Taking a Big Hit

The steep decline in the stock market last year triggered an erosion of foundation wealth, with many grant makers losing nearly one-third of their assets, according to a new Chronicle survey of many of the nation’s largest philanthropies.

At the 60 grant makers that provided financial data for 2007 and 2008, assets declined a median of 28 percent.

Foundations with investments in bankrupt or hard-hit companies fared much worse. For example, the Starr Foundation, in New York, which held a significant portion of its portfolio in American International Group stock, lost $1.7-billion — almost 57 percent of its assets.

Biggest Loss in Years

Last year’s losses were greater than during other periods of recent economic turmoil, like the stock-market volatility following the September 11, 2001, terrorist attacks, which triggered a median 10-percent decline in endowments at many large foundations.

In all, while foundations lost significant wealth last year, most outperformed the Standard & Poor’s 500, a leading market indicator, which declined 38.5 percent.

And, of course, investment losses are not the only reason foundation assets declined. Grant makers are required to award 5 percent of their wealth each year to charities and philanthropic projects, regardless of the condition of the economy.

Because foundations fared better than other investors, few of them report that they are making major changes to their investment approaches.

But many grant makers are changing what types of programs they finance and how much they give. Most big foundations are reducing grant-making budgets and administrative costs. Several foundations are laying off employees.

In particular, foundations are reluctant to support construction projects or make large philanthropic commitments that would take several years to fulfill.

Of the 73 foundations that provided data about their 2009 grant making, most of them — 39 — expect to decrease how much they contribute to charities this year.

“Everybody is nervous and tightening their belts and trying to figure out what it means for them,” said David T. Abbott, executive director of the George Gund Foundation, in Cleveland, which lost 35 percent of its assets last year and now has about $340-million.

Gund will decrease its giving by as much as $3-million in 2009, awarding around $17-million to the arts, economic development in Ohio and other causes.

To be sure, not all foundations are reducing their grants. Of the 73 foundations that reported 2009 giving data, 22 said their grant making would stay roughly at the same dollar amount, and 12 plan to increase it.

Meanwhile, many foundations are changing how they give in response to economic problems.

The Robert Wood Johnson Foundation, in Princeton, N.J., for example, has created a $10-million emergency fund to support health services that assist the elderly and other vulnerable people in its hometown and elsewhere.

In all, almost 50 grant makers, including community foundations and corporate donors, have pledged more than $100-million in new or revised efforts to help the poor during the recession or study the policies and financial deals that led to the market’s current problems, according to the Foundation Center, a nonprofit research group in New York.

Other foundations have changed the type of grants they award in light of the economy.

The Weingart Foundation, in Los Angeles, has suspended its grant making to specific charitable programs, and will instead primarily provide operating support to homeless shelters, food pantries, and other social services.

“You can imagine in this sort of economic downturn the greatest need on the part of the nonprofits that we work with is unrestricted funding to support continued operations,” said Fred J. Ali, president of Weingart, which supports charities in Southern California. “This is not a climate that nonprofits will be expanding existing programs as a general rule.”

The fund is also allowing some grant recipients that had already received contributions for programs to use the money to pay the rent, electric bills, or other day-to-day expenses.

Weingart will award the same amount in grants as in 2008, about $40-million.

Other foundations that are keeping their grant-making budgets level or even increasing their giving include the James Irvine Foundation, the John D. and Catherine T. MacArthur Foundation, the Bill & Melinda Gates Foundation, and the California Endowment.

“There’ll be a split,” predicts Harvey P. Dale, a professor of philanthropy and the law at New York University. “Some of the foundations, probably the smaller ones where they don’t have any full-time staff, are going to be much more cautious. But a very significant portion of the larger foundations will understand why it’s important to be countercyclical,” meaning they will not cut giving during a recession.

Worrying About the Future

Many grant makers argue that the economic environment makes it too difficult to keep giving at a steady pace.

Most philanthropies formulate their grant-making budgets based on a percentage of the average of their assets over five years. This calculation usually prevents steep declines in giving during sour economic times, but not this year, said Wendy Garen, chief executive of the Ralph M. Parsons Foundation, in Los Angeles.

“We do a five-year average, which is supposed to smooth [grant making]. Well, nothing can smooth what happened,” she said.

Parsons’s assets declined an estimated 37 percent last year, in part because the foundation owned a $1.5-million bond in an Icelandic bank when that country’s financial industry collapsed. The charitable fund awarded $19.1-million in 2008 to charities in Southern California. This year, it will contribute about $14-million.

She said that the foundation is not giving more because it would threaten her organization’s endowment and its ability to operate in the future. “Who’s to say the needs three or four years from now will not be more exigent? There’s no right answer,” Ms. Garen said.

Ms. Garen said that Parsons is not changing what type of organizations it supports, but it is focusing on helping those that are well managed.

“Our focus will be on sustaining excellent organizations and helping them weather this crisis,” said Ms. Garen. “It’s going to be harder to start new efforts or new nonprofits. They will face more headwinds.”

In some cases, programs that have long enjoyed foundation support are in jeopardy.

Due to stock-market losses, the Geraldine R. Dodge Foundation canceled its 2010 poetry festival, a nationally recognized event that attracted 19,000 poetry fans last year.

David Grant, the foundation’s chief executive, said Dodge will continue to support efforts to promote poetry, but the loss of 32 percent of its assets required the foundation to take tough steps. “It’s not as if we’re going to stop doing poetry activities anymore, but we’re not going to spend the $1-million-plus for the 2010 festival,” he said. “The idea that the Dodge foundation brings people together to directly experience poetry, that idea is alive and well. It will take different forms as we can afford them.”

Dodge’s assets fell from $305-million to $207-million in 2008. As a result, Mr. Grant said, its grant making — which also goes to education, environmental causes, and charities in its base of Morris County, N.J. — will decline by about $5-million this year.

“We know that both 2009 and 2010 are going to be lean years,” he said.

To save money, many foundations report that they are cutting administrative costs, like travel expenses and fees for conferences. Others have imposed hiring freezes or laid off staff members.

The Parsons foundation eliminated one program-officer position, and the California Endowment, in Los Angeles, is reducing its staff by as many as two dozen employees, although the administrative changes at the endowment are not solely due to the economy. The foundation, which focuses on improving the health of impoverished Californians, is making a long-planned shift in its giving, which requires changes in its personnel, said the foundation’s spokesman, Jeff Okey.

The Daniels Fund, in Denver, has laid off four employees and eliminated a vacant full-time position and a part-time position, said Linda Childears, the organization’s chief executive.

The assets at Daniels dropped by nearly 29 percent last year, to $1-billion. Ms. Childears said the foundation, which provides college scholarships and grants to charities in four Western states, avoided cutting its program staff to make sure it would not hurt its charitable efforts. It instead trimmed administrative jobs, a communications position, and its in-house lawyer.

“Ultimately it came down to the opinion that our business purpose is charity and we need to be focused on how we do the most of that,” she said.

Noting that all the former employees played a valuable role, she described the decision-making process as “very, very painful.”

Federal Taxes

Another concern for foundation leaders is the possibility that they would have to pay an increased federal tax, known as the excise tax, which is either 1 percent or 2 percent of their net investment income.

Foundations can qualify for the lower rate if the percentage of their assets directed toward charitable distributions is larger than the average percentage of their distributions during the previous five years.

The Council on Foundations, a Washington association that represents about 2,000 grant makers, argues that the current tax system dissuades grant makers from giving a larger portion of their endowments to charity this year. It says that when they give a lower percentage in the future as the economy recovers, they will not meet the 1-percent standard and will be taxed for stepping up their giving during a time of need.

The association is asking members of Congress to “flatten” the tax to 1.32 percent.

Theresa Pattara, tax counsel for Republicans on the Senate Finance Committee, said Sen. Charles E. Grassley, the senior Republican on the panel, is considering changing the two-tier tax.

The senator is also encouraging foundations and other donors to give more to charities, rather than press government to bolster efforts to support charities.

“Private foundations, donor-advised funds, and other grant-making charities are already set up to make payouts and even loans, if they want to, with an oversight structure already in place,” he said in a statement. “I’d like to see these charities step up and help their fellow tax-exempt groups. That would be more efficient and without more government involvement, which charities usually dislike.”

Charity leaders, of course, would also like foundations to increase giving. Many of them describe the current fund-raising environment as a feeding frenzy, with an increasing number of groups seeking money from the wealthy foundations that are not trimming their giving.

“Because many smaller donors are delaying or shrinking their giving, the larger donors are receiving new pitches, increasing the competition for the money that remains,” said Ivan Sigal, executive director of Global Voices, a nonprofit group in Washington that operates a Web site for blog writers from developing countries.

Indeed, of 42 philanthropies that reported information about grant requests to The Chronicle, many of them — 20 — said they expected such requests to increase in 2009.

One of Global Voices’ supporters is the MacArthur foundation, which, despite a decline in assets, plans to maintain its giving at $260-million, the same as in 2008.

“Consistency and steadiness is what really matters to our grantees. They can trust us, they can count on us,” said Jonathan Fanton, president of the Chicago organization. (To read more about what Mr. Fanton says foundations should do, see his opinion article.)

Like the assets of many other philanthropies, MacArthur’s have grown quickly during the last few years, even in today’s down market. In 2002, the foundation said it had $3.8-billion, which grew to $6.8-billion two years ago, and today it has $5.2-billion. Adjusting for inflation, the foundation’s assets have grown $700-million.

While foundations felt pressure from some charity leaders to give more during the boom years, Mr. Fanton said MacArthur’s decision to build a reserve is now justified given the current constraints on giving.

Said Mr. Fanton: “If you asked grantees, ‘Would you prefer MacArthur to have pushed money at you like everybody else when the times where good or would you prefer MacArthur to have held some powder dry for when the going gets tough?,’ they would say it’s better to give the foundation the flexibility to do what it’s doing.”

Candie Jones contributed to this article.

HOW ASSETS AT 40 BIG FOUNDATIONS HAVE CHANGED IN THE PAST 10 YEARS 1999 8.2% 2000 1.5% 2001 -9% 2002 -13.2% 2003 13% 2004 6.9% 2005 4.2% 2006 9.5% 2007 4.1% 2008 -26.6% NOTE: Percentages show median change in assets.