The turmoil in the banking system and the decline of the stock market are hurting philanthropy in two ways. First, they have substantially diminished the assets of many of our country’s leading foundations. Second, they have led to a decline in personal net worth that is reducing the size and number of future philanthropic ventures.
To make matters worse, the $700 billion federal package for the banking system and the budget crisis in many states means that legislators will be looking everywhere for new sources of revenue—including the taxation of foundation and other charitable assets.
Already legislators are beginning to follow the example of the California Assembly and seek to direct how foundations spend their charitable dollars. This kind of political interference is harmful to foundations and the nonprofits they support in any economic environment. It is especially destructive when charitable resources are stretched thin.
The Philanthropy Roundtable is committed to protecting foundations’ right to make their own charitable decisions, and to sustaining the public policy framework that will encourage the growth of new foundations and charitable giving as the economy recovers.
For the individual foundation, the down market forces trustees and staff to make agonizing decisions. In the rapidly rising markets that have characterized most of the past 25 years, many foundations had the resources both to sustain their traditional grantees and to embark on significant new initiatives. Now they must choose.
We suggest the following principles for achieving results in an economic slowdown and bear market:
The fundamental challenge for the philanthropic foundation is not substantially different in a falling or a rising market. In both cases, the potential range of philanthropic expenditures vastly exceeds the foundation’s resources. In both cases, it is the responsibility of the trustees to determine rigorously the foundation’s priorities, to choose how and where the foundation will seek to make the greatest difference given the resources available. In both cases, as they set priorities, trustees should be guided by the values and instructions of the donor, and, if the instructions are not explicit, they should determine how the foundation can most effectively achieve the intent of the donor in the changed circumstances of a new generation.
The 5 percent payout mandated by federal tax law is a legal minimum, not a maximum. If a foundation is achieving dramatic measurable results with its current philanthropic strategy, an important way to sustain momentum and influence during a down market is to raise the payout. Foundations should of course be free to exist in perpetuity, and to follow policies that enable them to do so. But, if it is consistent with donor intent, foundations that want to maximize their current and medium-term impact may want to spend generously during times of trouble and possibly consider a policy of spending down assets over 15 to 25 years.
If a foundation is not currently achieving dramatic results, then the down market is an ideal time to reexamine its priorities, strategy, and/or system of measurement. For instance, in the wake of the foreclosure crisis, foundations committed to the worthy goal of increasing homeownership among low-income families may want to take a careful look at their public policy assumptions and the community activists and demonstration programs they have been funding, to determine whether their strategies can achieve their objectives. Getting the priorities, strategy, and measurement system right when times are tough means the foundation will be much more effective when the market recovers.
Down markets are inherently painful for nonprofits and the people they serve, but they also offer a good opportunity to redirect resources to the most effective grantees. In every field of nonprofit activity, some grantees achieve better results than others, or have the potential to achieve better results than others in the future. This is a great time for funders to examine which nonprofits need extra help now because their potential for the future is so enormous, and which groups should probably disappear or be merged into more effective organizations.
The current down market should also remind the foundation world that it has a strong stake in vigorous, sustained economic growth. Reasonable people can disagree over which tax policies, regulatory structures, and level of government intervention in the banking and credit system will do most to bring back confidence in financial institutions and get the market economy moving again. But there should be no disagreement among donors about the central importance of restoring vigorous private-sector growth. A vibrant private sector generates the wealth that makes philanthropy possible.
Adam Meyerson is president of The Philanthropy Roundtable.