Off the Charts

As the stock market gyrates, charities face tough times

The recent volatility in the stock market has dragged down the endowments of major foundations and

charities, caused foundations to consider reducing grants, forced wealthy people to think twice about donating gifts of stock, and put a chill on charitable contributions in general.

Partly because of market fluctuations and the uncertain economy, many nonprofit groups are dipping into tightly held reserve funds to make up for lost grants and donations.

Assets of nine of the 10 largest private foundations had already fallen this year by a cumulative $8.3-billion as of June 30, before the market’s steep mid-summer plunge. Private foundations with a majority of their holdings in one or two stocks, usually bequeathed by their founders, such as the Lilly Endowment, in Indianapolis, and the David and Lucile Packard Foundation, in Los Altos, Calif., have experienced the worst losses.

While Lilly says it has no intention of divesting its holdings in pharmaceutical manufacturer Eli Lilly and Company, Packard’s board of directors recently approved a plan to minimize future losses by diversifying its investments, which currently consist of stock in Hewlett-Packard Company and Agilent Technologies, a spinoff of the technology giant.

The nation’s largest grant maker, the Bill & Melinda Gates Foundation, in Seattle, remained largely immune to recent market fluctuations because it keeps most of its holdings in bonds and other nonstock assets.

Gates aside, officials at most of the top 10 foundations said that unless the market significantly rebounds they will be forced to reduce their giving in 2003.

“We’re looking at future commitments and how to balance them with the economic reality,” says Rebecca W. Rimel, president of the Pew Charitable Trusts, in Philadelphia. The foundation has lost about $300-million since the end of last year. It may reduce new commitments from $180-million to $160-million in 2003, Ms. Rimel says, in an effort to figure out how to “continue the forward trajectory of the good efforts of the grantees and how to exercise fiduciary responsibility and stewardship of the institution.”

Besides considering cutting back on new commitments, Pew, which supports the arts, social services, and education programs, among other areas, has changed how it hands out money to grantees. It has gone from annual, semiannual or quarterly payments to monthly installments as a way to ease the foundation’s cash flow.

The change hasn’t been easy for grantees. “We’re used to getting this big chunk and now it’s going to be dribbled out throughout the year,” says Laura E. Burnham, executive director of the Abington Art Center, in Jenkintown, Pa. The group recently received a three-year, $90,000 grant from Pew that will be paid in monthly installments. The new regimen has forced the center to rely more on credit to support its programs and to seek out more individual donors, Ms. Burnham says.

Individuals Give Less

Foundations are not alone in their financial woes. Stock-market turbulence also has sapped the wealth of individual donors. Many nonprofit groups and planned-giving experts report that donors are postponing stock gifts or delaying the fulfilling of stock pledges.

“In 2000, 2001, we had so many calls from donors saying, ‘We can’t wait to add a very large amount to our fund as soon as the stock price hits X number,’” says Bryan Clontz, vice president of advancement at the Community Foundation for Greater Atlanta. “Of course, every stock is so far from that number.” The foundation has experienced a 10-percent decline in the amount of contributions compared with last year, in part because of a drop in stock gifts, Mr. Clontz says.

A decline in donations to community foundations may be exacerbated because endowment values already have fallen. Preliminary results of a survey by the Council on Foundations show that the portfolios of community foundations fell nearly 4 percent last year. Still, Mr. Clontz and officials of other community foundations say they expect to hand out as much in grants this year as they did last year.

For some nonprofit institutions, postponed gifts have been in the multimillion-dollar range. William T. Coleman III and his wife, Claudia, pledged $250-million of stock in BEA Systems, an Internet company, to the University of Colorado System but delayed payment on the gift because the stock lost more than 80 percent of its value since the gift was announced in January. Besides the stock pledge, the Colemans have donated $1-million in cash to help the public-university system’s Coleman Institute for Cognitive Disabilities, the recipient of the stock pledge, continue research projects.

Besides slowing gifts to large nonprofit institutions, the undulating market has also affected giving to small charities. Kid Alert, a child-safety charity in Santa Monica, Calif., has seen the average size of its cash donations from individuals drop from $500 to $250 since January, says Anthony Segil, the organization’s executive director. The charity, which has a budget of about $100,000, may have to cut salaries to avoid closing. “As we look into our strategic planning, it’s very scary,” Mr. Segil says. “If you’re a nonprofit with any large, grandiose plans, good luck.”

Tapping Rainy-Day Funds

Many charities suffering from falling contributions and shrinking government grants are digging into their savings or endowments. But tapping rainy-day funds and endowments can be painful, particularly as their values dwindle, as has been the case for many groups recently.

Studies show that the endowments of colleges and universities fell 3.6 percent last year, while the endowment income of Jewish federations plummeted 74 percent from 1999 to 2000. Losses in endowment earnings generally mean less money for groups that routinely use some investment earnings to help pay operating costs.

The reluctance of some nonprofit managers to use reserves during budget crunches and the limits put on the uses of endowment money by donors have sparked controversies between managers and nonprofit watchdogs over when it is appropriate to spend those funds.

When leaders of the Pine Street Inn, a homeless shelter and job-training and housing center in Boston, decided earlier this year to increase the amount of reserve funds the charity would use to help offset a 15-percent reduction in an annual grant from the Massachusetts government, some members of Boston’s nonprofit world complained that the charity should dig deeper into its pockets. The shelter laid off a handful of its 400 employees and eliminated some services to the 1,300 indigent people it serves daily — this during a year when Pine Street’s shelters were sometimes filled to 150 percent of capacity.

An article in The Boston Globe in June that listed the six-figure salaries of the charity’s leaders elicited numerous letters from angry readers and hand-wringing among Boston’s nonprofit social-service groups, many of which believed that the charity should spend more of its reserves to retain personnel and programs.

Pine Street Inn says it has no choice but to make cuts, while using only a portion of its $15-million in savings. It had used as much as $500,000 of its reserves — a combination of accumulated surpluses and bequests — on annual operating costs the four previous years because state support remained flat despite an increase in the number of homeless people.

But because of the state cut this year, the charity will use a considerably larger chunk of the fund — $1.3-million — for operating expenses. “It’s a lose-lose situation,” says Lyndia Downie, president of Pine Street Inn. If the charity were to spend down the reserve fund at a faster clip, “we’d get criticism from other quarters about not managing our money correctly,” Ms. Downie says. “If we don’t, we’d be told we’re not spending enough to fulfill our mission.”

Ms. Downie adds that an annual lack of support from state government in helping to meet the increasing needs of Boston’s 6,000 homeless people forces her group to look further down the road than the next budget cycle. “If it looked like this were a one-time-only expense, we could likely justify taking more from reserves,” she says. “But this is an ongoing, long-term funding problem.”

To add to the charity’s predicament, the reserve fund lost 15 percent of its value during the recent stock-market downturn. “Every pot is shrinking,” says Ms. Downie. While concerned about cuts in jobs and services designed to help homeless people find work, Ms. Downie says she also has concerns about the charity’s future. “We can’t just worry about whether we’re here offering the same services next year,” she says. “We have to worry about being here three years from now.”

Restrictions on Spending

For other charities that collected rainy-day funds during the flush years of the 1990s, a combination of economic factors has led them to use those surpluses for the first time.

At America’s Second Harvest, a network of 216 food banks across the country, officials decided to spend reserve funds after 80 percent of the charity’s affiliates reported an increased demand for food. Although financial contributions have remained steady, the charity worries that many of the two million people who lost jobs in the past year will need more help with food, says Susan Hofer, the group’s spokeswoman. The charity will probably use as much as $300,000 of the $5-million available in reserves this year.

Other charities that could use more operating money are limited by restrictions on endowment gifts. Such restrictions often leave groups with little choice but to pare staff members or programs when finances are tight.

The Pittsburgh Ballet Theatre, for example, can annually use no more than 5 percent of the total value of its endowment for operating expenses. Faced with $100,000 less than projected in endowment earnings, cuts in a Pennsylvania arts grant, a drop in ticket sales, and slashes in grants by New York corporate foundations, the organization projected a deficit of $900,000 for this year.

Hamstrung by stipulations in its endowment and fewer dollars from contributors, the theater laid off workers for five weeks, canceled some performances, and persuaded its orchestra members to take a 10-percent cut in pay to balance its budget.

Steven B. Libman, the organization’s managing director, says he and others asked donors who had put forward endowment money if they would allow the organization to spend a higher percentage of it in the short term. “Their polite reply was we could only take 5 percent,” Mr. Libman says.

He adds that twisting the arms of donors about use of the endowment could cause some trouble as well. “These are the people we’re counting on for major help in the future,” he says.

‘Not Prepared for Disaster’

Like the Pittsburgh Ballet Theatre, the L.A. Gay & Lesbian Center can tap only 5 percent of its endowment’s value. But the restrictions on spending are even tighter: The endowment can be used at all only when investments have earned 5 percent annually for three consecutive years. Because of poor stock-market performance, it is unlikely that endowment money will be available the next two years.

Chris Bare, the group’s chief financial officer, says that, for the first time in its 30 years, the charity is considering asking its board for permission to use part of its endowment principal to pay operating costs. “We’ve balanced our budget, using conservative estimates,” says Mr. Bare. “But if there’s a double-dip recession or another terrorist attack, we might have to use endowment money. We’re prepared for flat growth. We’re not prepared for disaster.”

Some critics of restrictions wonder whether endowments should be more elastic, so charities could serve people who desperately need services during tough times.

“If endowments don’t exist to avoid layoffs and maintain services, then what are they for?” says Rick Cohen, president of the National Committee for Responsive Philanthropy, a watchdog group. “When donors unnecessarily restrict nonprofit groups’ wise use of funds, it results in the donor substituting his or her judgment for that of the nonprofit manager who makes the decisions on the ground, day in and day out.”

Others counter that limiting the use of endowments forces organizations to be lean enough to survive tough times without endangering their future. Despite the pains the Pittsburgh Ballet Theatre has endured, Mr. Libman says, maintaining the value of the group’s endowment is a matter of long-term organizational health.

“I understand what the critics say, but another way to look at it is, what if I didn’t have an endowment? Where would I be now if I didn’t have one?” says Mr. Libman. “I’d be looking at a major disaster.”

While observers do not paint a rosy picture for charitable giving in 2002, they do say the market’s unprecedented volatility couldn’t have happened at a better time of year for charities.

“Changes in the stock market in the middle of the year don’t seem to have as much of an impact on giving than at the year’s end,” says Patrick M. Rooney, director of research at Indiana University’s Center on Philanthropy. Mr. Rooney just finished a study that examines the correlation between the stock market and giving by individuals. Using Internal Revenue Service data, Mr. Rooney discovered that in the 1990s, the stock market became a better indicator of giving than personal income, which previously had been the lead indicator.

Despite the study’s findings, Mr. Rooney says, charities can continue to win donations in a shrinking economy. He suggests that they “diversify their funding base, don’t forget individual giving, and keep fund raising, because that’s the one thing we know: If they stop fund raising, the money will stop coming in.”