnings were very negative due to the decline in the value of the Annual Fund’s assets, and did not provide any funds to pay for operating expenses. During that year, the operating reserve was depleted and World Fund money was used to pay for operating expenses, thereby reducing the amount available to fund programs. Our Foundation needs a more reliable source of funds to pay for its annual operating expenses – particularly when the reserve is not fully funded.
- Why do we need a new funding model? The current model relies on a primary source of funds (investment earnings) which can be unreliable, and The operating reserve is not fully funded. Therefore, if there is an earnings shortfall – we may not have enough funds to pay for our Foundation’s operating expenses. If that occurs, we may have to cut spending on programs. A new model for funding our Foundation’s operating expenses is needed to ensure our Foundation has sufficient resources to operate in the future without adversely impacting our ability to fund programs. It will be difficult for our Foundation to continue all of its good work around the world if its financial base is not strong.
- As noted earlier, the other reason for changing our model is that we have not been able to build the Foundation’s operating reserves to a desired level since the financial crisis. The blue bars in this slide show how our Foundation’s operating reserve has progressed over the past several years and the latest estimate for 30 June. The yellow diamonds show reserve targets. The operating reserve policy has changed several times over the past 10 years, which are represented by the blue vertical lines. You will note changes to target reserve levels as the policy has changed, becoming more conservative after the financial crisis, and then returning to a level we believe will be sufficient in most market environments. Our current policy was implemented in October 2013,. The target for a fully funded reserve is US$67 million, which represents 3 years’ worth of operating expenses. You will note that our reserve levels were adequate prior to the financial crisis, and then turned negative. The negative amounts reflected the decline in value of Annual Fund assets due to unrealized market losses. You will also note that our Foundation has not been able to re-build its reserve to an adequate level since 2008. Our operating reserve needs to be built to a sufficient level so there are adequate funds to pay for our Foundation’s operating expenses in the event that funding sources are not sufficient in any given year due to steep market declines. A well funded reserve will negate the need to use World Fund money for operating expenses as we had to do in 2009.
- Beginning 1 July 2015, we will be setting aside additional sources of funds to pay for the Foundation’s operating expenses if they are needed. Annual Fund investment earnings (shown in dark blue) will continue to be the primary source of funds, but they will be supplemented by some additional sources. 5% of contributions to the Annual Fund will be set aside to pay for operating expenses and/or to build the operating reserve. This includes contributions designated to SHARE and to Areas of Focus. Contributions to Areas of Focus would result in 95% of the contribution supporting the Area of Focus program and 5% would be allocated to Operating Expenses. 5% of Annual Fund Contributions will provide about 20% of the funding sources and is shown in pink. 5% of cash contributions to fund global grants will also be set aside. This amount is shown in the lighter blue. Given cash contributions are not invested for three years, they do not generate any earnings to help pay for the costs associated with processing those contributions. Shown in yellow are the Endowment Fund spendable earnings, which currently provide some funding for operating expenses.
- This slide shows how your Annual Fund SHARE contributions will be allocated. Currently, when you make a contribution to SHARE, 50% is allocated to DDF and 50% is allocated to the World Fund. Under the new model, that allocation will be the same, however, 10% of World Fund assets will be set aside to pay for operating expenses and/or to fund the operating reserve. These assets will continue to be invested in the Annual Fund in the same manner unless they are used to fund the reserve. It is important to note that the new funding model will not impact your DDF.
- Why will 5% of cash contributions be used to help pay for operating expenses? A global grant typically has about 6 sponsors – the host club, the international club and then on average, 4 other participating clubs. The participating clubs can be from many different countries. Some clubs send one payment for their contribution, while other clubs remit multiple payments from club members. It takes 8 weeks, on average, to process global grants funded with cash contributions. The cash received for these grants “flow through” the organization and are not invested in the three-year cycle. Therefore, they are not generating any investment earnings to help offset the cost associated with processing these payments. Clubs and districts can consider using DDF to fund global grants instead of cash. Processing of grants funded with DDF takes only 5 weeks, on average compared to 8 weeks for grants funded with cash. Additionally, global grants funded with DDF are matched 100% by the World Fund, whereas grants funded with cash are matched at only 50%.
- What is our long-term strategy for ensuring we can continue to do good in the world? Our long-term strategy has always been to make sure we have sufficient resources to pay for the Foundation’s operating expenses. Historically, we have done this by generating annual investment earnings to pay for these expenses, and if they were not sufficient in any given year, to utilize reserves. This strategy worked well until the financial crisis in 2008-09. During that time period, there were significant investment losses, and reserves were depleted. Since the financial crisis, investment performance has improved substantially, and investment losses have been completely recovered. However, investment gains have not been sufficient to pay for current year expenses AND rebuild the reserve. Once the reserve is fully funded, and if investment gains are more than needed to pay for operations, then any surplus will go to the Endowment Fund. Contributions to this fund are generally never spent – only a portion of earnings (called spendable earnings) are used each year to pay for programs. As the EF grows, more earnings are available to pay for programs each year.
- The new funding model will provide a more predictable level of financial support for programs and the operations it takes to make them successful. With a solid financial base, we’ll have an organization that is able to support all of the good work Rotarians want to do in the world. Without this change, we may not have the resources to do the good we currently do in the world.