Funders Convene in Seattle

Summary of Proceedings

What do we know about the prospects for foundation funding in the next 12-24 months?
Edward Pauly, Director of Research and Evaluation, The Wallace Foundation
For Philanthropy Northwest and Grantmakers in the Arts
December 4, 2008

I appreciate being invited to participate in this important conversation.

At The Wallace Foundation, we are responding to the same highly volatile and downward-trending investment situation that all of you are seeing and experiencing, as well. This economic environment is affecting all foundations in various ways, and it is affecting non-profit organizations even more.

And the toughest part of this situation is that none of us knows, or can realistically predict, where we will be even in a few months, and certainly not in a year's time. So uncertainty is a central and difficult part of this challenging situation.

In the face of this uncertainty, one of the things we can responsibly do is to inform ourselves about the current situation; about somewhat similar situations that have arisen in the recent past; and about some of the factors that will affect us in the near future.

The best information I know of on this topic has been gathered and analyzed by the researchers at the Foundation Center, drawing on their amazing database, which contains in-depth information on more than 1,000 of the largest foundations, and which goes back a number of years, to 1975. Some of their relevant publications were included by way of website links in the email you received prior to today's meeting (including Steven Lawrence's recent Research Advisories, “Past Economic Downturns and the Outlook for Foundation Giving” and “Do Foundation Giving Priorities Change in Times of Economic Distress,” which I have drawn on for these comments). I strongly recommend these reports—they are excellent.

A new Foundation Center report released in October looks at the extent to which past economic downturns have been followed by reductions in foundation giving.

During and immediately after three previous recessions (or four, depending on how you count)—in 1980, 1981-82, 1990-91, and 2001-2002—foundation giving declined slightly in the aftermath of two of the recessions, after 1982 and after 2001, and increased slightly after 1991. In all cases, the change in foundation giving was less severe than the economic decline.

This makes an important point: While foundation giving is definitely affected by recessions, the effect has been a somewhat dampened one.

Among the apparent reasons for this dampening affect, two reasons stand out.

First, many (though not all) foundations have sought to play a somewhat counter-cyclical role with their giving, by keeping their commitments for both current and out-year grants and by making targeted new grants. What they haven't done is to cut their giving in direct proportion to the decline in the markets.

Second, estate plans that were created 5, 10, or 20 years before a recession lead to the creation of new foundations every year, recession or no, and those new foundations add to the giving of existing foundations. These new foundations tend to be ignored when we focus on cutbacks by existing foundations, for understandable reasons—the new foundations are mostly off the radar, we're not familiar with them, and at the same time we are very aware of changes by the old familiar foundations. But that's a mistake on our part, because every year, new foundations add significant amounts to the total of foundation giving. The same point can be made about significant additions to the assets of existing foundations—these donations happen every year, too, whether there is a recession or not. The effect is to dampen the impact of cutbacks by the long-established foundations.

Just last month, the Foundation Center released a second research advisory, on a related but distinct topic—the extent to which during and after past economic downturns, foundations have changed their giving priorities—for example, by cutting back on support for the arts, and increasing their support for social services.

What they found for the economic downturns between 1980 and the 2001-2002 recession was that the overall grantmaking priorities in the foundation sector and the overall allocations by the sector did not shift significantly during and after past recessions. Instead, grantmaking priorities and allocations have remained remarkably consistent over time. We all know of individual foundations that are exceptions to this pattern, and it is definitely the case that some foundations have reduced or even ended their support for the arts after an economic downturn. But overall, the historic pattern is quite clear: for every cutback in giving there were some compensating increases in giving, so the overall giving priorities of the foundation sector have not shifted significantly in the aftermath of past economic downturns going back to before 1980. Allocations to the arts have fluctuated modestly, but these fluctuations have been no larger in recession or post-recession years than in periods of economic expansion.

Again, there are many reasons for this pattern, including the relative stability of foundations' commitments, strategies, and donors' intent, all of which have stabilizing effects over time.

The Foundation Center has also carefully studied grantmaking in the aftermath of the terrorist attacks of September 2001. That's a story that is fairly well known by now, and it has some relevance to the present situation. After the events of 9/11/2001, while foundations gave very significant amounts to the relief and recovery efforts, they generally did not shift their overall funding priorities, their programmatic focus, or their strategies and grantmaking practices. These findings continued even as the recession of 2001-2002 occurred.

I'm sure you have all heard advertisements for investments that end with the warning, “Past returns are no guarantee of future results.” That is true for today's topic, as well. We simply do not know the full extent of the current recession and the decline in asset values. It already appears to be a more severe recession than those we experienced over the last 30 years, and that should give us reasons for concern. We don't know the effect of the current recession and the decline in asset values on foundation giving and foundation priorities. The current volatility of the markets makes it difficult to know from one day to the next what the value of a foundation's assets really is. This is a very tough situation in which to make plans for the future, both for our foundations and for the non-profits our foundations support. Moreover, this recession already is clearly more severe than other economic declines in the last 30 years—and we all need to be concerned about that fact.

But at the same time, there are several factors that have been quite consistent during and after past recessions. They probably include these points:

  1. Severe recessions do reduce foundation giving, but at a lesser level of reduction than the reduction in the overall performance of the economy.
  2. Foundation giving priorities, including the arts, have been relatively stable during and after past recessions.
  3. Whether there is a recession or not, new foundations keep being formed, and some foundations receive additional contributions of assets, and these events add to the total giving by the foundation sector. This is a factor that tends to compensate to some extent for declines in giving by existing foundations, and it is a factor we often overlook.
  4. Many, though not all, foundations have responded to past recessions by seeking to be somewhat countercyclical: To the extent possible, they have met existing grant commitments, and some have made new targeted commitments in response to the effects of the recession.
  5. Foundation giving is at best a modest part of total nonprofit funding. Foundations provide only 2% of the revenue of the non-profit sector, and foundations provide only 10% of all charitable giving. This means that foundations cannot possibly compensate for large declines in the revenues or the donations received by non-profits as a group. The money simply isn't there to do that. At best, foundation giving plays a modest although significant role in the economics of the non-profit sector. Non-profits have reason to be concerned about the possibility that foundation giving may decline, but right now they have far larger economic concerns to worry about, unfortunately.

There is a lot that we would all like to know that we simply can't know right now. But at the same time, these factors are very much worth knowing, and worth including in our assessments of how we want foundations to respond to the tough economic situation.