How a Recession Would Affect Fund Raising: Certain Gifts Could Grow

Here's the outlook for different types of efforts to raise donations and generate income, along with

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suggestions from charity veterans and other experts:

Direct marketing. One of the first signs that the economy is affecting fund raising will be whether organizations have trouble attracting repeat donations through direct mail, experts say.

Meanwhile, efforts to find new donors, even when they are asked for modest gifts, usually become much harder in a bad economy, and many charities halt such efforts then. But they should not stop trying to find new donors altogether, says Keary Kinch, a senior vice president at Adams Hussey & Associates, a Washington company that helps charities with direct mail.

After the 2001 terrorist attacks, many charities stopped mailing appeals to potential donors because they feared alienating people during a time when they were focused on a national tragedy. "About 18 months after 9/11, clients started to panic because their donor base had started to shrink," Ms. Kinch recalls. "They had cut acquisition for three, four, or five months."

Instead of cutting back altogether, Ms. Kinch says, charities should curb solicitations to mailing lists that have not performed well in the past or are unproven. "It is possible to trim around the edges," she says.

What should be curtailed in a bad economy are test mailings and other efforts to try out different, unproven solicitation messages, says Ms. Kinch. "If you are testing something brand new at an odd time like a recession, you cannot trust the results," she says.

Special events. "During a recession, we tend to see donors pull back on the number of events that they will attend," says Laura Fredricks, vice president for philanthropy at Pace University, in New York. She says her university cut several events after 2001 and has kept the number of events at the same level ever since.

Particularly in hard times, Ms. Fredricks says, "donors would rather see their money go to the program or project itself. If they are going to spend $500 on a dinner, they would rather have the full amount go to the organization without any overhead costs coming out of it."

Steven's Hope for Children — an Upland, Calif., group that aids families with hospitalized children — already sees a problem for its special events. The charity until now has mostly relied on events that attract donors and sponsors from the housing industry and other related businesses. The charity raised $50,000 after expenses last May by holding a golf tournament, but if the same event were held today, it would probably raise about half that amount, says Tony Cappelli, the charity's president.

"We looked at our list and saw that for many people this year, instead of writing a check for $3,000 and bringing a foursome, maybe they'd write a check for $275 or not come at all."

To offset declining donations, Mr. Cappelli says, his group is focusing on donors who make small gifts. Mr. Cappelli and his wife, who co-founded the charity, plan to get some fund-raising training, and have enlisted marketing students at a local college to provide free help promoting their cause.

Foundation and government grants. With many state and local economies already in trouble, some charities in those regions are reporting cuts in government aid.

If the economy continues to worsen, grants from private and community foundations could also decline in coming years as grant makers see their endowments fall and groups that have lost donors or government grants intensify the competition for private aid.

Rodney Bivens, executive director of the Regional Food Bank of Oklahoma, in Oklahoma City, says he would not be surprised to see a drop in foundation grants next year, if the economy continues to worsen. Mr. Bivens says his charity experienced the biggest decline in foundation grants following the 1987 recession, when stocks plunged by nearly 20 percent.

"We are very dependent on private foundation grants," he says. "We saw reductions in the dollar amounts of grants, and many foundations also stopped making multiyear commitments." Since the 1980s recession, he adds, the food bank has worked hard to bring in other types of contributions; foundation grants now account for about 10 percent of donations.

Corporate donations. Companies affected by the mortgage crisis — especially banks — will probably be the first to cut donations substantially, says Rick Cohen, former executive director of the National Committee for Responsive Philanthropy. In a recession, companies that form marketing deals to sell or promote products that benefit charities are often not as willing to enter into such arrangements.

Kyle Zimmer, president of First Book, a charity that provides needy children with books, says her charity faced two difficult years after the 2001 recession, as companies slashed their cause-marketing budgets. "We took a hit like everyone else. It was a nervous period," she recalls.

"In hard times, companies get very traditional," says Ms. Zimmer, and they are less responsive to the "glow" of aligning themselves with a charitable cause. Instead, she says, "they start asking if their advertising fulfills the goals of the company, and they get back to fundamentals," such as focusing on sales figures, number of customers, and other bottom-line measures.

Ms. Zimmer says that's why charities should work as hard as they can to measure financial returns and other benefits companies receive from joint marketing deals.

Large gifts and capital campaigns. Charities beginning efforts to raise large gifts from wealthy people are likely to run into problems, says Del Martin, an Atlanta fund-raising consultant. The turbulence of the economy will make those donors more cautious, she says.

Donors with longstanding ties to an institution will probably still honor their commitment to make a sizeable gift, says Ms. Fredericks of Pace University. However, she says, some people will alter their pledges to either extend the number of years over which they make payments, or they might choose to make smaller payments in the first few years and pay more later when the economy improves.

Some charities are worried that they will not be able to raise enough in their capital campaigns to meet a sharp rise in construction costs over the past year.

Mr. Bivens of the Oklahoma food bank says that his charity will this month conclude a drive it started last year to raise $6-million, a goal that was already increased once to keep up with rapidly escalating construction costs for its new facility. But in recent months, the cost has ballooned to $6.9-million.

"This is an indication of what is happening with concrete and steel costs," Mr. Bivens says. He says the food bank is now figuring how to eliminate $400,000 worth of features, such as a canopy, from the new structure.

Bequests. Declining stock and real-estate values could mean that charities will suffer a loss in the amount they receive through bequests, the most common type of planned gift, says Edward F. John, vice president of planned giving at United Way of America.

A recession, he says, "doesn't affect the number of bequests we get, but it affects the average size of bequest, because United Way usually gets a percentage" of a donor's estate. Stock, property, and other assets in an estate are generally worth less.

Robert F. Sharpe, a Memphis planned-giving consultant, says he recently advised one of his clients to stop mailing bequest information to potential donors aged 50 to 65, a change that will save the organization hundreds of thousands of dollars a year.

"You do not want to waste your time on gifts that won't come in for decades," says Mr. Sharpe, adding that the median age of bequest donors is 85. "Instead of mass mailings about bequests and planned gifts to people in their 50s," he says, "switch to asking them to check a box in other fund-raising materials if they have your organization in their will, or are thinking about it."

Jeff Comfort, executive director of planned and principal gifts at Georgetown University, says donors tend to gravitate in uncertain times to bequests and other gifts that give them flexibility rather than making donations with terms they can't change.

He says financial advisers are increasingly likely to advise wealthy elderly clients to forgo a big outright gift and instead put a charity in their will or into a living trust, which operates like a will but enables the donor or a financial manager to set aside assets and manage them until they are given to a charity. The terms of both types of gift can be changed if the donor's financial situation grows dire.

Other planned gifts. Certain types of planned gifts, such as charitable annuities, are more popular than other forms of donations when interest rates decline and the economy sours, Mr. Sharpe and other planned-giving experts say.

In some cases, people who plan to make a bequest might be willing instead to transfer some of their assets into a gift annuity, which provides donors with a fixed stream of income during hard times, in exchange for leaving a portion of those assets to charity.

"But the institution needs to understand that a gift annuity puts the investment risk on the institution," not the donor, says Georgetown's Mr. Comfort. For example, if a donor transfers $1-million in stock into a gift annuity, he or she would receive a fixed percentage of the original gift, say 7 percent or $70,000, annually for life and a sizeable charity tax break.

But if the stock's value drops to $850,000 and does not regain its value for a long time, the charity is still obligated to pay the donor the same amount and could end up losing money on the arrangement.

Meanwhile, falling interest rates are likely to make people look harder at charitable lead trusts, which enable donors to set up a trust that pays a variable or fixed income to charity. When a donor dies — or otherwise takes back assets in the trust — whatever is left goes to the donor or heirs.

The appeal to donors — especially those looking for a way to pass on their wealth to heirs — is that when interest rates are low, the Internal Revenue Service determines that the value of the assets ultimately going back to heirs will also be low, says Vaughn Henry, a Springfield, Ill., planned-giving adviser.

The end result is that donors have more money to pass to their heirs and often avoid estate or gift taxes by using such trusts.

Charity-run companies. Charities that run their own businesses may also find new chances for growth, says Warren Tranquada, chief executive officer of Aperio, a social-enterprise consulting firm in East Orange, N.J.

"Nonprofits, especially human-service agencies, perhaps have a better understanding of people with limited incomes than any other organizations in the country. If there's an increase of people with needs," he says, charities "may be able to design or redefine their products to be competitive."

For example, more people may want to take advantage of thrift stores and credit-counseling services, he says. Charities could also start temporary-help agencies that would provide income for clients and might appeal to businesses in a down economy, he says.

Sam Kean and Elizabeth Schwinn contributed to this article.