This article is directed to our readers who are funders—a divergence from our usual focus. It is the result of suggestions made by readers. We of course expect it will be of interest to the rest of our readership as well. To get a sense of how the job of philanthropists needs to adjust to the current time, we asked Emmett Carson, president and CEO of the Minneapolis Foundation; Sandra Mikush, assistant director of the Mary Reynolds Babcock Foundation in Winston-Salem, NC; and Gary Yates, executive director of the California Wellness Foundation in Woodland Hills, Calif., to share their thoughts about funding in economically difficult times.

One of the more active debates in the foundation community has revolved around the issues of payout versus asset-building and maintenance. This debate has recently heated up as a result of Sec. 105 of HR 7, the Charitable Giving Act of 2003 (the House version of the Senate’s recently passed CARE Act), which would require foundations to pay out at least five percent of their assets—excluding administrative costs, which are currently included in the five percent calculation. This exclusion would be new. Our interviewees did not address this bill directly, but did comment about whether foundations should reduce their grant making in bad economic times—particularly when they have felt impacts within their own endowments.

As Emmett Carson comments, “We increased payout when times were good. Our board’s decision at that time was that we should never develop a bigger asset base as our primary goal. With that, we made the decision to give out more when times were good, and understood that we would not be able to maintain this additional giving during an economic downturn.”

Both Gary Yates and Sandra Mikush, on the other hand, say that their foundations need to do what they can to counter the impact of the economic downturn with grantees. The California Wellness Foundation is maintaining grant making at the level it was at in 2000, even though that will mean a reduction of assets. As Yates says, “The State of California has a $35 billion budget deficit. We can’t begin to solve that problem, but we shouldn’t add to it by giving less. I don’t know how long we can maintain this level—but certainly for one, two, maybe three years.”

Similarly, Mikush comments, “We’d rather not cut grants unless this downturn is enormously protracted and we have to really rethink our strategy, but for the short term—for two or three years—we won’t cut grants. In fact, we actually budgeted a seven percent increase in grants for 2003 over 2002, although our endowment has gone down. Granted, we’ve been fortunate to have received an estate gift, so we only felt about half of the loss we would have ordinarily experienced. We have also chosen to tighten our non-grant expenses—something we can control.”

Yates is concerned that many larger foundations are reducing grant dollars. “The Chronicle of Philanthropy several months ago looked at the difference in funding between 2001 and 2002 of roughly the top hundred foundations. The grant dollars decreased by 20 percent—that represents hundreds of millions of dollars and will have a negative impact on the nonprofit sector.

Mikush puts a slightly different spin on it. As she explains, “Most of our grantmaking is three to five years, rather than the one-to-two-year grants, so we can’t arbitrarily cut our grantmaking program. Our grantees are not typically health and human service agencies—they’re grassroots groups that address racism and poverty. They’ve always struggled, and when times get tough, they may rely on volunteers, they may cut their salary in half and get another job. But they don’t stop doing what they’re doing.”

“When it takes a couple hundred years to create the deep problems of racism and poverty, a five-year demonstration project does not effectively change them. It’s going to take a 20- to 50-year effort to create change in regions like the Mississippi Delta. I would love to see more long and deep investment in communities. I think there is more chance of this happening when local and statewide funders stay for the long haul.”

Yates and Mikush also agreed on the issue of providing more core operating support to organizations in which they have an investment. As Yates comments, “When nonprofits face reduced revenues and services for the populations that they serve, the concept of funding core operating support becomes really important.” Again, he is concerned that larger foundations are not setting a good standard, saying, “When you look at the large foundations in the country, only about ten percent of their funding goes to core-operating support.”

“The California Wellness Foundation changed the focus of its grantmaking three years ago, not in reaction to the suppressed economy, but as a result of a decade of interactions with grantees,” he continues. “It now emphasizes core operating support funding over project funding. Say a foundation’s goal is to improve healthcare access, and its choice is to primarily fund specific, innovative project work while other funding erodes. Does any funder really believe that organizations will be able to do creative work with a weakening—and increasingly less functional—nonprofit organizational system? The answer is obviously no.”
“Some people think of operating support as a blank check—that’s not what I’m talking about,” Yates says. “Our core operating support grants are negotiated with three outcome objectives, determined by the grantee. It may go to keeping the lights on and the doors open, expanding their funding base, building a new MIS system and so on. Those kinds of objectives can, in fact, be measured, and they are sometimes critically important to the whole body of work for which the organization is responsible.

“Strategically speaking, a strong nonprofit sector in the area of health and human services is the only way our foundation is going to achieve its overall mission of improving the health of the people of California,” he says.

“We’ve put tens of millions of dollars into the community clinic system here in California, and most of it is very flexible, so that the various associations and the clinics themselves can determine what the best use of their dollar is. The evaluations of that work are absolutely clear. Those clinics that received core operating support over a five-to-seven-year period are much stronger today, and able to cope with the depressed economy and government dollar flow than they would have been had that money not been available.

“So much of what foundations ask nonprofits to do with project-based funding is on the edge of—if not beyond—their core mission. Yet, with really effective projects, when the funding source dries up, nonprofits go back to their roots, back to their core mission. That is their priority. That’s why they exist. And I think there’s a real disconnect there.

“Too many of us in philanthropy think we know how nonprofits should do their work,” Yates continues. “It’s an incredible phenomenon—this belief that nonprofits don’t work very well. Many foundations focus on this innovative, creative-approach thing because they think they have a better way of doing nonprofit business. Having worked in the sector for 25 years before I went into philanthropy, I believe most nonprofits are actually quite efficient and effective.

“To exhibit that belief, we make multiple-year grants, and award the entire amount immediately. They have the flexibility to use it for their operations during, say, that three-year period. Giving people the cash in hand when cash flow is extremely tight for nonprofits is an important thing to think about right now.”

The California Wellness Foundation has also taken other steps to make grantees’ lives easier, simplifying both their application process and how people approach them for funds. Three years ago, the organization moved from quarterly reporting to annual reporting—in fact, a one-page report. As Yates comments, “The quality of the work has not dropped off a bit, nor has the efficacy of the work or the good stewardship of the foundation funds.”

Sandra Mikush emphasized the need to respond to changing conditions for grantees by, among other things, not making it hard on them when they try to renegotiate the terms of a grant. “You are shooting yourself in the foot if you’re not responding to changes, and not making investments in organizational learning—and an organization’s ability to adapt as a result of what it’s learning. And we shouldn’t send any messages to the contrary in our funding or our interactions. The bottom line is the Mary Reynolds Babcock Foundation is always open to revisions. We don’t want our behavior to be the reason an organization doesn’t do what they ought to be doing. That’s doing harm.

“Even more important is to acknowledge that the groups doing the work on the ground are the experts,” she says. “We are here to facilitate that, to help make the change happen that these folks know how to do; all of our policies emanate from that belief. It’s that core belief that underlies the fact that we are open to operating support and that we’re open to flexibility within grants, that we are willing to make long-term investments in organizations, to build their own capacity to do whatever it is they do.”

Mikush believes that you can always multiply the value of your grant by convening grantees. “We have a long history of convening grantees, which costs money—especially because we work regionally. The grantees help in the planning and we focus on peer exchange. Once you have the right general focus and you get all the right people in the room, all you have to do is close the door and good things will happen.

“When people come from communities where no one else does what they do and, all of a sudden, they’re in the room with dozens of people who do what they do, that’s an amazingly powerful experience to an isolated worker for racial/economic justice in the South,” she says. “An opportunity to share and learn from others is really valuable, especially in tough times.”

All three funders emphasized the value of advocacy and public policy-oriented funding. Carson of the Minneapolis Foundation described what he calls a faulty paradigm that speaks to this need. “One fundamental challenge for foundations today is the fact that we have long operated under the belief that innovative programs piloted by foundations would be adopted by government,” he says. “That paradigm, at least in this period of time, is not true. There is no belief, or little belief, that innovative programs will be taken on by state, municipal, local or federal government. If that’s true then, in the context of the way the world works, what are we doing when we focus on innovative projects? Are we just creating models that then sit on the shelf? Do we play this shell game now common in the foundation world, where we start something, only to try to pawn it off to other foundations? We have a musical-chairs game going on with innovative projects.”

Yates concurs, “This is a paradigm which everyone knows is outdated, but many of us still function as if it is in full effect—that foundations will act as the R&D for government… in truth, there’s no capital resource to pick these things up when foundations want to walk away from them. I think one of the untold truths in the philanthropic industry is that most of the creative project grantmaking we do is not sustained.”

Carson connects this back to advocacy by saying, “Our other option, too often underused, is for foundations to become more engaged in public policy, where those decisions are being made about what to support and why to support those things. Foundations have been reluctant in general to engage in support of advocacy organizations as fully as we might.”

“In North Carolina,” Mikush says, “some foundations have been working together on state budget issues and have been very outspoken about the need to have fairly radical budget reform in the state. Several retired foundation leaders have played prominent roles in the citizen blue ribbon panels which address budgetary issues—including looking at tax policy.”

But beyond direct involvement in advocacy, the Mary Reynolds Babcock Foundation sees its primary role in public policy change to be in the funding of state policy work of grassroots groups, she says. “Our advocacy funding is all over the map, addressing everything from environmental racism to welfare reform, or local living-wage ordinances. I would emphasize the necessity of all foundations making investments in nonprofits’ ability to be involved in state policy work—it’s frankly more important than ever.”