$8 Million Dollar Coffee with Dr. Sandra Hernandez, former CEO of the San Francisco Foundation, and How the San Francisco Foundation Really Works

October 3, 2016

The meeting, as I recall, was set up by Kary Schulman, San Francisco Grants for the Arts Director, and Susan Clark, the wonderful president of the now closed Columbia Foundation.  Sandra was looking for ways the foundation could engage with mid-Market revitalization efforts; the mayor was pressing her to carry the torch for his revitalization plans.   The meeting was to exchange ideas.

A thirty minute late-afternoon coffee turned into a three hour early dinner at farmerbrown.  One of the points Sandra made very clear at the outset: she was not interested in “Paying for Ed Lee’s laundry list,” the “list” being the myriad goals outlined in the mayor’s recently released Central Market Economic Strategy, his once-upon-a-time Mid-Market Legacy Project.  (We’ll look at that later.)

We talked about the Tenderloin and mid-Market globally, and I updated her on the 950 arts center project.  Shortly before meeting with Sandra, the American Conservatory Theatre (ACT) made the decision to take their property acquisition dollars and buy the Strand instead.  (ACT was understandably playing it safe; the Strand was an existing structure with a motivated and transparent seller, unlike the murky Texas-based hedge fund that owned the 950 properties at the time.)   I told Sandra that ACT was still committed to building their acclaimed conservatory on the distressed first block of Turk Street, where our kids would have a landmark arts school built in their own neighborhood, but that I had lost my buyer for the site.

Sandra asked me how much the site was going for.  I replied: $8 million.  She expressed amazement that we can take control of an entire highly-impactful block for a mere $8 million dollars.  “We make and lose that much money on any given day,” she said.

Wait a minute.  What did she just say?  Let’s try that again: “We make and lose that much on any given day.”  Pause.  Process.  Got it: Sandra was referring to what the Foundation’s $1.3 billion invested in multiple investment instruments (Wall Street) was earning or losing on any given day.  More on that later.

Sandra suggests the Foundation buy the site.  I’m stunned, but don’t object!  A couple of weeks later the Foundation convenes a very large assembly of mid-Market/Tenderloin stakeholders to make the announcement.  Seated next to Sandra is David Friedman, SF Foundation’s Board President.  Everyone leaves in a state of near euphoria – incredibly the site control crisis is resolved: We will own a piece of the mid-Market rock and control its destiny.

The engagement of the SF Foundation creates an exciting opportunity for a constellation of high-quality organizations that could engage with the Tenderloin community, generate people traffic, and finally have access to a permanently affordable, highly visible and accessible venue.   In short order my project team meets with: the Magic Theatre; Lorraine Hansberry Theater; Cutting Ball; CounterPULSE; All Stars Project; Youth Speaks; Women’s Audio Mission; Blue Bear Music; KDFC Radio; KALW Radio; SFArtsEd; Alonzo King LINES Ballet; Theater Bay Area; SF Playhouse; Community Music Center and Performing Arts Workshop.  (Astonishing, really, the caliber of organizations here, many of which were struggling with facility issues.  Many still are.)

During this new iteration of feasibility analyses I raised funding from:  Walter & Elise Haas Fund; Columbia Foundation; Gerbode Foundation and the Rainin Foundation.

Sandra disappears for weeks, not responding to calls or emails.  Finally, word gets out the board said no to acquisition, yes to supporting the project in a more “conventional” way.

Reactions, and Getting Schooled

Lots of folks in the arts community and city hall were incredulous.  Some were pissed.  I fell into the incredulous category.  (After Fiasco #2, I was firmly in the pissed category.)  I felt bad for Sandra.  I could not understand how the board would override the CEO, and its president, to kill such a powerful proposal that had enormous stakeholder support and groundbreaking potential to effect equitable development on a macro scale in a highly distressed community.  I gave Sandra credit for at least trying.

Soon after, I received invitations to lunch from a couple of directors of other Bay Area foundations.  One (definitely in the pissed category) told me the SF Foundation needs to be called out.  The other expressed condolences, then calmly explained to me how the SF Foundation really works.

“Elvin, you damn fool, let me break it down for you.  The SF Foundation is largely a tax-shelter mechanism for wealthy individuals/households who want to park their money somewhere to avoid paying taxes.  The instrument is called “Donor Advised Fund.”  At some point donors can direct foundation staff to make grants with their deposited funds, but they are under no obligation to do so.   In the meantime, the funds collect interest.”

 And there’s more, Elvin, you damn fool.   The SF Foundation is in an intense arms race for new Donor Advised Funds with the Silicon Valley Community Foundation: both behemoths are competing to buddy-up with the new crop of Bay Area tech multi-millionaires and billionaires.   Once the new money class chooses one of the foundations they are likely stay with them for life, so the pressure is on to solicit and get their business.  The goal is to bring money in before it goes to the other side, not to put money out.”

What’s the business proposition?  I was advised that the SF Foundation has little actual money of its own; the $1.3 billion asset base is made up of a multitude of Donor Advised Funds.  The Foundation, like all community foundations that operate under this model, charges fees to accept and administer these funds; that’s how they make money.   And a last surprising bit of information: giant Wall Street financial concerns like Charles Schwab and Fidelity are also in the Donor Advised Fund business.  Schwab and Fidelity call their divisions Schwab Charitable and Fidelity Charitable.

The Conventional San Francisco Foundation Way

The conventional San Francisco Foundation way, as it turned out, was to award itself a grant to steward the development of the project.  In other words, the SF Foundation makes a high-profile announcement about a major grant, but doesn’t disclose that the grant is largely to itself (we couldn’t tell how much, it’s very opaque over there) to cover staff time spent on the project.  This, I suppose, would be a reasonable, if self-serving, approach if foundation staff were qualified to undertake the work at hand.  In the case of developing 40,000 square feet permanently affordable arts and education space, however, no one at the foundation was remotely qualified, and the strangling of the project inexorably and painfully began.  When I raised this issue with the Foundation’s VP of Programs at the time, he responded: “It’s our money, and we have the prerogative to develop our staff.”  A disastrous policy, about which I’ve heard similar complaints from a prominent affordable housing developer engaged on another SF Foundation-funded project.

Jen Rainin is $5 million dollars short

During my time in the Tenderloin the Rainin Foundation has always been there in any effort to build arts program capacity.  Shelley Trott, who runs Rainin’s arts program, is one of the finest foundation officials I’ve ever worked with.  Shelley did her best to roll with the site control struggles of the 950 site, but eventually Rainin’s funds had to move and the Community Arts Stabilization Trust (CAST) was created, an excellent investment in its own right.  Now that the SF Foundation was publicly behind the 950 Project, there was some thought there might be a leverage play – SF Foundation & the Rainin Foundation – whereby we could move both 950 and CAST forward concurrently.

A meeting was set-up.  Shelley and her entire board were there, including the brilliant Jen Rainin.  Like they do with all things, the Rainin crew cut to the chase and say they’re all in, support collaborating and, not incidentally, have $5 million to start things up.  Here’s our big opportunity to leverage, leverage, leverage.  Sandra listened and replied: To avoid fees our minimum fund allocation is higher (my recollection: $10M), but we can look into waiving administrative costs to accept your $5 million.

Jen Rainin’s ready to write a check for five million dollars to support a project – a project you’re saying is a top priority for the Foundation – and you’re going to look into waiving administrative costs to accept it?   I could not, fucking, believe, what, I, was, hearing.  A sudden desire to slide under the conference table unnoticed and never to be seen again came over me.

In retrospect it made sense; it was a Bill Murray in Tokyo moment.  Sandra probably was thinking in Donor Advised Fund terms (the SF Foundation’s MO), whereas Rainin was not interested in parking money to dawdle and collect interest – they wanted to put it on the street ASAP.  That, of course, is exactly what Rainin did; they seeded CAST, the money was immediately leveraged (by New Market Tax Credits) and they went to work acquiring 80 Turk Street and 1007 Market Street, the new home of CounterPulse and ongoing historic home of Luggage Store Gallery, respectively.

Quick Sidebar: the KQED Fallout

A Cy Musiker piece on arts facilities development along mid-Market got me in big trouble.  City Hall was complaining about me, Sandra sternly advised.  I have to stop my “agitating against tech.”

Agitating against tech?  I did not see anything in Musiker’s piece that suggested as much.  What I was doing, I replied to Sandra, is advocating for the arts and equitable community development, not agitating against tech.  Sandra continued complaining about my making noise, but I wasn’t backing down.  It was strange, but telling, that I had to defend myself to the head of a community foundation for calling out a city hall that had mislead an entire community.  And the calling out consisted of a simple statement that no city resources were being made available to achieve the very outcome the mayor claimed was a high-priority.  Pretty mild stuff.

A side note:  It’s interesting to revisit Musiker’s piece and read the reference to Supervisor Kim working on arts district legislation.  We all know now that didn’t happen; in fact, behind the scenes, Supervisor Kim’s office worked against developing new funding resources for the arts.  More on that later.

Just Guarantee the Campaign, you don’t have to contribute to it

After the SF Foundation flaked a second time, with a special starring role by the former VP of Programs, I threw one last Hail Mary pass for 950 before it went completely under.   I wrote a note to SF Foundation Board President David Friedman asking for a meeting to float one more idea.  (Sandra had left the foundation by this time.)  Friedman responded that he would forward my communication to the appropriate party, but I never heard again from the Foundation.   The idea: Guarantee a loan the project team could utilize to build the arts & education center.  A loan guaranteed by the Foundation’s $1.3 billion was a sure bet, and it could have moved the project forward.  The loan would been taken out by the capital campaign and not have cost the Foundation a penny, for a project they claimed to hang their 1.3 billion-dollar hat on.

I credit the idea of Bay Area philanthropic assets being utilized as loan guarantees to Bob Gamble of Public Finance Group.  Bob ran the Goldman Fund in a previous life, and on a few occasions I’ve heard him rant about how underutilized the immense wealth of Bay Area philanthropy is.  Joining him is billionaire Bay Area philanthropist Marc Benioff, who has not been shy with his sharp criticism of the Donor Advised Fund model.

Lessons Learned

There are no villains here.  Definitely not Sandra; she’s a public-interest serving giant with a big heart that understands the need for holistic human development (hence her taking the unconventional leap so poor Tenderloin residents had access to quality arts education facilities and programs just like higher-income households do).  I didn’t appreciate her laying into me for being an anti-tech, anti-city hall agitator, but that’s small stuff.  The big stuff were the major structural disconnects: staff vs board; the foundation’s operating model vs. a community project’s needs. Perhaps as its critics – which includes some very experienced and smart figures in philanthropy – suggest, the Donor Advised Fund model does create a more savings bank rather than philanthropic institution cultural dynamic.  I’m not sure.

What’s the lesson moving forward?  All you practitioners out there still or newly in the trenches, I would recommend being highly suspect of SF Foundation’s spin.  They do invest heavily in marketing and communications.  In fact, during key technical meetings with Sandra to go over 950’s development numbers, the VP of Programs wasn’t present, but the communications director was.  Later the VP would be clueless as to what the CEO committed to: a big structural disconnect.

I would challenge their board – directly – to put money on the street; the Foundation’s CEO apparently has limited power and operates more as brand ambassador.  I would challenge them to put up real risk capital and not just ride the Wall Street train (If they make or lose $8 million on any given day whether they do anything or not, then why not do something?).  I would demand they live up to the endless self-promoting hype they broadcast far and wide as they try to score new Donor Advised Funds.  (Do you see the Walter & Elise Haas Fund plastering its name all over the place?  WEHF rocks, by the way.)

The whole Donor Advised Fund model needs to be reevaluated.  Maybe donors setting up funds should be advised a portion of their funds may be risked for, say, charitable purposes.

Lastly, upon returning to the Tenderloin, I learned the Foundation has dismantled its arts grant portfolio and is focusing its resources (whatever that means, to be determined) on “equitable development” (whatever that means, to be determined).    So, does that mean the San Francisco Foundation will, or will not, support the arts as part of its new campaign on equitable development? In my view they would be wise to recognize the arts are much more than just about the arts.

Maybe they could start their equitable development campaign by writing a check for $24 million to Tenderloin youth groups, all of which lost that much in committed money – and the chance to have their own state-of-the-arts education facility – the day 950 fell.  Hey, that would total 0.018 of the San Francisco Foundation’s Wall Street holdings, on any given day.

Yes on S Yo!