You are the director of finance and operations at a $280 million foundation. The Foundations program staff

Fantastic news! We've Found the answer you've been seeking!

Question:

You are the director of finance and operations at a $280 million foundation. The Foundation’s program staff is working on a proposal to expand the use of fluoridation in upstate New York. The staff believes that access to capital is a key impediment to local governments purchasing equipment to add fluoride to drinking water. The program staff would like to create a Program Related Investment (PRI) program that offers a 1 percent interest rate on ten-year loans to local governments to purchase equipment needed for fluoridation. The program staff believes that there would be demand for a total of $1 million in loans. The loan would require payment of interest only during its ten-year term, with full repayment of principal when the loan matures at the end of ten years. The program staff is excited about using a PRI; because the funds will be paid back to the foundation, they believe that they can make substantial improvements in oral health at no cost to the foundation.

The foundation currently has plans to make other grants that exceed its 5% minimum spending requirement.

You do research and find that local governments can easily borrow at 3%; they have no problems borrowing funds. You wonder whether the loan should really be considered as costing nothing to the Foundation. The Foundation has an unusual arrangement with its original donor. It is able to invest its assets with the donor at a guaranteed 7% return (For purposes of this exercise, assume that this really is guaranteed and that local governments really don’t have problems borrowing and that there is no risk to the foundation making the loan).

The Foundation’s Executive Director has asked you to evaluate whether the loan program makes sense, and what its true cost would be. Prepare a brief memo estimating the cost and whether it is economically efficient to pursue the loan program.