July 31, 2020

Should foundations donate more to nonprofits now or later?

July 31, 2020
Karen Kardos
Head of Philanthropic Advisory - North America
Tree in lavender field

The COVID-19 pandemic has increased the strain on already-stretched nonprofits. This presents a dilemma to the foundations that help finance them.

The COVID-19 pandemic is not only a global health crisis, but also an episode that will have economic, social, and political ramifications for years to come.It is already clear that the pandemic has affected certain minority and socioeconomic groups disproportionately. Those reliant on government and charitable support for their daily living needs, communities of color, immigrants, the homeless, and low-wage workers have often proved more vulnerable both to the virus and to its economic fallout.

Nonprofit organizations play an integral role in our society today. They come in many shapes and sizes, and serve countless people. Their activities include sheltering the homeless, feeding the hungry, working to alleviate poverty tending to the sick, the elderly and other vulnerable populations, enriching our lives through arts, education and religion, fighting to save our planet, and helping to correct social and racial injustice.

Despite their importance, the plight of nonprofit organizations is dire. Indeed, it has probably never been as grave as it is today. Most, if not all, nonprofits have been negatively impacted by COVID-19, with many having to cut back their programs and services.

A recent survey by Charities Aid Foundation shows that over 400 nonprofit organizations in 125 countries have closed their doors.Those nonprofits that earn fees for services, ticket sales or similar activities have suffered a sharp decline in revenue. A COVID-19 survey conducted by the Nonprofit Finance Fund during March 2020 shows that a majority of US nonprofits do not have six months’ worth of cash reserves to sustain their operations. And more than half of midsized nonprofits have furloughed or laid off employees.

According to the 2019 Nonprofit Employment Report , the nonprofit sector is the third largest sector of the US workforce, employing over 12 million people. The US government has signaled its recognition of this sector’s importance by including in its fiscal stimulus package a variety of loans and other provisions designed to help nonprofits. It has also increased the charitable deductions available to individual taxpayers in an effort to kick-start personal giving. However, government action alone cannot solve pressing social issues. Philanthropy, though, can help bridge the gap.

At a time when so many people are falling through the already-frayed public safety net and nonprofits are struggling to maintain limited services or just to survive, philanthropists and their foundations face a dilemma. Should they donate more now while the need is so enormous or conserve resources so they are better placed to assist with pressing needs in the future?

Philanthropists coming together

Very early on in the pandemic, a consortium of about three dozen US foundations came together to generate ideas to help struggling nonprofits. This consortium quickly grew to over 450 grant-makers. Among the ideas proposed were providing additional general operating support grants to nonprofit partners, accelerating instalment payments on grants into the current year, providing support to nonprofits that are not aligned to foundations’ mission or focus areas, converting program related investments (PRI) to outright grants or reducing the interest rate on PRIs to zero.

With the notable exceptions of the US and Canada, most countries do not impose a required payout or distribution requirement from either private foundations or from donor-advised funds. Foundations are free to spend their assets how and when they see fit, albeit within reason. And while the minimum distribution or disbursement quota merely represents the floor for required giving, many foundations also regard it as the ceiling.

Both this factor and the sheer magnitude of the crisis have prompted a coalition of over 300 prominent US philanthropists and foundations to petition the US Congress to raise the required distribution of private foundations from the current 5% to at least 10% for the next three years. They are also asking Congress to mandate a temporary 10% payout requirement from donor-advised funds for the first time ever.

If enacted, these measures would force many foundations to dip into investments or endowments that likely saw double-digit market declines for the first quarter of 2020. For foundations or donor-advised funds that aspire to exist in perpetuity – and especially for those that do not have living donors to replenish their shrinking endowments – annual distributions to nonprofits in excess of investment returns would, over time, deplete endowment assets.

The decision to use endowment funds to increase granting may not be the right decision for all foundations, however for many of the top US private foundations and a growing number of over 300 smaller foundations, this is the right answer for them. These foundations have expanded or even double their grant-making from prior years. In the case of other foundations – those that aspire to perpetual existence or those that want the ability to provide assistance during a future crisis or catastrophe – such increased grant-making at this time may not be affordable or make sense.

Foundations issuing bonds

In an unprecedented move, the Ford, MacArthur, and Doris Duke foundations are going to issue bonds in order to increase their grant making this year. Ford plans to issue $1billion in debt so it can distribute at least 10% of its assets over the next two years. The MacArthur Foundation will issue $125 million in bonds and Doris Duke Foundation will issue $100 million in bonds. This will allow them to dramatically increase their collective giving over the next couple of years.

While interest rates are around record lows, borrowing may make more sense than dipping into endowments. Some see this decision to borrow funds as the most significant development in the world of philanthropy in the past 25 years, and they hope that other foundations will follow suit.

Each philanthropist, foundation, and board member has tough decisions to make, both now and in the foreseeable future. Every foundation’s mission, culture, and operations are unique; what may work for one may not necessarily work for another. Many foundations work with their nonprofit partners to ‘fix’ problems by offering shorter-term solutions, as they work towards longer-term systemic change to address root causes of the problem.

For example, the urgent need to provide free medical care to marginalized groups during the pandemic requires immediate funding. This may outweigh a foundation’s longer-term goal of providing affordable and reliable medical care for everyone. Other foundations work with nonprofit partners under a “preserve-and-protect” model as way to “fix” problems.

Examples include many in the art world and environmental fields, such as those focused upon special art preservation, providing assistance to up-and-coming artists, wildlife preservation or conservation efforts. Funding of longer-term efforts may outweigh the need for increased short-term funding or funding outside of their stated mission and focus.

A little of both

Ultimately, there is no right or wrong answer here. And rather than being an “either/or” answer, perhaps the answer is a “little of both:” In other words, give more now and for the next couple of years while the need is so great, then build back the endowment in the following two years. So I leave you with something to ponder – a quote from Warren Buffett, American investor, businessman and philanthropist.

“The rich people of today should solve the problems of today. Let’s let the rich people of tomorrow solve the problems of tomorrow.”