Foundation recovery likely slow

The Foundation Center and the Council on Foundations are Atlantic grantees.

by Ret Boney

The injuries foundations sustained during the market downturns were severe, and it likely will be years before foundation giving is back on track, but funders have risen to the occasion and are committed to helping heal the nonprofit sector, experts say.

For most foundations, asset values peaked in late 2007, then plunged throughout the second half of 2008, posting investment losses averaging 26 percent for the year, according to the Commonfund Institute.

After factoring in money raised by foundations during the year, and the creation of new foundations, Steven Lawrence, senior director of research for the Foundation Center, puts the overall asset decline at 22 percent.

Still, that amounts to the evaporation of almost $150 billion in assets, he says.

But despite the huge losses, foundations gave away $41.2 billion last year, according to Giving USA, an increase of 3 percent over 2007.

The bad news

But that growth in giving isn’t going to hold, experts say.

Because many foundations award grants based on an average of their assets over the past three to five years, it will take time for the asset plunge to work its way through the sector’s digestive system.

“We’re yet to see any green shoots,” says Lawrence. “Frankly, from what we’ve been hearing, 2011 may be the year when things start to turn around, but that depends on what happens in the economy.”

And while the stock market generally is gaining ground now, it will take time for the good news to be reflected in foundations’ grantmaking budgets, says Del Martin, chair of Giving USA Foundation, which publishes an annual report on charitable giving.

“This year won’t be nearly as good,” she says of foundation giving. “And depending on what happens in 2010, we may see the same sort of flatness or slight decrease.”

While charitable donations from individuals tend to pick up as the economy does, foundation giving tends to lag the economy by two to four years, Martin says.

In fact, it could be quite some time before giving makes up the lost ground.

“It may be a decade before we see foundation giving reaching a level in inflation-adjusted dollars we saw in 2007,” says Lawrence. “It’s going to be better, but it’s going to be less than it was for a while.”

The good news

In many ways, foundations stepped up to aid a nonprofit sector besieged by record need and receding revenue.

And so far, the dip in giving is significantly less extreme than the plunge in assets.

While the Foundation Center expects foundation giving to decrease 8 percent to 13 percent during 2009, Lawrence notes that’s “roughly about half the decline in assets.”

In 2008, more than four in 10 foundations increased their giving by an average of just over 20 percent, according to a survey by the Commonfund Institute.

And almost four in 10 foundations plan to hold steady or increase their grantmaking in 2009, says a recent survey by the Council on Foundations of its member foundations.

In the meantime, its member funders are doing the hard work required to free up cash for grantmaking, the council’s survey says: More than a quarter have frozen hiring, almost as many have laid off staff or eliminated positions, and almost half have frozen salaries.

And while many foundations are closing the door on new grant requests, most are taking care of their long-term grantees and looking for ways to meet immediate emergency needs across the U.S.

“Foundation giving right now is about shoring up the organizations with which foundations have had long-term commitments,” says Lawrence. “While there’s support for some new initiatives, that’s much more rare than in more prosperous times. It’s more about keeping the ship of the nonprofit sector afloat.”

Community foundations in the U.S. may be unwitting beneficiaries of the crisis.

Dependent on no single endowment or contributor for funds, community foundations likely are welcoming new donors to replace those who can’t give at the moment, says Lawrence.

And some smaller family foundations, whose assets have been battered by the markets, may be lured by the lower operating expenses and strength-in-numbers provided by community foundations, he says.

“They’ve been the real leaders in terms of real-time response to the crisis,” he says. “They’re local and they’re close to the problem.”

Lessons learned

While it’s hard to put a positive light on the disappearance of $150 billion in wealth, the experience could bring about needed changes.

“Some people are looking to use what’s happening now to implement some changes that needed to take place,” says Martin of the Giving USA Foundation.

Already, foundations are providing more operating grants that struggling nonprofits can use to shore up their operations, a trend Martin hopes will become permanent.

Steve Gunderson, president and CEO of the Council on Foundations, which has more than 2,000 member foundations, agrees.

“We call it a reset, not a recovery,” he says. “Some of the changes we’re experiencing are not temporary. Foundations are changing what they’re doing and how they do it.”

Foundations, for example, are stepping up their support for families, particularly those in low-income or low-service populations; foundation governance has become a higher priority; many funders are creating rainy-day funds for future crises; and some are weighing the wisdom of long-term funding commitments that may hamper their flexibility.

But perhaps the most significant lesson was brought about by a collision with reality.

“The biggest lesson is that you cannot design your philanthropic giving and your business model on the false hope that resources will always increase through the markets,” says Gunderson. “If we have not learned lessons from this, then that is our fault.”

There are lessons for nonprofits as well. As foundations are forced to rein in their grantmaking, it’s often relationships that keep them giving.

“This is the best opportunity they may ever have to have candid conversations with grantmakers,” Lawrence of the Foundation Center says of nonprofits. “It’s the perfect time to begin to develop a relationship – there’s no money on the table.”

And that temporarily removes the power imbalance, allowing nonprofits to reach out to funders and have informal conversations about their programs and goals, and to seek advice and feedback.

But foundations likely will be looking for solid organizations, with engaged boards and best-practice processes, says Martin, so nonprofits need to rise to the occasion.

“Foundations have less money to give and there’s more need,” she says. “Most aren’t looking to save an organization that’s drowning, but to help out one that has hard times but is essentially healthy,” she says.

While the last 18 months have presented the foundation sector with opportunities to improve, and only the next several years will show if they take advantage of them, foundations as a whole have dug deep and worked to keep the nonprofit sector afloat, says Gunderson.

“History needs to record that philanthropy stepped up to the challenge during this economic crisis in ways that have to be commended,” he says. “Philanthropy responded to the public need.”