Lucy Bernholz, the most prescient analyst of future trends in philanthropy, is working on a book about the future of philanthropy and the social economy. So she has been using Twitter to ask people the following question:
“What trend, change, entity, idea will matter most to social sector in 2010?”
I thought I’d answer the question here and invite you to add your thoughts.
Foundations as Social Impact Knowledge Brokers
Foundation giving is going to fall off a cliff in 2010.
Private foundations are required to give away 5% of their investment assets each year (the average amount given is about 6%). The 5% is based on the average value of their investment assets from the previous year. That means that foundation giving in 2009 is based on 2008 asset levels and 2010 giving will be based on 2009 asset values.
The average value of the S&P 500 (the most important indicator of the stock market):
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2007: 1477
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2008: 1219
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2009 (if the market closes the year at today’s value): 940
That means we can estimate that required giving from foundations fell 17% this year compared to last [See correction at end of post]. 2010 is going to see another massive leg down. If the market trades exactly sideways for the rest of the year, required foundation giving in 2010 is going to fall another 23% compared to 2009.
It gets worse.
This year, many foundations decided to keep giving levels constant with last year or at least gave more than the required 5%. It was clear that the need for charitable giving was higher than normal and many foundations stepped up with additional giving. To the extent their giving exceeded 5%, they can count it towards next year’s required giving.
An example: A 2009 payout of 7% means that the 2% that exceeded the 5% minimum can count towards 2010 and so the foundation can legally distribute only 3% next year.
In other words, from the standpoint of foundation giving, more than half of the impact of the stock market crash has yet to be felt.
But even with 40% or so less grant dollars, foundations’ knowledge about philanthropy is just as strong.
As we’ve been developing the Tactical Philanthropy Knowledge Network, I’ve been talking to foundations about their role in the philanthropic sector as due diligence experts. Lets look at the Firelight Foundation as an example.
The mission of the Firelight Foundation is to support and advocate for the needs and rights of children who are orphaned or affected by HIV/AIDS in Sub-Saharan Africa. They have a portfolio of roughly 200 African based grantees on which they’ve performed extensive due diligence and continue to monitor results. On their website, they already list their grantees along with a short description of each organization. Other foundations already make grants to Firelight as a way to leverage their due diligence (a form of regranting, which we discussed earlier this week).
With their grantmaking budget decimated in 2010, forward thinking foundations are going to look for ways to leverage other sources of charitable assets. Encouraging other foundations to support their grantees is the easy path. It is also a bit like rearranging the deck chairs on the Titanic. The big opportunity, the real lifeboat that can significantly offset the effects of collapsing asset values, is for foundations to extend their due diligence to major donors. Individual donors give $6.30 for every dollar foundations give. Helping these charitable dollars flow towards high performing, well vetted nonprofits is the most dramatic way that foundations can leverage their own giving.
I don’t think most foundations are going to pursue this path. But some groups get it. Firelight clearly does. Just yesterday a representative from a major San Francisco Bay Area foundation approached me to say just how much she supports this concept.
The full effect of the financial crises will not hit the foundation sector until next year. When it does, the thing that will matter most to the social sector will be whether the influence of the collective expertise of foundation employees is greatly diminished or whether foundations step up to the plate and find creative ways to get their knowledge into the hands of major donors.
9/28/09 – 8:30am – CORRECTION
In this post I suggested that the value of the stock market was the determining variable in valuing foundation assets. However, foundations invest in a wide range of asset classes. While directionally my comments are correct and while I stand by the thrust of the post, the percentage decline of the stock market overstates the degree to which foundation giving will be impacted.
10 Comments
Sean:
Thanks for 1) your answer to the question and 2) putting it out to your readers. I appreciate everyone’s input and will be compiling the ideas (with attribution) along with a review of the year past and the year to come for publication in Q4 2009. I’ll keep in touch here with Sean and your comments, and you can also ping me directly on twitter at @p2173, email [lucy@blueprintrd.com] or on http://www.philanthropy2173.com.
I’ll get all online comments and ideas into one online place in advance of publication and also. And we can keep the conversation going.
Thanks, Sean and everyone, and keep the insights coming!
Lucy
Very interesting article. Thanks for the information and wisdom….
Spelmanite Makeba Williams
Remember that community foundations are in a different position with our focus on donor-advised funds and philanthropic service. Because people were able to give money to community foundations and set up donor-advised funds when the market was high and times were good, they are now able to recommend grants well over the 5% or 7% that private foundations are giving. This allows individual donors to be incredibly generous through community foundations, and it’s up to us to make sure we’re providing that due diligence and philanthropic advice while donors are seeing the incredible needs of nonprofits right now. At The Community Foundation for Greater Atlanta we introduced two new donor engagement series to do just that.
The first, “Impact Philanthropy,” focuses on a single issue and recommends highly effective nonprofits making an impact on that issue in our region. Our first issue area was crisis assistance, and we recommended six anchor institutions in the region that met specific criteria including that they have a mission to serve low-income individuals and families; professional, visionary board and staff; strong financial stewardship and locations throughout our 23-county region. In addition, we recommended 29 nonprofit organizations focused on crisis assistance who have previously been assessed through our extensive competitive grants process. This first “Impact Philanthropy” resulted in 96 grants from donor-advised funds, totaling more than $1 million to 29 organizations. In addition, a $100,000 donor-advised fund grant to one nonprofit was matched 1:1 resulting in $200,000 for the organization. Our next “Impact Philanthropy” will be focused on current challenges to Atlanta’s arts community and which arts organizations are doing effective work.
Our second donor engagement series, “Give Well,” highlights various giving approaches when considering a gift to a nonprofit. These giving approaches include general operating support, nonprofit effectiveness, public will and advocacy, research and analysis and project support. We focused first on general operating support, which is also where all of our competitive grantmaking is focused and has been since spring 2009, and we encouraged donors to look at key aspects of nonprofit management when considering a general operating support grant. Our next issue of “Give Well” will be focused on nonprofit effectiveness – offering resources for organizational and professional development opportunities through management consulting grants, scholarships for workshops, classes and/or coaching.
Through these donor engagement series, not only are we able to provide extensive knowledge about issues in our region and giving options when investing in nonprofits, but we’re also recommending specific nonprofits for donors to consider based on our competitive grants (regranting, as you mentioned).
The final count – in 2008 our payout across donor-advised funds was 28%.
Sean,
Thanks for raising this issue. Many of us have been talking about our concerns for possible giving declines in 2010, but little has yet been written about the subject so this is quite timely.
For me, your post reinforces the necessity for everyone in our philanthropic community to create an expectation that private foundations do more than is legally required of them.
There was a moment when the recession’s effects first began to be felt when foundations were debating what to do. A few put a halt to grantmaking entirely, realizing that legally they didn’t actually have to make any grants this year to meet their payout requirement. But then nonprofits became more vocal about the threat to their operations in a time of increasing demand and decreasing revenue. A few courageous grantmakers started making public there commitment to maintain grants payout for 2009 at 2008 or 2007 levels. And they did this even though it means their payout rate for 2009 may be 7% or 9% of assets or higher. And this responsible approach became the most socially acceptable response in foundation circles.
We need to start now working to ensure that it becomes unpalatable for foundations to consider cutting back their grants payout in 2010, even if it would be legally permissible. Nonprofits will still be struggling financially well into next year, and they’ll need grantmakers to step up to the plate.
The moral obligations of private foundations go far beyond the legal requirements. Leaders of many private foundations realize this and will act responsibly. We need to highlight their stories and challenge other grantmakers to follow their lead.
Anyone have examples of foundations who have publicly committed to maintaining 2010 grants payout at 2008 rates?
Thanks Sean, for highlighting Firelight’s situation. In a year of tight budgets, Firelight – and I’m sure other private foundations engaged in grassroots grantmaking – would greatly welcome partnerships with individual philanthropists that would leverage the resources we have built up. Among those resources:
We have the solid due diligence necessary to do international grassroots grantmaking, and a committed staff with extensive Africa experience.
We have an impressive network of 200 grassroots partner organizations in ten African countries, all doing tangible and important things for children’s well-being.
We have a strong network among much larger organizations (for example, USAID/PEPFAR, UNICEF, the Global Fund to fight AIDS, Tuberculosis and Malaria, and the larger US and European foundations). We are actively encouraging those organizations to get more resources closer to community-based organizations and thus closer to children.
What we DON’T have, at least in sufficient capacity, is capital to grant. This last year we’ve had to limit cap our grants at an average of $9000, when many of our partner organizations could put twice that amount to good use.
We feel a particular sense of urgency this year, because of course the same financial situation which is hitting the philanthropic sector is also being felt, acutely, at the grassroots level in Africa – already weak government services being stretched or discontinued, more stress on community safety nets, and more households left without resources.
It is certainly a time for putting together partnerships that stretch resources and build on complementary strengths. We’d love to hear from those who would like to do so.
Peter Laugharn
Executive Director, Firelight Foundation
http://www.linkedin.com/in/laugharn
Hope this doesn’t come across as too self-serving, Sean. re: “whether the influence of the collective expertise of foundation employees is greatly diminished or whether foundations step up to the plate and find creative ways to get their knowledge into the hands of major donors” is a valid point, but I also want to encourage donors to get that same kind of knowledge from each other. There are uninformed individual philanthropists for sure (and the same goes for foundations), but as donor networks like our grow, there are more and more philanthropists with a heck of a lot of knowledge they need to share and haev tapped as well. Good topic, Sean
Paul,
No doubt. I focused on “foundations” in this post, but I would add groups like Social Venture Partners who have organized philanthropic knowledge to the list.
Great post, SSS.
Given that the percentage of income the average American gives to charity has remained unchanged for the last fifty years, were foundations to implement the recommendation you’ve suggested, it would certainly seem to have the effect of moving money to the most well-vetted of charities…
…but it would not create new dollars.
This may still be a great good–eliminate the charities that foundations consider the dead wood.
But what if, instead of foundation officers trying to convince major donors to give more (to the charities foundations believe should receive more), what if foundations themselves went beyond the five percent they are required to give…not just for one emergency year but as a regular practice?
What would happen, in other words, if a foundation upped that to 10% annually?
Might it be that foundations can lead the way not only because of their extensive due diligence but because of the example of their increased generosity?
I would argue that major donors need the latter even more than the former.
And who’s to say that a foundation giving away 10% of its income wouldn’t draw a Warren Buffet-type gift from a major donor seeking to make twice the immediate impact of a gift to any other foundation?
Eric and Aaron,
I’ve responded to your comments regarding higher payout rates in a new post.
Peter,
Thanks for sharing your strategy at Firelight. I hope people take you up on your generous offer!