“Many grantmakers have less money to give out. Some have decided they will not give out any grants at all this year. Others are still giving, but less. At the same time there are more charities each year. They need more money to make up for cuts from other funders.” – Ken Wyman, CFRE, on the current state of grantmaking.

By now it’s old news that the economy is in rough shape. The various Ponzi schemes and sub-prime mortgage debacles have wreaked their havoc on the North American economy, laying waste to billions of dollars in investment income. Again, old news.

But for a voluntary sector struggling to keep its head above water in the best of times, the news continues to ripple through the nation, causing concern to charities, donors, and the much-relied-upon foundations that grant monies to those most in need.

So where do those foundations now stand and how are they adjusting to the new world economic order?

Last week, CharityVillage spoke with, among others, the leaders of two of Canada’s most influential foundation networks: Hilary Pearson, president of Philanthropic Foundations of Canada (PFC), and Monica Patten, CEO and president of Community Foundations of Canada (CFC).

While the members of these two umbrella organizations have been as hard hit as anyone else, their commentary isn’t all doom and gloom.

Tracking the carnage, and the upswing

Speaking on behalf of her 97 private foundation members, Pearson said that while a lot of them were very jittery about the future of grantmaking at the outset of this year, much of that fear has since been replaced with sober second thought about the best ways to continue helping their grantees in light of their diminished financial returns. To get a fuller idea of how this has progressed, she provided the following chronology:

“What’s important to underline is that there’s a bit of a lag effect. I’m not sure we’ve seen the full consequences of what happened [in the economy] last year. To differentiate between the economic recession and the financial collapse…the financial markets collapsed in the fall of 2008. This had an immediate impact on foundation endowment values,” she said. “By Dec. 31, 2008, after a couple of months of mayhem in financial markets, endowments had been hit very clearly. We don’t have good data on what the average drop in value was; but what I’m gathering from talking to my members and others, it seems to have been a drop, on average, of 15% to 20%. This is not as bad as endowments were hit in the U.S., [around] 30%.”

Still, Pearson noted, this didn’t have an immediate impact on grantmaking in 2009. According to her, many foundations had made decisions in the fall of 2008 “about what they wanted to do [about] setting targets. By and large, [PFC members said] they are really trying to honour their multi-year commitments” made prior to or during 2008.

“A lot of foundations realize that the hard decisions only have to be made now, a year later. As they look ahead to 2010 and realize what they have to disburse, they have much less. And this would be true, of course, for university and hospital endowments…in 2010 these institutions are now planning for pretty significant cutbacks,” she said.

From Madoff to moving forward

Despite what might normally be a perfect storm for increased demand of foundation resources, the requests for grants from charities has not risen significantly, according to PFC statistics. However, foundation strategies are changing, with boards now looking at modest, incremental grants on shorter-term basis.

“Some of our members have said they’ll not be making any more multi-year commitments. They’ve said [to their grantees], ‘We’ll give you the grant for this year, but we’re not making a commitment for next year.’ That has obviously generated some concern from the charities that were getting the grants,” Pearson said.

Charities hoping to launch new projects or get new funding should now realize this is not a good time for the “ask,” she said. As she sees it, the major concern now for charities is how to plan for 2010. “A lot of foundations have to be cautious now because they just don’t know” about their ability to grant for the mid to long term, she said.

For CFC, the proof is in the numbers.

According to its website, “In 2007, Canada’s community foundations held $2.91 billion in combined assets and contributed $176 million to a vast array of charities – making the network one of the country’s largest grantmakers.” When asked if these numbers changed significantly in the 2008-09 reporting year, Patten replied:

“2008 ended with $2.5 billion in assets and just over $161 million in grants. So, you can see the decline. Our income is down somewhat because we have recognized that our members are not able to pay dues to us at quite the same rate as in the past – though that will recover over time – so we have made appropriate adjustments. For example, a conference we would have held in 2010 is now planned for 2011.”

Feeling out the foundations

Twice this year PFC conducted surveys of its members: once in January and again in June. In June, data showed that endowment values had increased – an average of 4.4% to 5.6% – since the low point in late 2008. Although these gains still did not match the losses from the previous year.

“I should tell you that our foundations, in general, are not risk-takers on the investment side,” Pearson said. “They’re pretty conservative and risk-averse. So bottom line is you’re seeing a slow build back in investments with our members. I think everyone is still feeling quite shell shocked. It’s going to take awhile to build confidence. On the grants side, in June we found there were fewer foundations who were saying they intended to cut back. Whereas in the January survey, about 25% of our respondents reported they were making fewer grants.”

PFC sent CharityVillage the executive summary of its June survey, titled Managing in Turbulent Times. Of note in the summary are the following findings:

• For 2010, the outlook for grantmaking is slightly more cautious than it was in January 2009. While 72% of respondents expect grants to remain the same or increase in 2010, this is a slightly lower percentage than in January, indicating continued conservatism about the state of endowments and markets.
• Some foundations are encroaching on their capital to meet disbursement commitments. But it is not clear how much of this is related only to the downturn. A majority of respondents (70%) are meeting their disbursement quota without relying on previous quota excesses, which may indicate that they are still meeting the quota out of current reserves or earnings.

 

“As people get closer to 2010, and as they begin to see a [slow] build back in [endowment] value, they’re actually…now more cautious,” Pearson clarified.

Simple strategies

Another major indicator of where foundations are heading can be found in the PFC June survey. It states: “A significant number (42% of respondents or 15 out of 36 foundations) are offering assistance beyond the grant, such as convening meetings, offering strategic advice, and communicating strategically with the community about greatest needs.”

For PFC, as for CFC, this is a major trend to watch for as foundation boards gear up with new strategies to compensate for a dearth in dollars.

“We’ve been hearing a lot about [strategies] moving to assistance beyond the grants. I think a lot of foundations are now thinking that it isn’t just our dollar grants that we can use to help communities,” Pearson said. “We can use our role as conveners, facilitators…we can give advice to the charities we work with. We can help them in ways that are not just about grantmaking. I’m finding there’s a lot more conversation in this network about how foundations can play that role. So this is beyond grants. If dollars are scarcer, what else can we do?”

She adds that many more foundations are now thinking “not only about investing for a best return, but investing as a support measure.” This could mean investing in socially responsible companies, investing in environmental products, or making direct loans and program-related investments.

Pearson noted that PFC and CFC are currently collaborating on the creation of a guide to mission-related investing and the “legal and regulatory issues” surrounding this. They hope it will be ready before Christmas.

“A lot of foundations think making loans is not a possibility. But there’s nothing in the [CRA] regulations that say you can’t. The CRA is pondering a change in regulations…on how to clarify the regulations around mission-related investing. So we’re hopeful,” Pearson said. “For over a year now, many foundations have been talking to the CRA – this includes the Muttart Foundation, which has a regular dialogue with the agency – and raising questions around the rules governing social businesses or investing in businesses with a social mission. There’s a lot of confusion around this issue. You’ve seen a lot of debate around social enterprise…this sort of hybrid that isn’t exactly a profit-motivated, private sector business, but it’s not a charity either, so what is it? Can foundations support that kind of business? I think a lot more work has to be done to figure out what is allowed, to encourage foundation boards to move ahead. But CFC has done a lot to promote some of this practice and we’re trying to do the same.”

CharityVillage attempted to get some more response from the CRA on this matter, but the agency would only say through a spokesperson that it is only “responsible for administering the provisions of the Income Tax Act, so while the CRA understands the difficulties many Canadians may be facing in this economic downturn, issues related to tax policy should be referred to officials at the Department of Finance, who are responsible for creating/amending tax legislation.”

(As a side note for charities, the CRA did mention that a registered charity “can apply to reduce its disbursement quota for a particular year by completing Form T2094, Registered Charities: Application to Reduce Disbursement Quota.” However this reduction is granted “only under special or extraordinary circumstances. A charity must use its disbursement excesses from prior years before reduction relief will be considered. All applications are reviewed on a case by case basis.”)

Not just about the money

For her part, Patten told CharityVillage that CFC’s members are very much geared to looking at how to help communities as a whole and not just their grantees.

“[C]ommunity foundations are about a lot more than money. They are resilient, deeply knowledgeable about their communities, built on solid relationships and trust – all features that will serve them well as they go forward,” she said.

But there are also some clear, top-of-mind strategic questions for the foundations to answer. One of which is granting capacity and how to replenish this for the future and remain flexible in the face of similar potential economic downturns.

“It will likely take several years until granting levels return to what they were before 2008-09,” Patten said, adding that this will likely coincide with rebuilding donor confidence in the economy.

“Will they start giving again? I am speaking of significant gifts and community foundations will likely focus on renewing and/or building new donor relations and confidence,” she said. “Are we prepared if this happens again? Have we done enough to work with CRA to make sure the regulatory framework does not work against us, but rather, is flexible enough to see us though another downturn?”

Those answers will only be revealed in the coming years.

Andy Levy-Ajzenkopf is president of WordLaunch professional writing services in Toronto. He can be reached at andy@wordlaunch.com.

Please note: While we ensure that all links and e-mail addresses are accurate at their publishing date, the quick-changing nature of the web means that some links to other web sites and e-mail addresses may no longer be accurate.