What started as a worrying uptick in regional foreclosures has cascaded into a worldwide economic downturn. Every facet of the American economy has been affected—from housing starts to consumer demand to bank lending to currency exchanges. Gold is up; the markets, down. Polls suggest that upward of 60 percent of Americans are pessimistic about the future.
A vibrant private sector creates the wealth that makes philanthropy possible, so it is only natural that the economic setbacks will reverberate throughout the charitable sector. As yet, there are few hard numbers about the extent of recent losses among American foundations. But no one doubts that the decline has been incredibly steep, with losses of 40 to 50 percent not uncommon, according to many sources with whom Philanthropy spoke.
Response and retrenchment
How are donors responding to the crisis? Regrettably, 2009 is shaping up to be a tough year for nonprofits that depend on private giving. Consider the following data:
- Foundation giving: The Council on Foundations recently surveyed 127 foundations and found that assets had declined 28 percent in 2008—with no word yet on 2009 numbers. A March 2009 report by the Chronicle of Philanthropy found that half of the 73 large foundations it surveyed planned to decrease funding this year. The Foundation Center reports that of the nation’s largest 100 foundations, only two—the Bill & Melinda Gates Foundation and the John D. & Catherine T. MacArthur Foundation—have pledged to increase giving from last year, and many others expect to see giving drop in 2009.
- Corporate giving: Corporate philanthropy is expected to plummet, according to a report from the Conference Board, which found that half of respondents in a recent survey intend to trim their corporate giving program, while another 16 percent are considering it.
- Individual giving: Charitable giving from individuals and families is expected to drop in the wake of reports that 18 percent of household wealth nationwide vanished in the market decline. Losses may be exacerbated further still by the Obama administration’s proposal to reduce the percentage of charitable contributions that wealthy taxpayers can deduct.
On the last day of March, the Foundation Center added to this litany of dour predictions. It released a large-scale survey which predicts a steep drop in foundation giving. Based on federal 990 reports and questionnaires mailed to 5,000 large- to mid-sized grantmakers, Foundation Growth and Giving Estimates 2009 reports that foundation giving actually rose in 2008 by 2.8 percent, to $45.6 billion. The unexpected growth is largely attributable to the strength of new bequests in 2007 and to the spending of a few large grantmakers, like the Gates Foundation. Throughout the year, however, total foundation assets fell by 25 percent nationwide, with nearly $150 billion in charitable resources incinerated by Wall Street’s three-alarm fire.
Looking forward, Foundation Center estimates that 67 percent of foundations will decrease giving in 2009. The decline in giving will range from the high single digits to the low double digits—the first decline in years—but less than the rate of asset decline, offering one glimmer of hope. The hardest hit, according to the report, will be mid-sized foundations with grant programs of $1 million to $10 million per year, 71 percent of whom plan to decrease giving in 2009. Uncertainty in the economy makes it difficult to forecast beyond 2009, but the large number of foundations who budget based on a three-year rolling average of asset values suggests that the impact of the 2008 market losses will be felt well into 2010 and beyond.
Striking as those numbers are, here are two caveats that ought to chill grantees. First, the data on asset losses does not account for market declines since January 2009. Second, the 2008 edition of the report underestimated the percentage of foundations that would decrease their giving last year by nearly 20 percent.
Surveying the damage
Donors surveyed by Philanthropy echo these bleak national reports. Though many respondents stress that they have not made any final decisions, a number of them are already signaling that their giving in 2009 will drop, in many cases substantially. The response of Joshua Wyner of the Jack Kent Cooke Foundation is representative. Without yet settling on an exact number, says Wyner, the foundation will “almost certainly” be reducing its giving—mostly scholarships for high school and college students—this year. For Wyner, this reduction in spending will be accompanied by a focus on existing grantees. “Our first commitment will be to those students and grantees to whom and to which we have already made commitments,” he notes. “Only after fulfilling those commitments will we consider disbursing funds to new students and grantees.”
Peter Calder, a trustee of the Louis Calder Trust, states the foundation likewise plans to meet its commitment to existing grantees and reduce overall spending by limiting new grants. The Philip M. McKenna Foundation, like the Cooke Foundation, will also prioritize grantees as it makes cuts, focusing on a grantee’s consonance with the foundation’s mission and the percentage of a nonprofit’s budget the McKenna grant comprises. Nor is 2009 likely to be the end of the cutbacks, since many foundations base their giving on multi-year rolling averages that have not yet caught up with the decline in the markets. Thus, for example, Houston Endowment foresees level giving in 2009—but expects giving to decline in 2010 and 2011, according to executive vice president Sheryl Johns.
William (“B. J.”) Steinbrook of the Challenge Foundation reports that Challenge fulfilled all its 2008 year-end obligations and remains committed to long-term grantees, but that the board “will have to step back at its next meeting” and consider the effect the downturn has had on available funds. “Wisdom dictates careful strategic planning in an environment like this,” he notes, but adds that the present uncertainty has been hard on grantees, which he regrets. “Our phone has been ringing off the hook. Grantees are nervous, concerned, and some are already getting really desperate.” Steinbrook foresees sweeping changes in the nonprofit sector in the next few months, as grantees downsize, merge, and fold. [Please see “Bringing Mergers & Acquisitions to the Nonprofit Mainstream.”] “It will happen,” he says. “It’s unfortunate, but it will happen.”
The specter of desperate grantees and imploding nonprofits has stiffened the resolve of some donors to maintain their current giving levels—at least for the time being. Gary Yates, president and CEO of the California Wellness Foundation, reports that despite “significant losses,” the foundation has extended its 2008 grants allocation—approximately $50 million—into 2009. “We made this decision,” says Yates, “because health and human service providers in California have been hit hard by the economic meltdown and state budget cuts at a time when demand for their services is increasing. We wanted to do what we could to help, so we focused on our mission.”
Yates is echoed by Gisle Huff of the Jaquelin Hume Foundation, which has maintained its spending levels (largely on education reform initiatives) relative to last year. “In this downturn,” she says, “philanthropic dollars are more significant than ever, and should be used to counteract the current crisis rather than be preserved to address some problem in the future.”
Yet even those foundations that are maintaining their giving levels are seeing their portfolio of grantees shuffled by the downturn. George Vradenberg of the Vradenberg Foundation notes that the mounting needs of core grantees is causing his foundation to increase giving to a few nonprofits at the expense of a broader base of recipients. Vradenberg advises fellow grantmakers to follow a similar keep-it-simple approach. “This is going to be bad for a lengthy period and we cant afford to lose our key nonprofits in the arts, social services, peace and justice, or other fields,” he warns. “Hold on as long as possible and focus on the keystone nonprofits in your giving area.”
Of course, level giving for 2009 does not necessarily mean that foundations will be able to maintain those levels indefinitely. Yates reports that the board of the California Wellness Foundation will discuss the “limits” of level spending in the face of declining assets later this year, as it prepares its 2010 budget. “Well see where our investment portfolio is then and decide,” he says.
The most prominent example of a foundation maintaining its spending in the face of substantial asset decline is the Bill & Melinda Gates Foundation. The foundation’s portfolio declined by 20 percent in 2008—but, in his annual letter, Bill Gates describes its performance as “better than most.” In late November, however, Jeff Raikes, Gates’ new CEO, issued a statement on the financial crisis, pledging that the foundation would increase giving in 2009, though at a rate smaller than originally planned. In his January 2009 annual letter, Gates puts a number on this commitment by announcing that the foundation was increasing its payout to 7 percent of assets, or about $3.8 billion this coming year. “Although spending at this level will reduce the assets more quickly, the goal of our foundation is to make investments whose payback to society is very high rather than to pay out the minimum to make the endowment last as long as possible,” writes Gates.
To be or not to be?
Is it possible that the economic downturn will cause some foundations to close their doors, willingly or not? The market decline has already claimed a few philanthropic victims, primarily the handful of foundations caught up in the collapse of Bernard Madoff’s Ponzi scheme. (Perhaps most notable among them was the $1 billion Picower Foundation, which closed its doors in December.) Less dramatic, but with perhaps a greater long-term impact on the philanthropic sector, are foundations that are taking a hard look at the question of perpetuity in light of the increased needs everywhere. Byron Harrell and the board of Baptist Community Ministries (BCM), for example, plan to maintain existing commitments, even multi-year commitments, while acknowledging that the approach may push the foundation’s payout rate to 6 or 7 percent and degrade its corpus. “The debate is more of a moral question of, ‘Why do we exist?’” notes Harrell. “Is perpetuity our sole objective in preserving asset purchasing power? Or do we exist precisely for times like these, in which we see much higher nonprofit mortality rates and distress?”
For Harrell and the board of BCM, the economic downturn has prompted a series of hard questions about the tradeoff between protecting future spending power and achieving an immediate impact in its core mission areas. The foundation’s religious identity has played into this debate, but so too have pragmatic considerations about spending now to save later. “With once-in-a-lifetime market challenges, it is not just an academic exercise to shift spending now or to preserve assets,” observes Harrell. “Our approach has been to work from the moral underpinning of our mission and to try and decide if we are in one of those tsunami-type environments to which we must be responsive now regardless of the impact on our endowment. If we continue to see solid, high-performing, nonprofit organizations confronted with financial survival, we are likely to revisit our spending policy. It may end up costing us more to rebuild them later than to support their survival now.”
One foundation that had embarked on closing its doors has moved to reduce spending to keep its orderly sunsetting on track. The Avi Chai Foundation, which supports Jewish education and identity in North America, Israel, and the former Soviet Union, initially set a sunset date of 2027 in order to fulfill the wishes of its donor, Zalman C. Berstein, that the foundation sunset in the lifetime of the trustees he shared in selecting. Later, the trustees moved the sunset date to 2020 to enable larger annual grant budgets, and the foundation began the involved process of setting its priorities for its final years. “In North America, we began to consider ambitious but realistic goals for the last decade of Avi Chai’s activities. In part, we thought about how to help [grantees] strengthen their own capacity, to become self-sustaining,” says executive director for North America, Yossi Prager. “We also had to think about the larger field—what other institutions need to be created, which existing ones need to be strengthened. We knew that this would involve starting new initiatives and ending support for some current programs.”
The downturn, notes Prager, has accelerated the winnowing process. “The downturn forced us to prioritize among the programs, to ask, ‘Which are we willing to let go sooner, understanding that many would have to have been let go eventually, as we approach 2020?’” he says. “Sunsetting compels all foundations to think hard about strategic prioritization,” but with the downturn, Prager observes, Avi Chai had to do so with “focused energy.” The board began serious discussions in October of last year, and the staff created a rubric to rank existing grant programs along lines such as cost effectiveness and consonance with mission and strategic focus. The staff ranked all programs and then sent the rubric and recommendations to the board, which independently ranked grantees. The trustee rankings were tabulated and used to set a three-year program budget.
Some grantees found themselves with increased grants or new grants. “The foundation,” Prager says, “will honor all existing commitments,” but he admits that a few grantees that have been renewed in the past were “blindsided” when they were not renewed again. “Right now, every nonprofit is nervous,” he says. “Some have been incredibly understanding. But others have been upset and angry.” Still, despite the effort and the bruised feelings, Prager thinks the new clarity and focus has been good for Avi Chai. “It’s been an involved process, but a good one.” The new plan is meant to keep the foundation on track to sunset in 2020, though the trustees have expressed interest in moving the sunset date forward if further market declines generate a need to revisit the foundation’s annual spending.
Cushioning the blow
If a foundation must cut back on its giving, are there are other steps it can take to help key grantees make it through the downturn? Reaching out with timely communications can make a difference in alleviating anxieties among grantees. Houston Endowment, for instance, began to get questions from grantees that suggested misinformation was spreading throughout the community about its plans for 2009. In response, the endowment posted a statement on its website laying out precisely how it planned to respond to the downturn. “We assumed that if some people were asking, others were wondering,” says Sheryl Johns. “We wanted to send a clear and consistent message to the entire nonprofit community.”
Other foundations are getting creative in finding ways to help grantees make it through tough times. The Triad Foundation, formed by the family of media executive Roy Park, plans to maintain its continuing commitment to its largest programs: graduate fellowships at the University of North Carolina at Chapel Hill journalism school and at the business school at Cornell University. It has even taken advantage of unexpected opportunities in its target communities, such as emergency grants for a summer camp for at-risk kids and a first-time grant for the new KIPP charter school in Charlotte.
Triad’s executive director, Joanne Florino, nevertheless predicts that following the board’s grantmaking strategy will push the foundation’s payout rate above 7 percent, which will dramatically limit funds available for many new proposals. In response, the foundation has searched for ways to increase its efficiency and effectiveness. It has reached out to other funders to discuss possible collaborative efforts, and reduced administrative requirements for renewal applications in order to alleviate the burden on hard-stretched nonprofits. Triad has even made its color copier available to a small organization unable to afford the cost of commercial copying, and Florino says that Triad “is certainly open to other in-kind grants.”
Jamie Merisotis, president and CEO of the Lumina Foundation for Education [please see Member Profile]—which is among those foundations maintaining 2008 giving levels into this year—echoes the call for collaborative efforts between grantmakers, and also urges foundations to reach for tools beyond the checkbook in leveraging dollars to advance their mission. “Do you have compelling stories from grantees that capture the essence of what you are doing?” asks Merisotis. “Tell those stories. Tell them loud to anyone who will listen. In your database of contacts, are there people you could pull around a table to develop concepts or plans that can be put into action? Using other tools will allow each of us to maintain the capacity to be successful in our mission.”
Unfortunately, grantmakers have had to do without guidance from one important source: their donors. Not a single foundation contacted by Philanthropy had received guidance from its donor or donors—through incorporation documents or other means—on what to do if market contractions were to seriously deplete a foundation’s endowment. While no donor can possibly anticipate every eventuality, the likelihood of a sharp downturn in the business cycle grows with every year the foundation intends to operate. Yet few donors seem to have taken the time to give any guidance on how to deal with tough times—a startling omission.
Most important is maintaining focus on what’s important, and keeping an eye out for welcome and useful innovation even while retrenching, says T. William Boxx, chairman and CEO of the Philip M. McKenna Foundation. “Challenging times like this can nevertheless result in a positive reassessment of priorities and innovative development within the nonprofit world,” Boxx notes. “If any good thing can be said, it might be that.”
Contributing editor Justin Torres is an attorney in New Orleans, Louisiana.