Many Foundations Have Lost Almost One-Third of Their Assets, Chronicle Study Finds

Original Source

By Noelle Barton and Ian Wilhelm

The steep decline in the stock market last year triggered an erosion of foundation wealth, with many grant makers losing nearly one-third of their assets, according to a new Chronicle survey of some of the nation’s largest philanthropies.

For the 57 grant makers that provided financial data for 2007 and 2008, endowments declined a median of 29 percent. (A table showing this data is available to Chronicle subscribers.)

Foundations with investments in bankrupt or hard-hit companies, of course, fared much worse. For example, the Starr Foundation, in New York, which held a significant portion of its portfolio in American International Group stock, lost $1.7-billion – almost 57 percent of its assets.

In all, while foundation losses are significant, the median decline is less severe than 2008’s drop in the Standard and Poor’s 500, a leading market indicator, which declined 38.5 percent.

Thanks in part to their relative financial health, few foundations are making major changes to their investment strategies, which are often fairly conservative to begin with.

But they are changing their philanthropic work in light of the economic downturn; many are reducing grant-making budgets and administrative costs, like travel and conference expenses, and even laying off employees.

In particular, several foundations say they are cutting back on support for construction projects and declining to make large philanthropic commitments that would take several years to fulfill.

Plans for 2009

Of the 73 foundations that provided data about their 2009 grant making, 39 grant makers expect to decrease how much they contribute to charities this year, 22 say their grant making would stay roughly the same, and 12 plan an increase.

“Everybody is nervous and tightening their belts and trying to figure out what it means for them,” said David T. Abbott, chief executive of the George Gund Foundation, in Cleveland. The foundation lost 35 percent of its assets last year.

With its assets now around $340-million, Gund will decrease its giving by as much as $3-million in 2009, awarding around $17-million to the arts, economic development in Ohio, and other causes.

Foundations are required by law to award 5 percent of their assets to charity a year. Many of them formulate their grant-making budgets based on a percentage of the average of their assets over five years. This calculation usually prevents steep declines in giving during sour economic times, but not this year, said Wendy Garen, chief executive of the Ralph M. Parsons Foundation, in Los Angeles.

“We do a five-year average, which is suppose to smooth [grant making]. Well, nothing can smooth what happened,” she said.

Parsons’s assets declined 37 percent last year, in part because the foundation owned a $1.5-million bond in an Icelandic bank when that country’s financial industry collapsed. The charitable fund awarded $19.1-million in 2008 to charities in Southern California. This year, it will contribute about $14-million.

Like Gund and other foundations, Parsons is not changing what type of organizations it supports, but it is focusing on helping those that are well managed.

“Our focus will be on sustaining excellent organizations and help them weather this crisis,” said Ms. Garen. “It’s going to be harder to start new efforts or new nonprofits. They will face more headwinds.”

To trim overhead expenses, Parsons eliminated one program-officer position.

Cutting Jobs

Other grant makers are taking more drastic steps.

For example, the Daniels Fund, in Denver, has laid off four employees and eliminated a full-time position and a part-time position, said Peter J. Droege, the organization’s spokesman.

The assets at Daniels dropped by nearly 29 percent last year, to $1-billion.

Another concern for foundation leaders is the possibility that they would have to pay an increased federal tax, known as the excise tax, which is 1 or 2 percent of their net investment income.

Foundations can qualify for the lower rate if the percentage of their assets directed towards charitable distributions is larger than the average percentage of its distributions during the previous five years.

With their assets hurting, some philanthropies say they will be hard pressed to meet that requirement in years ahead.

Two associations that represent grant makers, the Council on Foundations and Independent Sector, are asking federal lawmakers to “flatten” the tax to 1 percent.

“We would definitely support a revision in the excise tax,” said Ms. Garen of the Parsons fund, which may have to pay the 2 percent rate in 2010.

Some Funds Won’t Trim Giving

To be sure, several foundations are maintaining their grant making despite investment losses.

Despite losing almost 24 percent of its assets, the John D. and Catherine T. MacArthur Foundation, in Chicago, plans to maintain its giving at $260-million, the same as in 2008.

MacArthur is one of several grant makers that has made new commitments to soften the economic downturn’s blow on impoverished families. In October, it announced it plans to spend $68-million in grants and low-interest loans to help prevent Chicago neighborhoods from being devastated by the national foreclosure crisis. (Read The Chronicle’s article about the MacArthur program.)

In all, almost 50 grant makers, including community foundations and corporate donors, have pledged more than $100-million in new or revised efforts to help the poor during the recession or study the polices and financial deals that led to the market’s current problems, according to a study by the Foundation Center, a nonprofit research group in New York.

Some foundations say they are responding to needs created by the bad economy through their existing programs.

The San Francisco-based James Irvine Foundation, for example, supports advocacy efforts to improve California’s budget process, among other programs. James E. Canales, the fund’s president, said the foundation will continue that work given the state’s current fiscal problems, which has triggered “greater public understanding and public will” for changes in public policy.

Irvine’s endowment tumbled from $1.9-billion to $1.4-billion, but Mr. Canales said it will commit about the same amount in grants to the advocacy work and other efforts as last year — $80-million.

He said grant makers need to ask themselves, “What are the opportunities this unfortunate market creates?”

An expanded article based on this survey will appear in the February 12 issue of The Chronicle, which will be posted online on February 9. Candie Jones contributed to this report.