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After the Fall

Financial crisis is affecting nonprofit groups in myriad ways

The Chronicle of Philanthropy

October 14, 2008


As signs continue to indicate that the crisis in the nation's financial markets will spill over into a full-blown recession, stock-market volatility and the credit crunch are hitting foundations and charities in myriad ways.

Initially, the market's plunge primarily affected investment returns at the nation's biggest nonprofit endowments. Now the troubled economy is stymying fund raising, hurting nonprofit groups that need to pay back loans for construction costs, and in some cases, imperiling organizations' ability to pay their employees.

As foundations, corporations, and individuals consider trimming their giving budgets, the money woes are creating a dire environment for small charities.

For example, the World Cares Center, in New York, a group that trains volunteers for disaster response and has in the past received substantial support from Wall Street investors, expects its annual fund-raising dinner in November to bring in half the $125,000 it did last year, says Lisa Orloff, the group's executive director and founder. She says she has taken a pay cut to help her organization stay afloat and has frozen the salaries of her small staff.

"It's not a very jovial mood right now," she says. "We're hoping this doesn't last forever."

Despite the problems, some charity experts argue that a reduction in the number of nonprofit groups could be beneficial, while others emphasize that even during down times, Americans continue to give.

Patrick M. Rooney, director of research at the Center on Philanthropy at Indiana University, says that on average giving declines only 1 percent in recession years.

The generosity of the American people, he says, is "resilient."

Credit Problems

Aside from fund-raising concerns, the seize-up in the nation's credit markets is having other effects on nonprofit organizations.

The University of Washington, for example, sued Northern Trust bank 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.

In a statement from Northern Trust, the bank said total earnings of 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 respond to the charges that the bank failed to act on the University of Washington's account.

Another problem triggered by the credit crisis is with tax-exempt municipal bonds that nonprofit groups rely on to support the cost of building new facilities or refurbishing old ones. Some charities that took out loans based on the bonds, which are usually issued by state agencies, are dealing with jumps in the variable interest rate, forcing them to owe larger monthly payments.

The Home for Little Wanderers, a social-service group in Boston, has $3.3-million in bond debt at a variable rate, says Kenneth E. Hamberg, the group's chief financial officer. Every time the interest rate goes up a point, the charity potentially has to pay an additional $3,000 as part of its monthly payments, money that would be better spent on programs, he says.

"You keep hoping for some stability," he says.

He notes that the organization switched the majority of its bond agreements, some $5.6-million worth, to a fixed rate before the crisis hit, making the payments much more manageable.

Cuts Projected

At major foundations, investment losses are sapping endowments. Some funds say they will be cutting their giving as a result, although other grant makers pledge to maintain or increase their giving to help struggling charities weather the crisis.

The William and 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 this primarily by reducing the number of grants it awards to new beneficiaries.

"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 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 impoverished families are greater — even though their own endowments are also 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."

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 the 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.

Emergency Sessions

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 $600-million, 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 endowments. The endowment pool had decreased in value by about 5 percent through June, compared with a 12-percent decline for the Standard & Poor's 500 stock index.

"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.

Some endowment managers see opportunities amid the turmoil. The Minneapolis Foundation's $600-million endowment has probably lost roughly 12 or 13 percent through September, according to Steve Hosier, the community foundation's investment associate. Aside from an allocation to real estate, the endowment has never invested in alternative categories like hedge funds and private-equity funds, but it is considering making such investments for the first time.

Many hedge funds are having disappointing years, and some investors are withdrawing money from the funds, while at the same time the credit crunch is forcing hedge funds to reduce their leverage (the borrowed money that many hedge funds use to try to improve returns). Mr. Hosier believes those two developments are a positive for the Minneapolis Foundation as it considers making some of its first alternative investments.

"We're going to have opportunities here to look at interesting managers and strategies that a year or two ago were not even an option for us; either they were full, or they had a higher risk profile than we wanted to take," Mr. Hosier says.

'Wait and See'

Investment opportunities aside, the downturn in the stock market appears to be having a chilling effect on giving by individual donors.

The Vanguard Charitable Endowment Program, a donor-advised fund in Malvern, Pa., had 20 new people set up funds in September, down from the 41 who established funds in September 2007. Donors to Vanguard and other 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.

"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."

At the Shriners Hospitals for Children, which are based in Tampa but have 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."

But John J. Havens, a researcher at Boston College's Center on Wealth and Philanthropy, last week predicted that, barring a sharp drop in national income levels, the troubled economy's effect on giving is likely to be relatively short and shallow.

The current crisis is similar to the conditions of the early 2000s, said Mr. Havens during a conference sponsored by the center, the Association of Fundraising Professionals, and the Eaton Vance Investment Council.

In that period, he said, America began to see a decline in net wealth, but the decline did not directly correlate with changes in philanthropic giving. Average household charitable contributions during that time did not begin to fall until 2000 — a year after net wealth began its drop — and did not fall as much as household net worth did. From 1999 to 2002, household donations decreased only 10 percent, while net worth dropped by 20 percent.

Hard Decisions

Even if donations hold up in the long run, some organizations are already reporting that they have to reduce programs because of a lack of money.

The American Museum of Natural History, in New York, is experiencing steady fund-raising returns, but New York City cut $2.4-million in its support for the museum in 2008, says Charles McLean, a museum spokesman.

That reduction has forced the museum to cut back on some educational programs, and to 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," he says. "A lot depends on New York's ability to keep its head above water."

The city's charity galas and dinners, which often attract celebrities and other well-heeled donors, are also suffering. While some venerable nonprofit groups, such as the New York Public Library, say that ticket sales for fund-raising events remain on par with last year, others are taking a more cautious approach.

Seedco, a job-training and education group in New York, postponed its second annual fall gala until spring 2009.

"At this moment, it didn't seem right to be asking our donors and friends to be making significant contributions during the tough economic times," says Carla Zanoni, a spokeswoman for the group. She says by next year the charity hopes Wall Street and New York City will have recovered from the financial turmoil.

Other nonprofit groups may not be able to survive that long.

"We're considering closing," says Peter B. Gudaitis, chief executive of New York Disaster Interfaith Services, a charity in Manhattan that helps coordinate the work of religious groups during an emergency. Mr. Gudaitis blames the poor economy and the lack of government grants for programs like his for the difficulties.

"It's been a really hard year. Donations are off substantially," he says of the group. "At the moment, we don't have the money to stay open past November."

'Too Many Charities'

While expressing concern for vital charitable programs that may be in jeopardy, Ken Berger, chief executive of Charity Navigator, a watchdog group, says a consolidation of nonprofit projects would be a good step in many states.

With almost one million American charities, he says, organizations that offer duplicate services should merge. "There are too many charities," he says. "All too often, self-preservation trumps mission."

Instead of waiting for the generosity of donors to run dry, he urges charities to consider joining forces now or at least share administrative staff. "There really is a value in partnering right now," he says.

Antonia Hernández, president of the California Community Foundation, which focuses on Los Angeles County, says she expects to meet her group's year-end fund-raising goal of $150-million, but that the outlook for local charities is less promising. The nonprofit health clinics that the foundation supports are expecting losses of government, corporate, and private-foundation support. "It's a very serious situation," Ms. Hernández says. "Nonprofits are getting a triple whammy."

Indeed, while Mr. Rooney, of the Center of Philanthropy, says that historically giving declines only slightly in recessionary years, he noted that the country is facing an unprecedented financial meltdown, and that the past may not be a good indicator of what's to come.

"I don't want to say the sky is falling, but also don't want to be Pollyannish," he says. A lot of "more-fragile organizations" will be in jeopardy.

The Chronicle of Philanthropy

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