November 19, 2017
 
A View on Charitable Giving in a Down Economy

By George McCully

George McCully
Media coverage and even professional commentary on how the economic crisis is likely to affect charitable giving as we enter 2009, show little grasp of how philanthropy actually works. Fragments of information are mistaken as telling the whole story.

Take private foundations. We are told that many of their endowments have been hit with 20%-30% losses in value within a period of weeks, which is true, important, and regrettable, but has little to do with losses to charities. That will depend on how this development is managed by the foundations themselves, and that—more than the losses themselves—is where any story is.

First, the law requires that foundations distribute only 5% of their asset value in charitable grants each year, which can include their own operating expenses; as it happens, almost all foundations’ grant making is the legally required minimum; so a drop of 20%-30% in asset value will actually reduce grant making by only 1/20th of that, or 1%-1.5% of the dollars lost from the endowments.

But the law also allows foundations to spread their grant making percentages across five-year periods, so a dramatic change in asset value in any one year can be mitigated by combining it with four contiguous years. The benefits of this qualification will vary with each foundation’s investment management, but it means that the impact on philanthropy of this year’s sudden decline in market value will be further diluted by better years before and after this one.

Would all this amount to a lot or a little, lost to philanthropy? Foundation grant making, despite its prominence, historically accounts for only about 10% of the private dollars contributed annually to charities (corporations account for even less: 5%), so the greatest loss—a 20%-30%% decline in foundation grants, concentrated in that one year of the stock market losses—would amount to only 2%-3% of the private dollars contributed annually.

This loss would not be evenly distributed across all charities, because grant makers heavily favor the largest charities—universities, hospitals, major national organizations, etc. Thus it would impact those institutions with the largest budgets, endowments, and fundraising operations—in short, those with the most mature and diversified support-structures, with the greatest flexibility and resiliency in times of crisis. Small-to-mid-sized charities, with narrower bases of support and smaller budgets to begin with, are so many in number (over 90% of all charities) and receive so small a portion of total foundation grant making (less than 10% of the total dollars in grants), that the effects of a decline on them will be miniscule except in some individual cases.

Concern about Personal Donations

What we have to be concerned about in an economic downturn, therefore, is how personal donations are impacted—because they supply 85% of the private dollars contributed to charities each year (ca. 15% from charitable bequests, and about 70% from annual giving).

A 20%-30% decline in 70% of the dollars, for example, would be a large chunk—14%-21%. Even here, however, there are qualifications to be considered. Most of this money—80%—comes from itemized charitable deductions; itemizers are generally those at the top of each IRS income group, but over half of the dollars come from taxpayers earning over $200K annually, who are most able to minimize the impacts of a downturn.

Claude Rosenberg, founder of NewTithing.org in San Francisco, who passed away this year, used to say that the average person with an income of $1 million has $21 million in investment assets, and can afford to give their entire incomes to philanthropy without impacting their lifestyles. At their level, a sudden and even severe decline in stock markets is a temporary bump in the road—the markets will return to normal, and possibly with stronger capital gains from re-investing at the bottom of the trough, for which tax incentives for charitable giving will come in especially handily.

What about the demand side for charitable giving? It seems now to be widely understood that when the economy declines, charitable needs rise, so that the challenge for philanthropy is to find reasons and ways to increase charitable giving, despite the economic current. Philanthropy, along with government, is a stabilizing mechanism against economic crises.

Under these conditions, each of the three main sources of giving has a role to play.

Corporations can do the least, especially in an economic downturn, but they supply only 5% of giving to begin with so changes in their ability to give are not crippling to philanthropy in general. Those with greatest flexibility are the ones with major endowed foundations—e.g., Bank of America, General Electric, Wells Fargo, Wal-Mart, Exxon-Mobil, et al. They are either maintaining their giving levels or even slightly increasing their grant making for 2009.

Endowed foundations should be managed counter-intuitively from the for-profit money-management perspective—that is, they need to take the long and big-picture view, and step up to the plate to increase their giving even—especially—when their endowments are losing some of their value in the short run.

From a profit making money-management point of view this seems irrational, but from the philanthropic perspective which is operative here, it makes the greatest sense. The reason is that philanthropic foundations’ highest priority is to do the most good, rather than to make the greatest profit on their endowments. Strategically, it makes better big-picture and long-term sense for foundations’ generosity to vary with needs rather than with the economy.

When needs rise, so should their generosity; when the economy improves and needs decline, they can make hay financially, building-up their reserves for the next rainy day, and so on—the priority being to do the most good when the most good is most needed. Cutting back in hard times for the sake of the endowment, rather than maximizing philanthropic impacts through increased grant making in hard times, shows inverted priorities in philanthropy. This time around the Gates and Ford Foundations have set the right leadership examples for their colleagues.

Individuals cannot meet that high philanthropic standard except at the highest levels of income where substantial capital reserves relieve the dependence on income alone for quality of life (including philanthropy as a contributing factor to quality of life). Individuals can appreciate keenly the need to dig deeper in hard times, so they should try to do whatever they can and feel like doing, to increase generosity when hard time increase needs.

What is happening to giving now? For philanthropy as a whole, results are mixed, but beneath that surface an intelligible picture seems to be emerging—that giving is focusing on directly helping people in greatest need.

Giving is up for basic human services—food, clothing, shelter, jobs; less so for health. Giving seems to be down for all other fields—culture (including arts and education), the environment, international, and promoting philanthropy. Small charities in these fields especially, but really all fields, are having the most difficult time finding the funds they need, just to survive. Sophisticated individual donors might therefore consider focusing this year on rescuing forgotten charities in this time of troubles.

George McCully is president of the Catalogue for Philanthropy, based in Watertown.

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