October 03, 2008
Foundations and Charities Harmed by Economic Turmoil
By Ben Gose
The crisis in the nation’s financial markets has yet to officially spill over into a full-blown recession, but the sharp downturn is already affecting foundations and charities in myriad ways.
Initially, the market’s woes primarily affected investment returns at the nation’s biggest endowments. Now the troubled economy is having much broader impacts: Hundreds of colleges are facing a liquidity issue at an account managed by Wachovia Bank that basically served as place to store cash. The University of Washington is suing its long-time bank for losing millions of the endowment’s dollars through an approach that had been considered low risk.
The anxiety about the financial markets is making individual donors wary, and some major gifts that had been in the works are falling apart. Some foundations, meanwhile, are responding to investment losses by cutting back on grant making, although others say they plan to maintain or increase their giving to help struggling charities weather the crisis.
The William & Flora Hewlett Foundation, which has $9.3-billion in assets, is cutting grant making by 3 to 5 percent next year. Eric Brown, a spokesman, says the foundation will achieve most of the reductions by slowing its awarding of new grants.
“Our core grantees are really not affected,” he says. “We might be slightly more careful about bringing in new organizations.”
A spokesman for the Robert Wood Johnson Foundation, with $10.1-billion in assets, says the foundation has no immediate plans to reduce the grant-making budget, but he says that budget is expected it to be a key topic at a board meeting this month.
Foundations are often prodded to do more during times of crisis—-when the needs of charities and individuals are higher—even though their own endowments are also be suffering.
The John D. and Catherine T. MacArthur Foundation, with assets of $6.2-billion, has suffered endowment losses like nearly everyone else, but it is not pulling in its horns.
“We are increasing our grant making in 2008 compared to 2007,” Jonathan Fanton, the foundation’s president, said in a statement. “And we expect to maintain or increase our grant making in 2009, despite the performance of the market.”
Small Foundations
At an Association of Small Foundations meeting held in Denver last month, roughly two-thirds of the nearly 200 staff and board members surveyed said they intend to hold steady or increase grant making in 2009. But nearly a quarter said they would be reducing grant making throughout rest of this year, and more than half of those said they would eliminate support to some charities in order to be able to fully support the rest of their grantees.
The difficult markets have led investment committees on some charity and foundation boards to hold special meetings to evaluate the holdings in their endowments. Most endowments will report losses for their 2008 fiscal years—and for some, a single-digit loss will be viewed as a relative success.
The Jewish Federation/Jewish United Fund of Metropolitan Chicago manages an endowment pool worth more than $1-billion, and more than a third of the assets are owned by smaller organizations, including day schools, synagogues, and other Jewish federations, that hire the Chicago federation to manage their own endowments. The endowment pool was down about 5 percent through June, compared with a 12 percent decline for S&P 500.
“When we’re able to report that whatever losses we might have are in the modest single digits, on a relative basis, people think that’s pretty great,” says David R. Brief, the Chicago federation’s chief investment officer.
Cash Crunch
But the seize-up in the nation’s credit markets is having other effects on nonprofit organizations—and the troubles at Wachovia Bank have put some colleges in a liquidity crunch. Wachovia bank froze accounts of nearly 1,000 colleges on Monday, leaving those institutions unable to access billions of dollars in a fund that they viewed as a cash equivalent and depended on for salaries, campus construction, and debt payments.
The limitations on withdrawals from the Wachovia fund, which colleges invest in through Commonfund, led Commonfund to fear that colleges would make a run on the only other fund Commonfund has that allows daily withdrawals. On Wednesday, Commonfund limited withdrawals from its Intermediate Term Fund to no more than 30 percent of an investor’s balance. The Wachovia fund was open only to colleges and universities and private high schools; it was not immediately clear whether the limitations on the Intermediate Term Fund would affect charities besides colleges and schools.
Meanwhile, the University of Washington sued Northern Trust last month for not responding to the university’s request that it remove funds from a failing lending program. Northern Trust loaned $750- million of the university’s $3-billion endowment under a securities lending agreement that began in April. The university maintains that it instructed Northern Bank to terminate the arrangement after it learned of a $750,000 loss, but that the loss had ballooned to $7.5-million before action was taken.
“We gave instructions regarding our portfolio that were not followed,” said Susan Ball, the university’s senior associate treasurer, in a statement.
In a statement released by Northern Trust, the bank said total revenues earned by the university and other participants in the lending program over many years “have been several multiples of their share of the recent decline in the fund.” The statement did not address the charges that the bank failed to act on the University of Washington’s account.
Giving by Individuals
The downturn in the stock market also appears to be having a chilling effect on giving by individual donors. At the Shriners Hospitals for Children, based in Tampa with 22 pediatric hospitals around the country, some donors contemplating major gifts are delaying their decisions until the volatility on Wall Street plays out, according to Edgar McGonigal, director of development.
In September, he says, “we started to see a few donors who were saying let me hold off for a few weeks to see what happens.”
At the American Museum of Natural History, in New York, donations are holding up for now, according to Charles McLean, a museum spokesman. But New York City’s financial woes, caused in large part by the problems on Wall Street, have led to budget cuts, including a $2.4-million reduction in the city’s support for the museum in 2008. That reduction has forced the museum to cut back on some educational programs, and cancel a monthly jazz concert that brought young people to the museum.
“To the extent that New York City is facing challenges, all of the big cultural institutions in New York are also facing challenges,” Mr. McLean says. “A lot depends on New York’s ability to keep its head above water.”
Some donor-advised funds are also seeing declining interest. Contributions to donor-advised funds are especially influenced by tax incentives, and one of the most tax-effective ways to open an account is by donating appreciated stock. The Vanguard Charitable Endowment Program, in Malvern, Pa., had 20 new donors set up funds in September, down more than half from the 41 who established funds in September 2007. The program, which has grown rapidly since it was founded in 1998, is preparing for the sort of slackening interest it witnessed amid the bear market that followed the technology boom.
“Some donors are not going to give a stock until they get the price they want—well, that price is long gone now,” says Benjamin Pierce, the program’s executive director. “People are holding to wait and see what the depth of this recession is going to be.”
The California Community Foundation, which focuses on Los Angeles County, has already received nearly half the $150-million it had hoped to raise this year—and its president, Antonia Hernández, believes the community foundation is on pace to hit its target, since November and December are the busiest months of year.
For local charities, she notes, the outlook is less promising. The nonprofit health clinics that the foundation supports are already seeing declining from governments and corporations—and private foundations may be next in line to cut funds.
“It’s a very serious situation,” Ms. Hernández says. “Nonprofits are getting a triple whammy.”
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Prof. Ray Fisman, an economist with Columbia Business School, has a great blog post on this topic: Philanthropist’s Guide to Rainy Days
— Catherine New Oct 9, 04:39 PM #