Foundation Grantmaking during Economic Collapse: Pollyanna or Cassandra at the Helm?

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At 1:00 p.m. on February 23, 2009, the Dow Jones Industrial Average fell to an 11-year low, to 7,190.72, the lowest since October 28, 1997. By the end of the month, the market closed at 7,062.93. Compare that with the all-time high on October 9, 2007, of 14,164. In less than 18 months, the Dow, the Dow Jones Wilshire 5000, and the Standard & Poor’s 500 indices have lost more than half their value.

While foundation executives and staff have thought carefully about what to do during a recession, their tried-and-true strategies may not hold up during this economic maelstrom, which is different and deeper than any in the past two decades. What should foundations do when their own assets have plummeted so precipitously? How should these institutions respond when the U.S. automotive sector is in danger of bankruptcy, the banking sector is so weak that former Federal Reserve chairman Alan Greenspan hints at “temporarily” nationalizing key banks, and hundreds of thousands of nonprofits may simply go out of business?

True, foundation grantmaking constitutes only 12.6 percent of total charitable giving, according to , leading some observers to suggest that foundations do not merit the attention they garner. But foundation grants are one of the few sources of discretionary capital that nonprofits might-again, might-be able to use to sustain capacity and subsidize programs to weather financial storms. The role foundations choose to play during these times will speak volumes about their commitment to people in need and to the services and advocacy organizations that serve them.

So how have these important financial institutions responded to the worst recession since the 1930s? How will their strategies for navigating the next months-or years-of national and global economic crises alleviate or exacerbate these turbulent times for America’s nonprofit sector?

Recent Foundation Grantmaking: A Sinking Feeling

While some foundations-such as the John D. and Catherine T. MacArthur Foundation, the Bill & Melinda Gates Foundation, and the James Irvine Foundation -have announced their intentions to exceed their 2008 grantmaking in 2009, most news reports cite grantmaking cutbacks.

Even in these cases of proposed increases, some announcements contain equivocal wording suggesting that foundation overseers might reconsider or curtail their proposed increases. Many foundations, such as the John S. and James L. Knight Foundation, have issued lengthy statements to assure grantees that funders will not renege on existing commitments, which suggests that future grantmaking levels look more than a little bleak. Some foundations announced increases in their percentage payout, which press accounts mistakenly interpreted as 2009 grantmaking increases. Straightforward statements about losses-such as those by the McKnight Foundation in Minnesota (which lost $700 million in assets) and the George Gund Foundation in Ohio, which announced that its higher-than-anticipated payout rates will still translate into lower actual grant payouts in 2009 because of depressed endowments-remain rare.

But in this era of economic downturn, what will the norm be? Countercyclical expansion of the likes of MacArthur and Irvine? Higher payout rates but lower grantmaking such as at McKnight and Gund? Efforts to maintain 2008 grant levels through 2009? Or couched amid statements of concerns, reductions of unknown levels in grant budgets?

The complete answer will probably take time to unfold. Still, the Nonprofit Quarterly has compiled early data from surveys of 15 regional associations of grantmakers on foundations’ response to the economic crisis, and the data is discussed below.

The Data Sources

Many foundations belong to regional grantmaker associations (which bear the unfortunate acronym RAGs) and in late 2008 or early 2009, about half these organizations surveyed their members about grantmaking expectations for 2009.

Table 1 features the 15 grantmaker associations whose survey information we have reviewed in this article.

Table 1: Grantmaking Association Survey Respondents

Grantmaker Association (and Geographic Coverage) Time Frame in which Surveys Conducted Number of respondents
Donors Forum of Southern Florida (Broward, Miami-Dade, Monroe, and Palm Beach Counties) November 1-December 1 2008 57
Ohio Grantmakers Forum January 2009 92
Council of Michigan Foundations December 2008 49
Council of New Jersey Grantmakers 34
Minnesota Council on Foundations November 2008 107
Connecticut Council on Philanthropy October 2008 38
Delaware Valley Grantmakers (Greater Philadelphia region) October 2008 27
Arizona Grant Makers Forum October 28-December 1 2008 31
Indiana Grantmakers Alliance October 2008 71
Grantmakers Forum of New York (upstate New York) 40
Washington Regional Association of Grantmakers (metropolitan District of Columbia, including suburban Maryland and Virginia counties) October 2008 “just over one-third of the membership”
Southeastern Council of Foundations (11 Southeastern states: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, and Virginia) Not specified Not specified
Northern California Grantmakers (largely San Francisco Bay Area) November 2008 32
Donors Forum (Illinois) October 2008-November 2008 54
Donors Forum of Wisconsin August 2008-December 2008 100-plus

Because of a variety of factors, there are limits on what we can learn from these grantmaker association reports. First, the RAGs didn’t use a uniform survey design, so comparing information among them can be difficult or impossible. Second, these reports’ level of detail varies. Some provide only gross aggregate information on survey respondents, others disaggregate the information by type of funder or by regions within the state. In some cases, detailed benchmarking of this information may have been available to association members, while the press and public received only summary data.

Further, like most nonprofit surveys, these surveys are not random or stratified random surveys of the foundation sectors in their regions. They are responses from the foundations that choose to respond to surveys. As a result, the responses are more revealing as general foundation reactions to the downturn than they are as evidence for  definitive claims.

And the responses themselves are not definitive concerning what funders will do. The surveys, for example, ask respondents about their expectations for their 2009 grantmaking. but responses provided in late 2008-when the markets and the economy were merely plummeting-may differ markedly from those provided in the winter of 2009 when “plummeting” hardly conveys the depth of the economic crisis. Many foundation executives may prefer to maintain or increase their 2008 levels of grantmaking in 2009, but they may also find that the combination of sinking investments and cautious trustees makes these hopes unrealizable.

Interpretation is also limited by the various kinds of foundations. Survey respondents include community foundations; private foundations; health-conversion foundations; and, in some cases, regranting intermediaries, United Way agencies, and even some quasi-public or public entities. They are not always easily comparable. Conversion foundations created as a result of state government intervention or legal consent decrees may be required to do certain kinds or levels of grantmaking. Public foundations, such as community foundations and regranters, may use a different calculus for responding to economic downturns than do private foundations feeling hamstrung by “inviolable” endowments and a fear that too much spending will harm gilded notions of perpetuity.

Despite these limitations, the survey findings reveal important signals about how the foundation community may navigate the recession. This review focuses on two core issues:

1. Compared with 2008, what will funders do with their grantmaking budgets in 2009? Increase, decrease, or hold steady?

2. How will funders change grantmaking strategies? What will they emphasize and deemphasize?

Will Foundations Give More or Less?

As Table 2 indicates, many foundations expect to give less in 2009, and few expect to give more. In all but five of 15 regions, the majority of foundations expect to give less.

Table 2: Respondents’ Predictions for 2009 Grantmaking Budget

Grantmaker Association Respondents’ Predictions for 2009 Grantmaking Budget Compared with 2008 Level
Will Increase No Significant Change/

 

Will Decrease
Southeast 6.9% 63.8% 29.3%
New Jersey 6.7% 16.7% 66.6%
South Florida 10.6% 26.3% 50.9%
Ohio 11.0% 29.0% 60.0%
Michigan 4.0% 14.0% 67.0%
Wisconsin 4.0% 44.0% 53.0%
Minnesota 15.0% 41.0% 40.0%
Connecticut 13.0% 34.0% 24.0%
Delaware Valley 6% 42% “over 50%”
Arizona 9.7% 16.1% 58.1%
Indiana 8.0% 22.0% 69.0%
Upstate New York 8.0% 27.0% 57.0%
metro-Washington, D.C., area 17.0% 30.0% 54.0%
Northern California 18.0% 28.0% 40.0%
Illinois 17.2% 32.7% 36.6%

In none of these regions did more than 20 percent of funders predict that grantmaking would increase in 2009, and in most surveys, less than one-tenth of survey respondents predicted increases. With the exceptions of respondents in the Southeast, Illinois, and Connecticut, between 40 percent and 70 percent of respondents anticipated cuts.

When calculating payouts, endowed foundations typically average assets over a three- to five-year period, ostensibly so that a bad year or two doesn’t unduly depress grantmaking. The fact that so many anticipate cutting grant budgets may be because some have experienced asset downturns in 2007 as well as in 2008. But remember, the Dow’s all-time high was in the fourth quarter of 2007, and the year ended at the still-astronomical 13,264.82. The depth of some foundations’ anticipated cutbacks in 2009 do not suggest calculations that include pre-2008 boom market levels or reflect other concerns and priorities for foundation decision makers.

How Deep?

More striking than the number of foundations that expect to shave grant budgets are the those that anticipate hefty retrenchments:

  • AmongNew Jersey respondents, 13.3 percent predict cutting 16 percent to 46 percent.
  • Among Ohio respondents, 28 percent anticipate cutting their grants by more than 10 percent.
  • Among Wisconsin respondents, 11 percent anticipate “significantly decreasing” their grantmaking.
  • Among Minnesota respondents, nearly one-fourth predict cutting by more than 10 percent.
  • Among Connecticut respondents, 14 percent expect grantmaking cuts of 16 percent and more.
  • About one-fifth of Arizona foundation respondents anticipate cutting their grant budgets by 16 percent or more.
  • Among respondents to the Illinois Donors Forum, 13.5 percent predict cutting their grant budget by one-fifth or more.
  • Among metro-Washington, D.C., area funders, 27 percent anticipate 2009 grantmaking budget reductions of more than 16 percent.
  • In South Florida, 29.8 percent estimated cuts of more than 10 percent.
  • Among Indiana respondents, 39 percent estimate cuts of 16 percent or more, with 13 percent cutting their grantmaking almost half or more.

As distressing as this picture may be, the whole scene may be worse if the numbers are skewed due to respondent self-selection.

How Long?

As much as six months have passed since most of these surveys were completed, and since that time, even more bad news has emerged. But even at the time of these surveys, there were ample hints that foundation respondents did not anticipate an economic reversal in 2009. While only 29.3 percent of Southeastern survey respondents predicted that they would reduce their grantmaking in 2009, for example, 62.5 percent expected that 2010 grant totals would decrease. Similarly, Ohio grantmakers, reportedly using 12-quarter averaging of their assets, indicated that grantmaking in 2010 could be much worse than in 2009. [See the CR post, “Foundation Payout Depends on How You Average”, for an explanation of foundations’ asset averaging calculations]

Grantmaking Strategies

Respondents typically report anticipating or having received more grant applications, most often via requests for general operating support.

In some areas, foundations report that they have responded by increasing the proportion of their budgets devoted to flexible general operating grants. In a few cases, foundations report releasing their grantees from program or project grant restrictions. Just about half of the Ohio, Indiana, Northern California, and metro-Washington, D.C., area respondents and one-third of Illinois survey respondents, for example, say they will increase their general operating grantmaking.

At the same time, respondents indicate that they will pull back on multiyear grantmaking. While multiyear grants are also critical infusions for nonprofit sustainability, the impossibility of predicting next year’s and the following years’ endowment values makes long-term commitments understandably difficult.

Respondents also expressed interest in encouraging their grantees to collaborate and specifically to merge. Three-fourths of the Michigan respondents, 71 percent of surveyed Illinois foundations, nearly 40 percent of upstate New York foundations, half of Ohio respondents, 56 percent of Northern California respondents, 42 percent of Arizona grantmakers, 37 percent of Connecticut respondents, and one-quarter of Southeast grantmakers suggest that they will increase focus on facilitating nonprofit mergers (in some cases, using the euphemism of “mergers and collaborations”) in 2009.

Prescriptions for the Future: Good and Bad Medicine

The surveys reveal a relatively split foundation community on whether a recession means that foundations should hunker down on existing missions or rethink purpose. A debate in a Council on Foundations newsletter between Karl Stauber of the Danville Regional Foundation and Emmett Carson of the Silicon Valley Community Foundation summarized the merits and liabilities of revising foundation mission during a down period. Stauber argued for continuity and suggested that foundations “must have the courage and will to balance the short-term charity needs with the long-term philanthropic opportunities.” Carson, on the other hand, argued for change, saying, “Each foundation has an obligation to consider whether, and how, to respond to this crisis.”

Both Stauber and Carson lead community foundations whose discretionary grant pools may have more room to consider these questions than at private foundations whose restrictions are tied to their endowments. But the longer and deeper the recession, the more likely foundation executives will be compelled to revisit their raison d’être and ask whether the intentions of their foundations and donors are relevant within a broad, national economic collapse.

Today’s economic climate is continually shifting. Every day’s news headlines announce that the recession is worse than imagined, that the stimulus may not generate jobs and recovery as quickly as hoped. Foundation executives now have to make difficult decisions about conditions that our nation’s top government and economic leaders cannot predict with any precision. They are clearly struggling to discover answers, often reverting to tried-and-true bromides of little specificity: more leadership development, more focus on current grantees, more capacity building, more one-on-one (foundation staff-provided) technical assistance,

Their ultimate answers in terms of grantmaking strategies and grantmaking budgets are, hopefully, yet to be fully crafted and open to input from the nonprofits they support.

Not Inevitable

For many foundations, when they see their assets depleted by 20, 30, or 40 percent in one fell swoop, the first reaction is to cut back their grantmaking accordingly. It is a business-rational calculus. But what will happen as we all take a second and third look at the potential damage of this approach?

Unlike profit-oriented corporations responsive to shareholders, philanthropic foundations have a different mission-the welfare of our society-and a different set of stakeholders: the American public that has entrusted them with the stewardship of tax-exempt resources. From community foundations to health-care conversion foundations to family foundations and “independent” foundations, these institutions have the decision-making and financial latitude to respond to this economic crisis that is beyond the capacity of cash-strapped operating charities.

The social mission of foundations is on the docket. Are foundations going to focus on husbanding their assets or deploying them at the most dire time nonprofits have faced since the Great Depression? Unlike many tens of thousands of nonprofits, foundations are unlikely to go out of business because of the recession. Their assets may be down, but they will survive until the market rebounds, as it inevitably will. But without capital infusions for their capacity and sustainability, many nonprofits will not be there to greet them, and the communities they serve will be devastated by the effects of this downturn.

During economic recessions, nonprofits and communities are at their most vulnerable, with few alternative ports in the storm. Foundations are under no mandate to cut back or hoard their resources. To the contrary, by virtue of their functions on behalf of the U.S. taxpayer, they could and should follow a more recession-specific agenda. That kind of agenda involves the following components:

Think countercyclical grantmaking. When the economy goes south, that is the time for foundations to increase their grantmaking. Whether their constituents are food pantries or art museums, their access to “typical” sources of revenue, such as donations from belt-tightening individuals or grants and reimbursements from constrained government budgets, is battered during these economic times. Why should foundations give more only when their assets skyrocket during a bull market?

Convert program grants to general operating. The reports of foundation-aligned groups such as Grantmakers for Effective Organizations, the Center for Effective Philanthropy, the National Committee for Responsive Philanthropy, and others attest to the importance of general operating support for nonprofit sustainability. If there were ever a time to heed the messages of these philanthropic experts, it is now. Whether or not a foundation believes in the long-term efficacy of general operating grantmaking, now is the moment to release grant recipients from life-threatening project-related restrictions.

Rethink mission and priorities in this economy. At least for the moment, there is nothing to prevent foundations from asking whether they might do more for people in need, for families and communities that are likely to bear the brunt of our national economic vortex. This is not an appeal for a conversion of philanthropy into charity, but rather a wake-up call for philanthropy to prioritize the needs of communities and populations that are least well served in our economy and society in the best of times and that are now on the precipice of devastating consequences.

Fund community-based nonprofits. It doesn’t take an advanced economics degree to imagine that in this environment, midsize and smaller nonprofits are at risk of going under. Some observers suggest that small nonprofits will survive better than midsize groups because small groups can convert to volunteer status, have employees work out of their homes rather than at offices, and take other measures in a shift to an “underground nonprofit economy” of sorts. Whether foundations believe in service or advocacy, they have to remember their obligation to build and support a vital nonprofit infrastructure at the community level if these communities are to access the government stimulus or recovery resources.

Don’t turn off the spigot. When the McCune Foundation temporarily stopped taking new applications early in the nation’s economic slide, some observers misread the announcement as the foundation’s having shut down its grantmaking entirely. The grantmaker association surveys suggest that other foundations are doing the same regarding unsolicited applications, such as the decision of the Harry and Jeannette Weinberg Foundation to stop taking letters of inquiry until at least April 2009, and other foundations have temporarily stopped future grantmaking.

As Stauber notes, the operating norm for philanthropic foundations is different than it is for individual charitable givers. But there are local circumstances that necessitate immediate foundation attention. To name two, the double-digit unemployment rates of Michigan and California cannot be ignored. Given the inevitable reductions in Fannie Mae and Freddie Mac grantmaking budgets, foundations have to be exceptionally aware of the vulnerability of metro-Washington, D.C., area nonprofits. States with proportional double-digit gaps between revenue and expenses in their 2009 general funds-Arizona, Alabama, California, Connecticut, Illinois, Georgia, Rhode Island, South Carolina, Utah-require special foundation attention and creativity. Unless their investment advisers or Bernard Madoff decamped with their assets, foundations should put their money into the budgets of frontline nonprofits and open themselves up to nonprofits with the best ideas for responding to the crisis. Hibernation is not an option.

Increase Program-Related and Market-Related Investments. In this economy, it is incredibly easy for alternative investments-program related investments and, more specifically, market-related investments  from foundation endowments-to meet or surpass returns from equity investments. How could community investments do worse than the 30 to 50 percent losses of investments in the stock market? But the surveys reveal that few respondents have contemplated program- or market-related investment strategies. In program-related investments, foundations could make available lines of credit for reimbursement- and contract-delayed nonprofit service providers or put loan and guarantee money toward community objectives in which nonprofits now play major design and implementation roles, in the acquisition and redevelopment of foreclosed residential properties, for example. Through market-related investments, foundations could invest in nonprofit-sponsored social enterprises that would address national priorities of job generation, green technology, K-12 education, and community technology.

A suite of program- and market-related investments mobilizing billions in tax-exempt philanthropic assets just might make foundations critically important contributors to the economic stimulus plans passed by Congress and the White House. Putting general operating support into nonprofits that constitute the nation’s best delivery system for the services and programs in the national recovery legislation is a contribution to the nation’s future well-being.

Counseling no need to panic, researchers from the Foundation Center and elsewhere have documented how foundations weathered the recessions of 1981-1982, 1990-1991, and 2001 to bounce back in a year or two with increased endowments and grants.  But this time, many of the nation’s most important nonprofits serving and giving voice to the needs of the poor and disadvantaged may not be there to benefit from the philanthropic recovery. Unlike its predecessors of the past 30 years, this downturn might affect foundation endowments more like the Great Depression than the September 11 recession by requiring several years to rebuild foundation assets. In the interim, the cumulative work of foundations building a nonprofit infrastructure across the United States might be rapidly eviscerated-unless foundations come to grips with their obligation to sustain the investments they have made in our civil society institutions.

Foundations have choices to make during these turbulent times. With the help of regional and state grantmaker associations and state nonprofit associations, they may find their way to the choices that support nonprofits and boost economic prosperity.

 


 Paul Light, “Four Futures,” The Nonprofit Quarterly, vol. 15, no. 4, winter 2008 (http://www.nonprofitquarterly.org/content/view/806/1/).

 

 Foundations also receive 9.1 percent of all charitable gifts, according to Giving USA 2008NPQ‘s Illustrated Nonprofit Economy, vol. 15, no. 4, winter 2008, indicated that in 2006, foundations received $100 billion in interests, dividends, bequests, and individual contributions from which they made $41 billion in philanthropic contributions but also added $59 billion to their own assets. Since one-third of individual charitable giving goes to religious institutions and initiatives, the $41 billion from foundations in the form of philanthropic grantmaking is not inconsequential.

 The John T. and Catherine D. MacArthur Foundation Web site (http://www.macfound.org/site/c.lkLXJ8MQKrH/b.4196225/apps/s/content.asp?ct=6334379).

The Bill & Melina Gates Foundation (http://www.gatesfoundation.org/press-releases/Pages/statement-financial-crisis-081121.aspx).

 The James Irvine Foundation, “Letter from the President” (http://www.irvine.org/news/from-the-president/letters/2008-letters/fall-2008).

 For example, see this letter from the Knight Foundation:http://www.knightfoundation.org/news/press_room/knight_press_releases/detail.dot?id=339422#

 See statements from the McKnight Foundation and the Gund Foundation for explanations (http://www.mcknight.org/newsandviews/ourviewpoint_detail.aspx?itemID=6728&catID=2442&typeID=16;http://www.gundfdn.org/NEWS_AND_PUBLICATIONS/NEWS/how_we_respond_economy.asp). Both foundations have lost about one-third of their endowment value.

 Some grantmaker associations and their surveys have not been included in this article either because the surveys were not yet completed or because the information was not available.

 South Florida survey results also include 8.8 percent “still unknown at this time,” and 3.5 percent that “temporarily stopped” grantmaking

 Michigan identified 14 percent responding as “uncertain.”

 Of the Arizona respondents, four out of 31 said it was too early to tell.

 Eight percent of respondents were unsure.

 Twelve percent of respondents replied, “still unknown at this time”

 Among Illinois respondents, 13.5 percent said “other,” some of which might reduce their 2009 grantmaking below 2008 levels.

 Karl Stauber, “Staying the Course in Hard Times,” and Emmett D. Carson, “Grantmaking with Intention,” Thought>Action>Impact(http://www.cofinteract.org/taijournal/index.php/2008/11/19/title-three/comment-page-1/index.php?author=5)

 Dan Fitzpatrick, “McCune Foundation Puts Hold on Grant Applications,” Pittsburgh Post-Gazette. February 19, 2008.

 Harry and Jeannette Weinberg Foundation, November 5, 2008 (http://www.hjweinbergfoundation.org/subPages/press_pdfs/110608_lettersofinquiries.pdf)

 At the earliest, the John Templeton Foundation, for example, will not make new grants until September 2009; see “Restructuring Our Grant-Making System” (www.templeton.org/submitting_a_proposal). In the grantmaker surveys, responses to the South Florida and Northern California surveys indicated they may temporarily suspend grantmaking.

 Elizabeth McNichol and Iris J. Lav, State Budget Troubles Worsen, Center for Budget and Policy Priorities, updated February 10, 2009 (www.cbpp.org/9-8-08sfp.htm).

 See, for example, Steven Lawrence, Past Economic Downturns and the Outlook for Foundation Giving, October 2008 (http://foundationcenter.org/gainknowledge/research/econ_outlook.html); Steven Lawrence, A First Look at the Foundation and Corporate Response to the Economic Crisis, January 2009 (http://foundationcenter.org/gainknowledge/research/econ_outlook3.html); Daniel Trotta, “U.S. Charities Resisting Recession, but Hardships Ahead,” Reuters, February 5, 2009. (http://www.reuters.com/article/lifestyleMolt/idUSTRE5147NJ20090205).