Cutting Its Losses

Plunge in assets forces Packard to slash programs

At a college in Harlem, Mont., Native American students and faculty members are sampling the water polluted

by a gold mine to bolster a lawsuit brought by local tribes. Their laboratory is a state-of-the-art classroom built and outfitted by the David and Lucile Packard Foundation, which has been supporting Fort Belknap and 29 other tribal colleges as part of a nine-year effort to improve science education for Native Americans.

But that support, which amounted to more than $20-million, is coming to an end. Packard is cutting its grants by hundreds of millions of dollars due to a drop in its assets, and like many of the foundation’s other ambitious projects, the tribal-colleges effort ended up on the budget-cutting table. With few other donors interested in the subject, the impact is expected to be great.

“It’s going to devastate the science movement at the tribal colleges,” says Richard Williams, executive director of the American Indian College Fund, in Denver. “We’re talking about very isolated, poor areas that have limited opportunities at best.”

Eliminating the program is part of a grueling process under way at Packard’s offices in Los Altos, Calif., and rippling through the charities that received or benefited from its support as the foundation adjusts to life after a plunge in assets, from a high of $13.1-billion in 1999 to $4.8-billion at the end of last year.

Still Seventh Wealthiest

The foundation — still the nation’s seventh-wealthiest — is communicating candidly and thoughtfully with the charities it has supported, grant recipients say, and making efforts to help them sustain as few bruises as possible as they lose their Packard support. But some question the wisdom of eliminating certain project areas — particularly support for groups that help nonprofit organizations run better and for advocacy organizations — saying such grants could have had a major impact at a time when the country faces a fiscal crisis and many government social and environmental policies are being refashioned. Other observers are angry that the foundation got itself into such a difficult financial predicament.

The process has involved slicing two-thirds of Packard’s grants budget — or $416.3-million. That amount is far more than all but the very biggest foundations award in a year. For example, it is double the total amount distributed last year by the John D. and Catherine T. MacArthur Foundation, the nation’s ninth-wealthiest foundation.

To pare spending, Packard has been eliminating and reshaping grant-making programs. It has also laid off 60 of the foundation’s 160 staff members, including 39 who held program positions. Among those losing their positions: the directors of the Organizational Effectiveness program and the Cross-Cutting Initiatives program — which promoted collaboration across the foundation’s grant programs — and the director of Packard’s science grant-making programs.

As steep as the cuts have been, they could have been worse. Payments made in 2003 on new and previously awarded grants are expected to total 8.6 percent of the foundation’s net assets, exceeding the 5 percent required by federal law, foundation officials say, to ease the impact of the cuts at a time when other foundations are also making reductions.

Hewlett-Packard Stock

The $8.3-billion decline in assets since 1999 occurred as the value of Hewlett-Packard stock, which makes up the bulk of the foundation’s portfolio, took a nosedive. While the foundation has some real-estate holdings, the only other company it invests in is Agilent Technologies, a Hewlett-Packard spinoff.

Before his death in 1996, David Packard, co-founder of Hewlett-Packard Company, wrote to encourage the foundation’s trustees and Colburn S. Wilbur, then its executive director, to retain his company’s stock in the foundation’s portfolio. The trustees decided that the foundation should hold on to the shares to honor the founder’s wishes, says Mr. Wilbur, and the stock continued to perform well for several years after Mr. Packard died. In 1998, after receiving $6.2-billion in Hewlett-Packard stock from Mr. Packard’s estate, the fund vaulted to the top of the foundation ranks.

Some find it hard to understand why the foundation, which has since sold some of its stock to pay for grants, kept its assets so concentrated, even as technology stocks crumbled. Said one executive director whose group received hundreds of thousands of dollars from Packard but no longer falls under any of the foundation’s current grant-making programs: “In this day and age, that’s just insane.”

The board of trustees decided last summer to reduce the holdings in both Hewlett-Packard and Agilent by 50 percent by the end of 2007.

Even so, Mr. Packard’s wish for the foundation to retain an interest in his company continues to be important, says Mr. Wilbur, who currently serves as a Packard trustee. “As long as it makes sense, we’re going to try and follow the donors’ ideas,” he says.

The Packard family continues to have a strong role in shaping the foundation. Susan Packard Orr, one of the founders’ daughters, who declined to be interviewed for this article, is the chairman. Her husband, Franklin M. Orr Jr., is another of the foundation’s 11 board members. The founders’ two other daughters, Nancy Packard Burnett and Julie E. Packard, are vice chairmen. (Their brother, David W. Packard, runs the Packard Humanities Institute, a separate entity that has received support from the foundation in the past, including nearly $1.6-billion in 1999.)

Substantial Steps

As the decline in assets showed no sign of reversing, Packard officials realized they would have to take more substantial steps than cutting a grant recipient here and there. From 2001 to 2002, the foundation reduced its number of grants by 42 percent, from 1,510 to 874. “We needed to no longer deal with this on the margin,” says Richard T. Schlosberg III, the foundation’s president, a former publisher of the Los Angeles Times who was hired in 1999.

Figuring out what — and whom — to hold on to has been by all acounts a painful process.

In 2002, the trustees asked Mr. Schlosberg and Carol S. Larson, Packard’s director of programs, to start brainstorming with their staff members about how they would make cuts under several different financial scenarios — if they had to cut their budgets by 40 percent, for example, or even 50 percent, what would they do?

The idea was to figure out where Packard could make the biggest difference with far more limited dollars, building on projects the foundation had already supported as opposed to starting out in entirely new directions.

The foundation froze salaries and hiring during the first half of 2002, although by the second half it had lifted the restrictions. At a board meeting in September, trustees approved a plan to streamline programs and cut the staff and administrative costs. From October to December the layoffs were made — mainly on the basis of job duties, not performance, says Mr. Schlosberg.

Mr. Schlosberg set up a special telephone line so staff members could call him directly with their ideas and reactions.

Looking back, Mr. Schlosberg feels that he communicated with staff members about cutbacks too much via e-mail. “One mistake was that there were certain situations where associates heard about things over e-mail from me, rather than personally,” he says.

Severance packages were offered based on the amount of time employees had worked at Packard and what their salary was, with three months’ pay at a minimum. The foundation also paid a job-placement company to help in finding employment.

Helen J. Doyle, who was laid off in December from her job as the director of science, says that, while foundation leaders tried to treat people fairly and sensitively, emotions ran high and the process broke down at times.

“There were some decisions and some communications that were not handled as well as they could have been,” she says, declining to elaborate.

Charities Impressed

While internal communications between foundation officers and staff members may have had trouble spots, charity leaders say they have been impressed by Packard’s interactions with them.

Mr. Schlosberg says he called officials at the majority of groups that would be affected by the cuts.

In addition, the foundation sent letters to grantees in September 2002, after the 2003 grants budget was set, suggesting that many grants would not be renewed. In December, the foundation sent a second letter to grantees who were no longer covered by the foundation’s program areas to tell them the bad news.

The foundation made clear that it would fully honor all the multiyear grant commitments it had previously made.

To help ease the transition out of the foundation’s fold, Packard officials also decided to award at least $20-million held over from last year’s budget to charities that have been cut or that will soon find themselves without the foundation’s support.

‘Challenge Assumptions’

As Packard decided how to slash spending, the foundation’s operating assumption was to stick with its commitment to several causes David and Lucile Packard took a special interest in, says Mr. Schlosberg. The Lucile Packard Children’s Hospital, in Palo Alto, Calif., at Stanford University, for example, is receiving a seven-year, $230-million grant it was awarded in 2001, and could receive smaller grants in the future. The Monterey Bay Aquarium Research Institute, in Moss Landing, Calif., which was founded by Mr. Packard in 1987, will get $32-million from this year’s budget.

Mr. Schlosberg says most other grants were fair game: “I wanted to challenge old assumptions.”

The foundation’s reorganization resulted in the continuation of its Children, Families, and Communities Program and its Population Program, and the merging of two grant programs into its Conservation and Science Program.

Gone are many of the specific projects that the foundation previously supported within the broad grant-making programs.

Children, Families, and Communities, for example, is phasing out its grants on health-care quality, changes to the welfare system, food policy, foster care, and other social-welfare issues so that the foundation can focus more squarely on its goal of enrolling every child in California, and ultimately the nation, in preschool. The Population Program is ending its aid to reproductive-health services in Mexico, Myanmar, and Sudan, among other changes.

Trustees eliminated the formal grant-making program in organizational effectiveness and philanthropy, and ended the separate arts program for four California counties, although limited grants to improve nonprofit management will be made to recipients in its other grant programs and arts grants will still be awarded.

Arts organizations will receive $3.5-million from Packard this year, compared with $15-million in 2001. Peter Hero, president of Community Foundation Silicon Valley, in San Jose, says that the decline in Packard money has left small arts groups in his region desperate for support. “They’re turning everywhere for help,” he says.

Choices Questioned

Some Packard observers question the value of several of the commitments the foundation has kept, especially given the challenges of finding other grant dollars in this weak economy and a political climate that some charity officials feel has made their work more urgent.

One consultant who has worked with the Packard Foundation calls the cuts shortsighted. “What they’ve ended up doing is standing by the family commitments and cutting back disproportionately on the strategic ones,” he says. “That is too bad, because those really are the ones where the dollars have less impact.”

Because of the faltering economy, many charity leaders are particularly concerned about the decision to cut grants to help organizations pay for management advice and training.

At its height in 2000, the organizational-effectiveness program awarded $43.8-million, including money to create Grantmakers for Effective Organizations, a Washington group with members from more than 400 grant-making organizations.

Trustees voted to drop the formal program and retain just $3-million to help some of its grant recipients operate more efficiently. “We had helped build up the sector dramatically,” says Mr. Wilbur. “It wasn’t necessary to continue as the major funder.”

At Packard, officials are unapologetic for the turn in the group’s fortunes, pointing out that charities benefited from the sharp rise in Hewlett-Packard stock when times were good.

Says George Vera, the foundation’s chief financial officer: “We had a great run.”

Elizabeth Schwinn and David Whelan contributed to this article.

ABOUT THE DAVID AND LUCILE PACKARD FOUNDATION

History: Created in 1964 by David Packard, co-founder of Hewlett-Packard Company, and his wife, Lucile Salter Packard. Mrs. Packard died in 1987 and Mr. Packard in 1996.

Purpose and areas of support: To provide opportunities for children to reach their potential, to protect reproductive rights and stabilize world population, to conserve and restore natural resources, and to encourage the creative pursuit of science.

Assets: $4.7-billion as of January.

Grants and operating programs: This year, the foundation’s budget for new grants is $200-million, down from almost $229-million in 2002 and $455-million in 2001. It gives money for the following programs: Children, Families, and Communities; Conservation and Science; and Population.

Key officials: Susan Packard Orr, chairman; Richard T. Schlosberg III, president.

Application procedures: The foundation accepts grant proposals primarily from tax-exempt, charitable organizations. It does not support projects that benefit specific individuals or that serve religious purposes. There are no submission deadlines. Guidelines for each program are available on the foundation’s Web site.

Address: 300 Second Street, Los Altos, Calif. 94022; (650) 948-7658.

Web site: http://www.packard.org