Tough Times Require Change Throughout Philanthropy

Original Source

by Gara LaMarche

Americans are all too familiar with the ups and downs of the tech, housing, and stock-market bubbles. Now we are learning that there has been a “nonprofit bubble,” too.

The nonprofit world grew rapidly as a result of generous giving while the economy was booming. But the financial crisis has crippled nonprofit groups, shrinking their investments and the endowments of the grant makers that support them.

As if that weren’t enough, Bernard Madoff’s Ponzi scheme has had a devastating impact on numerous foundations. The JEHT and Picower Foundations, for example, which supported projects to improve criminal justice and strengthen human rights in the United States, were both forced to close their doors. Now their grantees are scrambling to fill huge holes in their 2009 budgets.

The nonprofit bubble has burst.

The impact is being felt disproportionately by those least equipped to handle it. Many projects and programs to improve the lives of the most vulnerable Americans are losing their support. This comes at a time when economic scarcity has reduced government dollars earmarked to aid low-income individuals and families, especially African-Americans, Hispanics, and other ethnic and minority groups.

In response, some foundations are working together to identify ways to provide emergency funds. In late December, the Atlantic Philanthropies and the Open Society Institute responded to a request from MoveOn.org, the progressive public-policy advocacy group and political-action committee, to match donations individuals made to four of the groups victimized by the Madoff scam.

Several foundations, including the Ford and Bill & Melinda Gates Foundations, have announced plans to increase the share of their assets they will spend in 2009 and 2010, notwithstanding their own losses in the stock market.

But nothing foundations do in the near term will be enough to fill the enormous money gap left in the nonprofit world.

Most foundations are working hard just to meet their existing commitments, and many are eliminating staff jobs and trimming other expenses to do so. Some are even increasing the amount they distribute in grants in 2009 above the federally required 5 percent of their total holdings.

Like so many businesses, the philanthropic world has rapidly gone from boom to bust. Even if the economy rebounds in 2010, foundations will remain hard pressed to return to previous levels of giving. Under circumstances like these, “business as usual” will no longer do.

Real change is needed to get through these difficult times, and to ensure the long-term health of nonprofit organizations. Foundations and other nonprofit organizations would do well to emulate President Obama and his team, who see the immediate economic crisis as an opportunity to press for much needed long-term changes in the economy and the government’s relationship to society.

First, foundations must be more rigorous in scrutinizing their own operations and the management and budgets of the groups they support. Even in the best of times, the business plans and revenue projections of many organizations and their grantees have been unrealistic. Too many organizations created or expanded in recent years depend too heavily on a handful of large foundation grants, and their sustainability plans have contained a large element of wishful thinking.

Second, small groups should consider merging with other like-minded organizations. In principle, the presence of many active charities in fields like human rights or youth development means a diversity of approaches to big problems.

But when too many small organizations with substantially overlapping mandates compete for a shrinking pool of dollars, all are made less effective. At the very least, some should form joint ventures to share some support services like finance, human resources, and information technology.

Foundations asked to support emergency spending for such groups should make sure those opportunities have been explored before considering a “bailout.” When foundations do provide support, they should ask those organizations to explore these new ways of structuring themselves.

Third, large nonprofit groups should streamline their operations. Many large organizations have grown well beyond their means, avoiding hard choices. The current crisis should prompt an economizing that ought to have occurred during flush times.

Restructuring, mergers, and economizing make sense because the hard truth is that there simply is not enough money, at least from conventional sources, to sustain the nonprofit world as it currently operates. Just as America seems poised to use the larger economic crisis to take bold steps toward structural changes in health care or investing in green infrastructure, so too must nonprofit organizations be ready to make fundamental changes.

Let’s encourage charitable organizations to take the hard steps now to survive the tough times and flourish in better days. And let’s make sure that if new federal and foundation dollars do flow to nonprofit organizations, they are accompanied by requirements for structural change.

At the same time, we grant makers will redouble our efforts to find new sources of funds. If those things happen, the bursting of the nonprofit bubble may in time be seen as an important turning point for philanthropy.

Gara LaMarche is president of the Atlantic Philanthropies, in New York.