Big Funds See a Dip in Assets

Charities could face future cuts in grants if economy falters

Dragged down by a declining stock market and faltering economy,

asset values of the nation’s biggest private foundations fell slightly last year, marking the first decline in a decade and signaling a potential slowdown in new grants, a new Chronicle survey shows.

Fifteen of 142 foundations responding to the survey said they expected their giving to drop this year, and another 64 predicted that their grant making would remain flat. The outlook could worsen in 2002 if the economy slips into a recession and foundation investments continue to perform poorly. Large grants and new long-term awards could be the first to be jettisoned as foundations adjust their spending to slower growth or losses in asset values, experts said.

Among key findings from the Chronicle survey:

• Assets declined by a median 0.3 percent last year among the 128 large foundations that reported data for fiscal 1999 and 2000, meaning that half posted larger percentage changes and half smaller ones. The dip comes after 10 years of gains, including a 7-percent median increase in 1999 over 1998.
• A sharp drop in assets at several of the wealthiest foundations reshuffled The Chronicle‘s annual lineup of the biggest funds. The David and Lucile Packard Foundation, in Los Altos, Calif., fell from third to fourth place as the grant maker’s assets — invested almost entirely in the stock of the Hewlett-Packard Corporation — plunged 25 percent, to $9.8-billion.

  Assets of the W.K. Kellogg Foundation, in Battle Creek, Mich., which are invested mostly in the stock of the Kellogg Corporation, fell 24 percent to about $5-billion, leaving the grant maker in sixth place, unchanged from last year.

• The median value of grants approved in 2000 rose 18 percent. But foundation experts noted that most of those grants already were in the pipeline when the economy began to falter in the second half of 2000. A decline in assets could mean little or no growth in giving for many funds beginning next year, they said.

The dimming outlook puts charities, especially those serving people who themselves are hurt by a slowing economy, in a vulnerable position. During lean economic times, charities typically become more reliant on private foundations because of declines in gifts from individuals and corporations. What’s more, the drop in foundation assets comes just as the Bush administration is asking nonprofit institutions to play a more prominent role in caring for the poor — a task that will require considerable help from the foundation world.

$5-Billion Infusions

The downturn in foundation fortunes has not hit all funds equally, of course. Many remain flush with cash from the recent bull market on Wall Street or from new infusions of capital from donors. The Bill & Melinda Gates Foundation, in Seattle, the nation’s wealthiest philanthropy, received a $5-billion infusion in January 2000, helping it to boost its giving last year to nearly $1-billion. Gates expects to give the same amount this year, and in 2000 it made the biggest single gift of any foundation responding to The Chronicle’s survey: $210-million to Cambridge University, in England, for scholarships.

Rivaling the Gates infusion of capital last year was a $5-billion pledge that Gordon E. Moore, co-founder of the Intel Corporation, and his wife, Betty, made to a new family foundation. The Moores plan to make their donation to the Gordon E. and Betty I. Moore Foundation, in San Francisco, over the next two years. The fund is too new to have been included in this year’s Chronicle survey.

Altogether, 61 of the 128 grant makers that reported asset figures for both fiscal 1999 and 2000 enjoyed increases, with aggregate gains of $16.4-billion last year.

Still, just three organizations accounted for a little more than two-thirds of that sum: the Gates Foundation; the Lilly Endowment, whose main asset is stock in Eli Lilly and Company, which makes the popular antidepressant, Prozac, as well as new osteoporosis and anti-psychotic drugs; and the Ford Foundation, which benefited from lucrative investments in venture-capital funds.

An additional 65 foundations in the survey saw their wealth decline last year, by an estimated aggregate sum of $9.03-billion. The Packard and Kellogg foundations accounted for $4.7-billion of that loss.

Many foundations’ executives played down the effect of reversals in investment performance, saying investment losses won’t have a lasting effect on giving.

“We have plenty of assets to do what we need to do,” said Owen W. Wells, president of the Libra Foundation, in Portland, Me. The foundation lost 11.9 percent, or $35.2-million, of its $294.9-million in assets last year. Still, Mr. Wells said that the foundation, which restricts its giving to Maine charities, would not reduce its grant making even if assets continue to fall.

Stanley N. Wellborn, director of external affairs at the Annie E. Casey Foundation, in Baltimore, said he expects the fund’s grant making to increase in 2001 despite a 17.3-percent drop in assets last year. The foundation’s assets nearly doubled overnight in 1999 when shares of United Parcel Service, Casey’s main asset, soared in an initial public offering.

“Most of our grants build on old work that we wanted to enlarge,” mainly by expanding programs for children living in poor urban neighborhoods, Mr. Wellborn said.

Palmer Moe, executive director of the Kronkosky Charitable Foundation, in San Antonio, said Kronkosky’s assets dove 30 percent in November before ending the year down 10 percent. Still, he said, the foundation doesn’t plan to pull back on its giving in 2001. “The stock market drop had a very nominal impact on our assets,” Mr. Moe said.

Likewise, George Vera, treasurer of the Packard Foundation, said the grant maker would hold its giving steady this year despite losing about one-fourth of its asset value in the broad sell-off of technology stocks that rattled Wall Street last year.

Despite such expressions of confidence, however, many foundation executives, when pressed, conceded that their grant making is inextricably tied to the economy and that if stock values continue to fall, giving will too.

“If there were a prolonged bear market,” Mr. Vera acknowledged, “we would have to reassess.”

Robert Berkopec, chief financial officer at the Lynde and Harry Bradley Foundation, in Milwaukee, said that if Bradley doesn’t recover soon enough from a nearly 15 percent decline in assets last year, the foundation could wind up trimming its giving and reducing the amount it puts into a grant-making fund for so-called emerging issues. In the past, such issues have included school vouchers.

“If we had to cut, while we’d maintain an emerging-issues fund, it would be lower,” Mr. Berkopec said. “Obviously, if there are new emerging issues, our ability to create grants is down because our portfolio is down.”

Previous Downturns

Indeed, history shows that grant making typically suffers during recessions and Wall Street upheavals.

In 1975, amid a deep recession, foundation giving plunged 28 percent, and it was a decade before grant making recovered to its prerecession levels, after accounting for inflation. In 1988, after the Dow Jones Industrial Average lost 22.6 percent of its value in the “Black Monday” crash of October 1987, foundation giving rose a mere 0.5 percent, and it was three years before the year-to-year growth rate rose to pre-crash levels. Even so, the often long-term nature of grant making, coupled with the federal rules that govern foundations, helps to even out peaks and valleys in giving — provided that investment losses don’t last a long time.

Many foundations, for example, stretch grant commitments over several years, making them reluctant to halt payments to charities because of a market downturn. “You can’t just shut them off,” said James Piereson, executive director of the John M. Olin Foundation, in New York.

The Olin Foundation plans to distribute all of its assets in the next three to four years — a factor that influenced its 26-percent increase in grant approvals and 10-percent decline in assets last year. However, stock losses caused Olin’s assets to fall more quickly than it had expected, and as a result the foundation will reduce its grant making this year by an estimated 10 percent.

Besides feeling compelled to fulfill commitments, foundation executives also must meet a federal requirement that their organizations distribute at least 5 percent of their net investment assets each year. Funds have 24 months after the close of a fiscal year to meet the requirement, a flexibility that allows them to average the amount they distribute over several years. Thus, if their giving falls short one year, they can make up the required distribution the next — a reason that giving is unlikely to decline this year, experts said.

“We fluctuate a lot because of our investments,” said Gillian Norris-Szanto, of the Annenberg Foundation, which lost 18 percent of its asset value last year. Even so, she said, giving will be up this year. Annenberg’s assets grew by 242 percent in the latter half of the 1990’s from stock-market gains.

Payout Debate

Because many foundations have enjoyed prodigious investment gains in recent years — and because many grant makers say they can weather the current downturn — a new door has been opened on a long-standing controversy: whether the government should raise the minimum percentage that must be distributed annually.

Rick Cohen, president of the National Committee for Responsive Philanthropy, said foundations should be giving away more money despite the rocky times on Wall Street. “They’ve had huge growth over the past 10 to 20 years, and there have been increases in gifts to them,” he said.

But Dorothy S. Ridings, president of the Council on Foundations, which represents nearly 2,000 grant makers, said the stock-market decline “may be a way of reminding people that 5 percent is really a very prudent amount” for annual distribution.

Because of inflation and operating expenses, foundations need to make an average of 9 percent on their investments each year to keep their portfolios from shrinking, Ms. Ridings said. “We’ve had some very good years,” she conceded, “but some very bad years before that. And we may be in for more.”