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Credit crunch philanthropy: what next gens need to know

The current economic downturn has hit the philanthropic sector hard. "There's no question that this has devastated the assets of those who have endowed foundations, and it's really chilled a lot of people who do their giving out of advised funds or do it out of cash, direct gifts," says Virginia Esposito, president of the National Center for Families in Philanthropy in Washington DC.

"The average foundation people we're talking to have been affected: their assets are down 30% to 50%," continues Esposito, whose organisation recently conducted a major survey of its members.

If this recession turns out worse than recent ones, the implications for foundation budgets and for the organisations they serve could be dire. "Many foundations determine their grant making on a three-year, or 12-quarter, rolling average of their assets," says Kathleen Enright, president and chief executive of Grantmakers for Effective Organizations, also in Washington DC. "If you have only two, three or four quarters of down assets, you've averaged it out over a decent amount of time and the shock is not as huge."

However, if this recession continues for 18 months, or if an incipient recovery occurs very slowly, foundations that use the three-year rolling average calculation will feel the real effects in 2010 because they will then have more quarters of lower assets to figure in their calculations, says Enright.

"For foundations that have a strict policy of giving out 5% of their three-year rolling average of assets, 5% will be less in 2010 than it is now because they will no longer have late 2006 and 2007 in the mix, when stocks were performing at a better level."

Foundations are coping with the exigencies of this economic climate in various ways, which can be instructive for the new generation of philanthropists, who haven't previously experienced a downturn.

Esposito says many foundations, which are required by law to give away 5% of their assets, are increasing their payout this year because the needs in their communities are so great. Some are even taking out low-interest loans in order to do this.

"The notion of a 5% payout for many in 2009 is going to be off the table," she says. "We've heard they're calculating 7% up to 17% more is going to be needed to approximate what they were giving in the past. If you're giving 5% of one set of assets and all of a sudden your assets have plummeted by 30%, you're going to give as much as you possibly can to approximate what you have been giving."

Other foundations that make multi-year grants are renegotiating the terms to stretch out the payment periods, according to Esposito. And based on experience from past recessions, she expects to see some foundations change their willingness to give long-term grants. "They stopped giving multi-year grants so they would never be in a position where they didn't have the assets to meet all their commitments. I'm now seeing people who are changing; most are saying they're changing just for the next year or two."

But the knock-on effects for recipients of multi-year grants that have budgeted for these regular payouts can be devastating to research facilities and organisations that have to front money and then wait for reimbursement by government agencies.

"Some philanthropists are very fearful because they've seen their assets go down so appreciably and so fast," says Esposito. "What I'm hearing from so many donors and families is, we're looking at all of our goals and asking how does our investment strategy, our payout strategy, our creativity, our boldness in the community—how does this play out, given out all of our goals?"

Esposito has also noticed that many newer donors – people who are going through a downturn for the first time – don't seem to be as invested in giving in perpetuity as some more seasoned donors. Newer philanthropists have chosen to give in their lifetime; they haven't left their estates as a legacy to be handled by future generations, she says. "What I'm hearing from many of the newer donors is, 'Me doing this work now, me being invested with these communities and organisations: that's what's important to me. I'm going to figure out the perpetuity issue when we get past this crisis because I know, based on history, we will get past it.'"

Ellen Remmer, president of The Philanthropic Initiative in Boston, says that younger donors, who tend to take a hands-on approach to their giving, are engaging in more strategic conversations with their grantees. For example, they are helping nonprofit groups become more efficient operationally and encouraging them to collaborate or even merge with other organisations in order to survive.

"All kinds of meetings are happening among donors," says Remmer. "They all want to know what everyone else is doing. They're searching for what they can do that would be most useful."

Enright says philanthropists who haven't been stuck in a recession before can consider several no-cost changes that will give their grantees additional flexibility to weather this storm. One idea is to lift restrictions on existing grants. Many foundation grants, she notes, are restricted to a particular programme or purpose, but in the present climate, the activities or the projects for which the nonprofits requested money may no longer have as high a priority. By lifting restrictions on grants, foundations can give grantees a better opportunity to react to what's going on around them.

Another possibility is giving more flexible dollars in the form of general operating support, a practice many foundations frown upon. Indeed, at present only 20% of foundation dollars go out as operating support, says Enright. "But the landscape is changing quickly and there's a new administration coming into the White House; so much could change that's outside the control of nonprofits. If you trust an organisation enough to give it money, then give it the added flexibility to be able to react intelligently as the landscape around them changes."

Enright says foundations can also help to provide access to credit, for example, in the form of cash flow loans. "With the tightening of credit, many nonprofits, which have always had a harder time getting access to credit, are in a situation where they need a cash flow loan because they're doing work under a government contract where the payment is being delayed. So, some foundations are freeing up pieces of their assets to give cash flow loans."

The bottom line for all next generation philanthropists, in Esposito's words, "is to remember why you wanted to do this, and if you're hurting the chances are your grantees are hurting much, much more. So, what can you do reasonably to keep those initial goals that you had in mind?"

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