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A Note on Private Foundation Giving During Tough Times
Dr. Neal H. Mayerson, President

During 2008 family and private foundations lost approximately $150B of asset value.  These are tough times.  As a result of the economic downturn many private foundations have cut back on their annual giving, sending non-profit organizations into tailspins.  However, other foundations have responded by maintaining or even increasing prior giving levels despite the decline in their corpus. 

Recent surveys by the Foundation Center and the Chronicle on Philanthropy indicate that 40% or more of foundations have recently pulled back on their annual giving.  After putting aside Gates Foundation activities which skew the overall data, it is estimated that private foundation donations in 2008 dropped about 3%, or $1.3B.  The result of this withdrawal of charitable giving by foundations has had a very significant negative impact on non-profit organizations and the people they serve.  A survey of 986 non-profits by Nonprofit Finance Fund indicated that only 16% of the non-profits expect to cover their operating expenses in 2009, while more than half think the economic downturn will have long-term or permanent negative effects on their organization.

I’d like to argue that much of this devastation could be avoided if foundation directors anchored their decision-making in their fundamental raison detre -  to serve the community’s good.  While individuals and for-profit corporations rightfully have self-preservation as a base motivation, philanthropic foundations need not.  If a corporation does not survive, then it cannot serve its primary mission of making money for its shareholders and providing jobs for its employees.  If an individual does not survive, they cannot achieve any purpose in life.  Alternatively, if a foundation were to spend out all of its assets on the explosion of social needs resulting from an economic meltdown, then it would achieve its primary purpose even if it meant closing its doors for the future.  It would need to take solace in the fact that it stepped up to the plate when most needed, and that future philanthropists will emerge to take care of future social needs.

The reality of choosing to “step up” during tough times actually need not be a matter of spending out completely, but instead, a matter of accepting that the individual foundation will have fewer assets in the future.  Financial modeling can provide a peek into the future to see how much effect there could be on future assets. 

A model that assumes a starting value of $100MM and a decline in assets of 30% in a single year followed by a steady recovery at an average market portfolio return of 8% shows the following.  If Foundation A decides to pull back donations as their assets decline and implements that approach by pegging annual giving to 5% of asset value, then in 10 years it would have donated about $39MM to the community and would have an asset value of $84MM.  Alternatively, if Foundation B decided instead to step up to the crisis by increasing its annual giving with a 2.5% annual inflation adjustment, over this 10 year period they would donate $57MM and have an asset value of $60MM.  Foundation B would have invested $18MM more in the community than Foundation A, or 46% more.  And, it would have more than 70% of the asset value after 10 years that it otherwise would have had if it had kept that $18MM in its own coffers to grow.  Far from putting itself out of business, Foundation B would have been truer to its mission of serving community needs, and it would still have plenty of assets to work with moving into the future.  When applied to the entire $530B of estimated private foundation assets at the end of 2008, that would equate to a difference of $95.4B more invested in social needs versus $127B of retained foundation wealth.  It seems clear which avenue benefits society most.

Foundations should also factor in the reality that new foundations are continually being added to the philanthropic garden.  With an average growth rate for new foundations of about 7%, over a 10 year period we might expect the estimated 125,000 existing private foundations to grow to about 230,000.  That would equate to about $440B of new philanthropic dollars!  So, even though decisions today to respond to the increased social needs vs. pull back indeed leaves current foundations with fewer assets in the future, all can rest somewhat assured that new philanthropic wealth enters the picture to ensure that future social needs can be met.  In making decisions, foundation directors should keep in mind that they are part of a living philanthropic ecology which allows them to attend to current needs without worrying about society being left high and dry in the future.

Foundations are run by directors who, as individuals and business people, have self-survival instincts.  Their instinctual response to their foundation’s loss of assets is the same as if it were a personal or business loss – to shift to a model of austerity.  In my opinion, society would be better served if they resisted that impulse and took the counter-intuitive route of holding true to their mission.  In times of greatest social need it seems that foundations should be more responsive as opposed to less responsive.  Our job as foundation directors is to mitigate the ill effects of negative events on people and to help people thrive.  We are here to respond during tough times, not to withdraw.

Dr. Neal H. Mayerson is President of the Manuel D. and Rhoda Mayerson Foundation and The Mayerson Company.

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