October 30, 2008 | Read Time: 6 minutes
As the worldwide business crisis has deepened, the prospects for philanthropy have looked increasingly bleak. Fears of sharply reduced donations, plummeting endowments, and cutbacks in government support have swept through the nonprofit world. With unemployment rising and many homeowners facing trouble paying their mortgages, heightened demand for food, shelter, job training, and other kinds of assistance loom as well.
Since the full extent of the economic downturn is still unknown, the seriousness of those challenges remains to be seen. But several reasons for optimism about philanthropy exist. It would take just a few simple policy changes for Congress to stimulate giving to help charities get the money they will need to help people in trouble. And judging from recent recessions, a sharp fall in charitable giving is very unlikely.
According to statistics collected by Giving USA and other sources, in several downturns spanning the past three decades, the average decline in philanthropy, after adjusting for inflation, has been on the order of 1 percent annually.
Moreover, not since the early 1970s has giving dropped for more than two years in a row. And once economic growth has resumed, philanthropy has quickly made up what it lost, and more.
Giving by foundations has held up even better during recessions. A new study from the Foundation Center reports that in the four economic downturns since 1980, foundation philanthropy actually increased slightly each year, even after inflation.
Part of the reason is that most of those donors calculated their grant-making budgets by applying the federally required “payout rate” of 5 percent to an average of their endowments over two to five previous years. That ensured that periods when assets were slumping were offset by others when they were doing well.
In addition, even during recessions, new foundations were established and new gifts or bequests went to existing ones. During the slowdown of 2001-2, for example, 3,000 foundations were created; the following year saw the birth of another 1,500. Donors probably wanted to liquidate assets that had increased substantially during the preceding “boom” years but were declining in value as a result of the “bust.”
Despite the turmoil in the world’s economy this year, stock-market indices, such as the Standard & Poor’s 500, are still higher than they were at the end of the last recession. Entrepreneurs and investors who have prospered since, and now want to reap their gains before further losses occur, may add significantly to philanthropy in the next few years.
That will not be the case for most corporations. Business giving is closely related to profits, which have been falling and are likely to continue doing so for a while. Restructuring in the financial industry and elsewhere is apt to have an impact — in some communities, such as New York, a large one — on the philanthropic bottom line, too.
But of the major sources of donations, corporate giving has been the smallest. Last year, according to Giving USA, it accounted for just 5 percent of contributions to American charities, less than half of what foundations provided.
Even though some companies have been hard hit and will have to reduce their giving, it is likely that companies will be especially interested in continuing their marketing deals and other arrangements that generate revenue for the business at the same time that the charity gets a lift.
For many nonprofit organizations, in fact, traditional sources of donations have become less important for their operations. On average, charities now obtain half of their income through earnings: tuition, hospital charges, tickets, child-care payments, and the like. (A third comes from government and the rest from gifts and other sources.) While an economic slump will cause some people to forgo or delay spending on such items, many nonprofit providers may also have the ability that businesses do to cut back on expenses when consumer demand softens.
Similarly, government support has become increasingly focused on programs like Medicare, Medicaid, and Pell Grants, which assist those who need the kinds of services that philanthropic groups offer, rather than on grants that go directly to charities.
It is easier for the White House and Congress to cut direct grants to charities when they need to control federal spending, but more challenging to cut back college and medical aid and other programs that are designed to provide assistance to anybody who qualifies for them. So even in an economic downturn, charities can count on getting money through these subsidies.
At relatively little cost, policy makers can also take some steps to stimulate increased giving. They have already taken one: The Emergency Economic Stabilization Act (the so-called “bailout bill”) renewed a law allowing older people to donate money from their individual retirement accounts to charity tax-free. The National Committee on Planned Giving estimated that this tax break produced more than $140-million in contributions in one year.
They can also take other steps. Following Hurricane Katrina, Congress enacted a temporary measure to enable donors to deduct up to 100 percent of their annual income for gifts to charity (compared with the normal 50 percent). In the four months during which the tax break was in effect, a Treasury Department official estimated that it produced $11-billion in donations at a cost of about $3-billion to the federal government.
To be sure, much of this money may have been contributed eventually anyway. But renewing this provision and offering a greater incentive to give now would not only help charities struggling with the economic downturn, but also assist donors who may be awash in assets, relative to their incomes, as they sell off their holdings before suffering further declines.
Foundations that want to spend more now than they normally do face a different problem. Under current law, if they increase their grant making for a year or two, but then return to their typical levels, the “excise tax” they pay on their investment income goes up from 1 percent to 2 percent.
According to the Council on Foundations, ending this tax could lead to another $400-million in giving. Simply replacing it with a single rate, as President Bush and others have proposed, would remove a deterrent to doing more during this or other times of crisis.
Just how long — and how extensive — the current business crisis will be is impossible to forecast. If it becomes more severe, philanthropy’s recent experience with recessions may become less germane. Yet, barring that and notwithstanding the fact that some portions may be more at risk than others, the nonprofit world has shown a remarkable ability to adapt to economic slumps in the past and, with a few changes in policy, could be in a stronger position now.
Leslie Lenkowsky is a professor of public affairs and philanthropic studies at Indiana University and a regular contributor to these pages. His e-mail address is llenkows@iupui.edu.
