Sep 29, 2008

Who Will Bail Out the Non-Profits?

by Tim Ogden

While news of financial and automotive industry bailouts respectively dominated and were absent from the headlines, there is another industry in deep trouble these days: charities and nonprofits. We first noted in June, in a post about the low donation rates in response to disasters in Burma and China, that a major decline in 2008 charitable giving is likely.  Over the last 40 years Americans’ giving has remained constant at about two percent of income. But given rising unemployment and plunges in the stock market this year, it would not be surprising to see some decline. And there is some evidence to suggest that the decline will not be minor.

At the Cohen Report, a blog from the Nonprofit Quarterly, Rick Cohen gives a detailed breakdown of the specific impact that the financial services failures and consolidation may have on donations. Financial service institutions (FSIs) are the largest corporate donors of cash to non-profits. While technically the pharmaceutical industry gives more, the vast majority of this giving is “in-kind”; in other words, donations of free or discounted medicines. All of the companies in the headlines—Lehman, Fannie Mae, Freddie Mac, Wachovia—were significant donors of cash. Since many of the companies affected are based in New York, non-profits focused there are likely to be especially hard hit. A Wall Street Journal story notes that some are already creating plans based on a possible 40 percent decrease in giving this year. Compounding the problem is that many charities who did not receive money directly from corporate foundations still count the executives of those companies among their major donors. Bear Stearns executives, for instance, had a pact that all 1000 senior directors would give four percent of their annual compensation to charity.

The damage seems likely to spread far beyond the non-profits who counted FSIs and their executives among their largest donors. Hidden in a recent New York Times story about donor-advised funds is this tidbit from the Fidelity Charitable Gift Fund, the largest donor-advised fund servicer in the country: “Contributions to existing accounts fell 40 percent in the first six months of this year from the comparable period in 2007\.” For many non-profits, a majority of the funds they receive are donated in the fourth quarter of the year. Given that, it’s quite likely that at least some of them will be caught by surprise when the donations don’t come in this year. This possible plunge in donations is happening at the same time that human services non-profits are seeing demand rise.

Ultimately this is yet another reason why we should be questioning the payout regulations placed on foundations and donor-advised funds. At times like these, it would seem quite powerful to have foundations acting counter-cyclically, giving more because the need is higher. But since grantmaking budgets are driven by the five percent “rule”, the plain fact is that for many foundations their grant-making budgets will be falling, if not this year then next as their endowments absorb the damage from plunging stock markets worldwide. Thus, at the time of the greatest need, all sources of giving will be drying up at once.