Shaken foundations
By Andrew Jack, Financial Times, December 26 2008 19:37
When a group of rich benefactors and arts specialists gathered recently over canapés and local wine in Seattle, they were greeted with a bittersweet message.
Phyllis Campbell, the head of The Seattle Foundation, which matches donors with a wide range of local causes, congratulated those assembled for their work in supporting the conversion of a crumbling boarding house into a striking museum dedicated to the US city’s Asian-Pacific communities. But she also warned of funding shortages ahead – just as demand for aid of all sorts was rising.
“The crisis is on our minds,” she said. “Needs will go up, and the role of our foundations is more meaningful than ever. These are times for all of us to come together.”
The long-term charitable commitments of local companies such as Boeing and, more recently, Microsoft have made Seattle into one of America’s leading centres for philanthropy. Yet here, in a pattern repeated across the US, Europe and Asia, problems that began in finance have spread not only into the “real”, for-profit, economy but also into the non-profit sector that relies so heavily on it for support.
The effects are varied and nuanced, but are creating pressures for change that could reduce philanthropic activity through restructuring as radical as that being seen in the corporate sector, with budget costs, job losses, mergers and closures.
In Seattle, demand for social support has swelled sharply as unemployment and mortgage foreclosures have risen. Calls to helplines, requests to food banks and demand for assistance with everything from utility bills to school fees are on the rise.
But the ability of charities to respond is under threat. Current levels of austerity threaten their support from government just as individual donations are squeezed. A survey in the UK conducted this autumn – before a wave of bank failures exacerbated the crisis – by the Charities Aid Foundation and the Association of Chief Executives of Voluntary Organisations found that almost a third of charities had seen individual donations fall, while nearly three-quarters reported growing demand for their services.
The sharp decline in house prices across the developed world is reducing the value of assets bequeathed to charities. In the UK, the Northern Rock Foundation suffered after the collapse last year of the eponymous mortgage lender that was its benefactor. Many other charities that had placed cash in high-interest accounts with Icelandic banks were destabilised by the collapse of these institutions this autumn.
In the US, a number of Jewish charities and foundations backed by personalities such as Steven Spielberg, the film director, and the writer, Elie Wiesel, are threatened by their exposure to Bernard Madoff’s alleged $50bn (€35bn, £34bn) fraud. Meanwhile, many non-profit endowments led by US universities such as Yale have launched economy measures after falls in the value of their investment portfolios.
Also hard hit has been the UK-based Wellcome Trust, one of the world’s largest medical charities. Mark Walport, its chief executive, says overall disbursements may have to fall modestly next year.
The result will be a shake-up among charities. At one of several recent conferences on the impact of the crisis, Paul Light from New York University’s Wagner School predicted that up to 100,000 of the estimated 900,000 non-profits in the US could go bust in the next two years as funding dried up.
Not all is gloom. Fiona Halton, head of Pilotlight, which pairs British business executives with charities seeking professional advice, says: “When the going gets tough, the tough get volunteering.” Six per cent more people in London are offering their services than a year ago – including some who have lost corporate jobs in recent weeks.
Even the decline in financial support is not universal. “People are still giving, but in a less extravagant way,” says Susan Mackenzie from Philanthropy UK, an advisory service. Organisations working on long-term and less popular causes may suffer more than those generating immediate sympathy for work in providing emergency relief to those affected by the current crisis.
By contrast, the BBC’s annual Children in Need telethon this November raised a record £21m. The Big Give, a UK-based website that helps match givers with charities, crashed last month after being swamped with demand. Donations up to early December at Catholic Charities USA were up 15 per cent on last year.
Industry estimates suggest foundations with endowments typically experienced a drop of 15-30 per cent in the value of their assets between August and November. But most managers use smoothing strategies that attempt to balance spending over good years and bad, reducing the likelihood of budget cuts. Continued income from dividends – for now, at least – means that there may be no need to sell shares at their current low valuations.
Historically, economic downturns have not had a detrimental impact on giving by US foundations. According to research by the Foundation Center, a philanthropy research group, this in fact increased slightly in inflation-adjusted dollars during past recessions.
In the years ahead, with greater competition for lower levels of funding, non-profit groups may need to work harder to win donor support, demonstrating their efficiency and effectiveness through greater transparency and rigorous evaluations of their work. Many could be forced to restructure, consider mergers or face collapse.
Pamela Barnes, head of the Elizabeth Glaser Pediatric Aids Foundation, says organisations need to fight the “ownership culture” and join forces in pursuit of shared objectives. “We must work together more smartly and more effectively, and present opportunities to donors for cost savings.”
If organisations seeking grants need to adapt, so too may funders, working with each other and through intermediaries such as the UK’s New Philanthropy Capital to identify the best recipients. “Foundations are trying to do more with less,” says Steve Gunderson, head of the Council on Foundations, a US membership organisation serving grant makers, family foundations and corporate giving programmes.
He says foundations are actively reviewing existing grants, borrowing money to meet multi-year disbursements, and embarking on internal cost-savings including reducing staff, leaving vacant positions unfilled and waiving membership dues. “They are trying to save money and redirect the resources they have.”
The Philadelphia Foundation, for instance, cancelled an event to celebrate its 90th anniversary and, instead of printing its annual report, simply posted it on the website. The $100,000 saved was given to local causes.
The world’s biggest philanthropic organisation, at least, is not planning to scale back. The Bill & Melinda Gates Foundation has resolved to increase giving by about 10 per cent next year – albeit less than planned and with tighter controls on expenses and job growth. “We’ll just be spending a higher percentage of assets than we would have been otherwise,” says Mr Gates. “We’re going to keep the spending going because these things are even more important.”
He has been helped by an endowment that was shielded by a conservative investment policy and is boosted with regular top-ups from both his own personal wealth, and – since 2006 – from his friend, Warren Buffett, the world’s richest man.
But most importantly, Mr Gates has committed himself to spending his entire endowment within 50 years of the death of the last of his foundation’s three trustees: himself, his wife and Mr Buffett. That contrasts with many long-established foundations that attempt to maintain or increase the value of their assets, with a view to existing in perpetuity.
Pablo Eisenberg, a veteran researcher and commentator on philanthropy, argues that US policymakers should change the threshold granting tax-exempt status to foundations, which requires just 5 per cent of assets to be spent each year. He would like to see the limit – introduced in 1969 – rise to at least 6 per cent. “Given the tax benefits that foundations enjoy, their boards and staffs should be ashamed of their reluctance to give more,” he says.
Such moves may ease the pain in the non-profit sector but – as with companies – it is likely that there is worse to come. “When markets begin to deteriorate, you don’t see it immediately,” says Bradford Smith, president of the Foundation Center. “Foundations are saying that in 2009 there will be some downturn in giving, but 2010 is the year to watch out for. There’s a lot of nervousness, there’s a lot of concern, and a lot of non-profits are bracing themselves.”
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