U.S. funders face the downturn: Part 1

[Editor’s note: This is the first of three articles on foundations’ role in addressing the economic crisis. See Part 2See Part 3.]

Ret Boney

U.S. foundations are in a tight spot.

Their assets have taken a beating in a stock market that still hasn’t hit bottom.

But U.S. nonprofits are hurting more.

Demand for their services is increasing as people lose jobs and homes, and contributions are drying up as wary donors begin to feel the effects.

What’s a foundation to do?

Step up to the plate, dig deep and show leadership, foundation heads and experts say.

“Our commitment to serve the common good in this uncommon time requires us to step back and look at innovative ways we can serve the need,” says Steven Gunderson, president of the Council on Foundations in Washington, D.C.

That call to action is echoed by some of the nation’s leading foundations and foundation experts, and generally includes two main points of leverage — funding and thought leadership.

So far this year, the average foundation endowment has absorbed a percentage drop in the “double-digits,” estimates John Griswold, executive director of the Commonfund Institute, a research organization in Wilton, Conn., that tracks foundations’ endowment performance.

And with stock markets still lurching wildly, more down than up, the hit likely isn’t over yet.

By law, private foundations have to pay out at least 5 percent of their assets every year for grants and associated expenses.

Many private foundations base that 5 percent on a rolling average of their asset value over three to five years, says Gunderson, an approach that may bode well for nonprofits in the near term.

But a decline could hit by 2010, he says.

Gunderson is urging the council’s more than 2,000 member foundations to take a careful look at their grantmaking in an effort to help those most negatively impacted by the downturn.

“We’re not dictating anything to anybody,” he says. “But we are encouraging our members to recognize this is an economic crisis for the nation and a leadership moment for philanthropy.”

He is optimistic, he says, and encouraged by what he’s hearing from his membership.

“From the feedback we’re getting, this is the dominant issue,” he says. “And it’s not just the declining endowments, it’s how do we respond.”

Exactly how foundations are able to address the crisis may depend in part on how they’ve used their money in the past, says Bradford Smith, president of the Foundation Center, a group in New York City that  provides research and resources for the nonprofit sector.

The economic upswing of the past several years bolstered foundation endowments, which on average grew 13 percent from 2003 to 2007, says the Commonfund Institute.

Some funders used that extra cash to grow their longer-term core programs, while others invested in shorter-term or one-time efforts.

“Those that used that money for special projects and special initiatives as opposed to growing core commitments will probably be in better shape,” says Smith. “Those who used special projects will probably cut back on that and keep up their core giving.”

In general foundations likely will do what they can to continue funding those core commitments, he says.

But they may be more reluctant to take on big new initiatives or big endowment grants.

Right now, foundations are still trying to understand the nature and depth of the economic crisis and a host of immediate issues.

“In the near-term, foundations will be pressed to deal with the social fallout of the crisis and the stresses placed on the groups they fund,” says Smith.

But a healthy sense of competition in the sector could help. “If you saw one foundation take this on as a signature effort, you might find others follow suit,” he says.

Part 2: Foundations respond to crisis

Part 3: Foundations urged to lead in tough economy

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