1 Loan Pool, 15 Loans, 10 Organizations

Investor: Harris And Eliza Kempner Fund And The Moody Methodist Permanent Endowment Fund
Investee: Ten social service agencies receiving social service block grant funds
Asset Class: Private Debt - Loan Pool
Investment Amount: $1.3 million
Impact Sector(s): Community & Economic Development; Employment & Job Related; Human & Social Services
Date of Investment: 2010
Projected Exit: 2011
Financial Return Goal: Below Market Rate

 

The Harris and Eliza Kempner Fund has had a PRI program in place since 1992, as it believed loans to local businesses were the most appropriate way to advance its mission of supporting the needs of Galveston, Texas. The demands on its area were intensified in the wake of Hurricane Ike in 2008. At that time, several dozen Galveston County social service agencies collaboratively applied for federal social services block grant (SSBG) funding to address human service needs throughout the county. The lead agencies in this collaboration were the University of Texas Medical Branch, Catholic Charities, Lutheran Social Services, and Gulf Coast Center. The collaborative succeeded in garnering about $40 million in federal funding for capital purchases, service delivery, and direct aid that was to be spent by October 1, 2010. Since these funds could be expended only on a reimbursable basis, and there was lag time between award and disbursement, small sub-recipient agencies suffered a severe cashflow problem, in addition to a short time frame to properly expend their allocations. To fill the gap, the Harris and Eliza Kempner Fund, together with the Moody Methodist Permanent Endowment Fund, created a loan pool. Treated as a PRI, it offered loans at a very low interest rate of 1.5 percent and considered them to be charitable in nature.

 

The loan pool formed when the Harris and Eliza Kempner Fund approached other foundations in Galveston about joining in an effort to assist the social agencies that were receiving SSBG funds. After several weeks of meeting, discussing, and negotiating with other foundations on the island, the Moody Methodist Permanent Endowment Fund joined with the Kempner Fund in offering these short-term loanswith repayment anticipated no more than six months from origination date. A joint committee with representation from both foundations made final decisions on the loan details. The Harris and Eliza Kempner Fund supplied two-thirds of every loan, and the Moody Methodist Permanent Endowment Fundsupplied the remaining third. For accounting and record-keeping purposes, loan recipients received separate checks and each foundation was responsible for its own collection. Because needs were urgent, efforts were made to arrive at decisions within one week once an application was completed.

 

The social service agencies collaborated in securing the SSBG funds.

 

The SSBG loan pool made 15 loans to ten organizations between February 2010 and September 2011. The total circulated was $1.3 million. One of the loans defaulted, representing 1 percent of the total investment. The loan collaborative was successful in circulating more than $1.3 million in the community. The social service agencies had access to cash and were able to provide services to the community and make repairs to their facilities while they awaited reimbursement.

 

The government may not work as fast as promised. When dealing with the federal government, assume the time frame will get pushed back. “In retrospect we should have made the terms of the loanslonger, and for larger amounts,” said Anne Brasier, executive director of the Harris and Eliza Kempner Fund. Millions of unspent dollars were temporarily forfeited back to the federal government after Congress failed to vote an extension. Due to the delays, the agencies were forced to continually ask the foundations for extensions, requiring additional meetings and paperwork, which could have been avoided had the terms been longer.

 

In emergency situations, work with organizations that have preexisting relationships with the foundation(s). Given the emergency nature of the situation and limited time for due diligence, the foundations provided loans only to organizations that they knew well and with which they had existing relationships.

 

Consider what will happen to nonprofit partners once funding is exhausted. Several of the nonprofits that received bridge loans hired new employees to provide increased services during recovery efforts. However, after federal funding ran out, many employees were laid off because the employment levels were not sustainable in the long term.

 

For pooled investments, consider appointing one foundation to receive applications and generate all paperwork. It was easy for the Moody Methodist Permanent Endowment Fund to partner with the Harris and Eliza Kempner Fund since the Harris and Eliza Kempner Fund oversaw all of the paperwork. Once paperwork was finalized, the Moody Methodist Permanent Endowment Fund was responsible for sending its own award letters and issuing checks.