Foundations respond to crisis: Part 2

[Editor’s note: This is the second of three articles on foundations’ role in addressing the current economic crisis. See Part 1. See Part 3. ]

Ret Boney

While foundation assets are taking a double-digit drubbing in the stock market, the nonprofits they fund are seeing demand for services soar as funding sources plunge.

It’s time for foundations as a sector to step up and continue to award big grants, even if it hurts, foundation experts say.

A healthy sense of competition among foundations could spur such large-scale, signature giving, encouraging other funders to follow suit, says Bradford Smith, president of the Foundation Center in New York City.

The recent $68 million investment in foreclosure prevention by the Chicago-based John D. and Catherine T. MacArthur Foundation might be that clarion call.

The mammoth investment comes even as MacArthur is feeling the weight of the market collapse.

And yet the funder, which awarded $267.2 million in grants last year from assets of $7 billion, could award even more in 2009, says Jonathan Fanton, its president.

“In past economic downturns, we have kept our grantmaking steady,” he says. “Next year, I expect to give away more.”

And given the recent performance of the foundation’s endowment, that commitment may require the funder to push its spending rate up to 6.5 percent or more this year and next, and the foundation is prepared to dip into its endowment to support that move, he says.

“I believe that foundations that have flexibility as we do should be countercyclical,” he says. “When things are bad, we ought to step up and help the good organizations that are doing important work on the front lines.”

MacArthur’s effort will pump $68 million this year and next into foreclosure prevention and relief in Chicago.

That funding, which comes in the form of grants and low-interest loans, is expected to leverage another $500 million in capital that Fanton says will provide counseling and loans to 10,000 struggling families, with the goal of preventing 2,700 foreclosures by 2010.

“I think it is part of the role and responsibility of a foundation to offer hope,” says Fanton. “To be there when times are tough and be willing to take some risks to help the people and organizations in our field that are doing such great work.”

The foundation is able to do that in part because the performance of its endowment has been “extremely strong” in recent years, he says.

That’s the case for the sector as a whole, too, with the average foundation seeing an investment return of 13 percent from 2003 to 2007, according to the Commonfund Institute, a research organization in Wilton, Conn., that tracks foundations’ endowment performance.

“So now we should take some of the gains we’ve had and put them to good use with the organizations we know,” says Fanton.

A similar history of careful planning, coupled with a strong endowment performance over the past few years, is helping the Philadelphia Foundation keep its funding levels steady.

Community foundations have a particular obligation to respond to the needs of their communities when those needs arise, says Andrew Swinney, president of the foundation, which manages more than 775 charitable funds totaling over $350 million in assets.

Over the years, the Philadelphia Foundation has built up an operating reserve “for this very contingency, so we can continue to operate next year at a similar level to ensure that our service to our donors and nonprofits is not damaged,” he says.

But Swinney says simply committing to spending more could be dangerous.

“We don’t know how long this thing will last or how bad it’s going to get,” he says. “So to arbitrarily say we’re going to spend more, we might not have it to give if the downturn continues. And then all of a sudden the tap has to be turned off.”

The foundation bases its spending levels on a five-year rolling average of its assets.

Because the funder is now “buoyed by four good years of growth,” Swinney says, any money it has above and beyond the 2008 spending level will be put into a reserve fund that can be tapped if the economic downturn drags on.

An unrestricted bequest received in 2001 of $1 million, which was set aside for emergency community relief, will be used if projected spikes in utility costs this winter leave the elderly and those on fixed incomes in need.

And the foundation is cutting any unnecessary expenses to focus its resources on grantmaking.

Its annual report will be available online only this year, saving as much as $40,000 in printing costs, says Swinney.

And its 90th anniversary celebration, which would have cost about $75,000, has been scrapped.

“We’ll be looking at every expense we make to make sure it’s servicing our donors and nonprofits,” he says. “And if it isn’t, we won’t do it.”

Next: Foundations urged to lead in tough economy

Part 1: U.S. funders face the downturn

Part 3: Foundations urged to lead in tough economy

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