Giving sector needs to get real

By Todd Cohen

Instead of gearing up to weather the deepening economic crisis, the giving sector continues to descend into hysteria.

Fueled by their sense of entitlement, nonprofits and foundations find plenty to complain about rather than taking the tough steps required to advance their mission.

The proposal by President Barack Obama to reduce the tax break for charitable giving by the wealthiest Americans, for example, has unleashed a chorus of wailing by nonprofits such as Independent Sector that say the tax change could hurt donations to charity.

Nonprofits apparently do not buy Obama’s common-sense view that what drives charitable giving is altruism, not lower taxes.

But if they truly want givers to give, nonprofits need to do a much better job telling their story and engaging givers in their organizations.

That story is important yet is becoming downright alarming.

As Nonprofit Finance Fund says, based on its new survey, nonprofits are “strained to the breaking point.”

That survey of nearly 1,000 nonprofit leaders finds only 12 percent expect to keep their head above water this year, only 16 percent expect to cover operating expenses this year and next year, 31 percent lack enough operating cash to cover over one month of expenses, and another 31 percent have less than three months’ worth of cash.

Nonprofit Finance Fund recommends funders and nonprofits “address fundamental practices and strategies, along with tactics, that will improve the strength and readiness of the sector.”

For its part, Congress last week took some big steps to invest in the sector, with the Senate approving an act to create an army of 250,000 volunteers a year, up from 75,000.

It also adopted an amendment to that act to create a $25 million matching grant program to provide needed technical assistance and training to boost small and mid-sized nonprofits on issues such as financial and legal compliance, grant-writing and board governance.

While that is good news, the giving sector cannot expect government to bail it out, especially when it is not willing to fix itself.

The economic crisis has handed nonprofits and foundations a rare opportunity, maybe a final chance, to stop their sobbing, get rid of their entitlement mindset and build market-driven business models.

To cope in the real world, nonprofits and foundations need to get real.

Instead of looking to foundations and government to bail them out, nonprofits need to get their own houses in order.

And instead of squealing like stuck pigs over the loss in the value of their endowments, foundations need to dig deeper and invest what is needed to help nonprofit equip themselves to take on the social and global problems they exist to address.

If it expects to help the communities it serves help themselves, the giving sector need to stop looking for handouts and take responsibility for itself.

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Foundation hoarding backfires; billions lost

By Todd Cohen

By hoarding and not paying out a bigger share of their assets in grants, foundations have cost the charitable world of billions of dollars now likely lost forever because of the plunge in the value of their endowments.

Givers gave those funds to foundations to support charitable causes.

But the law does not require foundations to pay out more than 5 percent of their assets a year.

So rather than use more of their assets to support causes for which givers gave them in the first place, most foundations hoard them, although big foundations have been willing to invest millions of dollars to fight moves to require they pay out more.

Instead of giving more each year and truly honoring their givers’ intent, most foundations sit on their assets, betting the investment of those funds will earn returns big enough to cover their required payout and also build their endowments so they can operate forever.

The sad irony is that while foundations hoard so they can go on forever, their hoarding has resulted in the loss of billions of dollars that now likely will never go to charity.

In 2006, the last year for which data are available from the Foundation Center, the assets of nearly 72,500 U.S. foundations totaled $614.7 billion.

Those foundations, in contrast, made grants totaling only $39 billion.

And in 2008, with the capital markets in flames, the assets at 127 foundations responding to a survey by the Council on Foundations lost 28 percent of their value.

Those assets totaled $16.9 billion at the end of 2008, down from $23.4 billion a year earlier.

To put that decline in perspective, the value the endowments of all foundations lost in just one year represents the total grants they might have made over multiple years at their current payout rate.

Instead of hoarding, foundations should have invested more in the charitable marketplace.

Those dollars could have helped house the homeless, feed the hungry, protect women from domestic violence, keep children safe from neglect, preserve the air we breathe and the water we drink, and enrich our communities by engaging more people in civic and cultural activities.

Now those billions are gone. And those problems just get worse.

Still, rather than acknowledge their greed and poor judgment, foundations remain in denial.

What is more, shaken by the hemorrhaging economy, a growing number of foundations are delaying or reducing their grantmaking.

Foundations just do not get it.

Compounding the missed opportunities their miserly annual payout represents, foundations continue to play only a passive role in overseeing their investments.

What they should do is exercise greater scrutiny of their investment managers, track their investments to see if they are in sync with their missions, and push companies in which they invest to be better corporate citizens.

Sadly, foundations are not alone in blowing the opportunity to expand the pool of resources invested in charitable causes.

Nonprofits also are to blame because they rely too heavily on foundation grants and ignore the main source of charitable dollars.

While foundations account for only 12.6 percent of charitable giving in the U.S., nonprofits invest a disproportionate amount of time and effort in seeking foundation grants.

Living individuals, in contrast, account for 75 percent of all giving, with another 13 percent of giving provided by individuals through bequests and family foundations, according to Giving USA 2008.

Yet many nonprofits are not comfortable asking individuals for money, or simply are not prepared to ask, and instead focus on foundations, feeding those institutions’ inflated sense of power and influence.

It is time for foundations and nonprofits to face reality.

Foundations are the stewards, not the creators of wealth, and their job is to make sure the donated wealth they oversee is invested in the charitable causes it was given to support.

Members of foundation boards have a fiduciary responsibility to exercise discretion in overseeing assets given to their foundations.

And at a time of unprecedented economic crisis, those boards should be using their discretion to spend more of those assets, not save it for a hypothetical rainy day.

That day is now.

So instead of continuing to withhold from charities the assets they oversee, foundations should invest a bigger share of their assets in nonprofits that show they can make effective use of those funds in addressing increasingly urgent complex social and global problems.

And instead of begging for scraps or tailoring their programs simply to pander to what they believe foundations will fund, nonprofits should ask foundations for the resources they truly need to fund their current operations, build their organizational capacity and better serve their clients.

Nonprofits also need to kick their addiction to foundation grants and instead invest the time and effort needed to better engage individual donors.

The economic crisis and the human suffering it is causing should be spurring foundations and nonprofits to remake the charitable marketplace and replace bad habits with market-driven strategies and services.

Foundations can be better advocates

By Todd Cohen

With the U.S. in economic crisis, the stakes for the giving sector and its constituents are greater than ever.

Nonprofits are scrambling to secure the resources they need to cope with soaring demand for services that will address escalating social problems while also keeping their doors open and their lights on.

A small but growing number of foundations are digging deeper to support nonprofits’ need for operating funds.

An increase in operating grants from foundations is long overdue, as is an increase, from 5 percent, in the share of their assets that foundations are required to “pay out” each year for grants and overhead.

But foundations also should be doing a lot more to help shape public policies that affect the giving sector and the causes of social problems it exists to address.

Foundations can raise their voice on policy issues, do more to spur a more inclusive conversation to address issues, invest more in policy and advocacy work by nonprofits, and use their role as shareholders to help shape the business practices of companies in which they invest.

As the Los Angeles Times reported recently, a group of California foundations and think-tanks, moving beyond the funding of studies and pilot projects that have failed to generate broad improvements in medicine, have turn to social activism to push state and federal lawmakers to make the health-care system better.

And in New Mexico, according to a study by the National Committee for Responsive Philanthropy, foundations and other groups invested more than $2.6 million over five years to help 14 nonprofits in the state with their advocacy, community-organizing and civic-engagement work, generating $16.6 million in benefits for residents.

The National Committee plans to study and promote advocacy grantmaking in up to 10 states, starting with North Carolina.

Too many foundations for too long have not been willing to use their money, their connections and their voice to help shape policies that affect them, the nonprofits they support and the people those nonprofits serve.

With the U.S. economy is crisis, the problems that foundations and nonprofits exist to address only will get worse.

Now more than ever, foundations need to invest more time and resources in policy work.

Giving sector should get over sense of entitlement

By Todd Cohen

Slapped in the face by the economic crisis, nonprofits should be focusing on how to best run their shops, serve their clients and engage their givers.

The news is grim: Paul Light of New York University expects 100,000 of the 1.3 million nonprofits in the U.S. to fail this year, while a new survey by consulting firm Marts & Lundy says the recession has triggered roughly 20 percent in staff cuts at nonprofits.

And barely a day passes without reports of charitable retrenchment.

But despite the reality check, nonprofits and foundations alike seem lost in their delusion of entitlement.

Instead of getting their act together and making their own way, nonprofits are rushing to belly up to the federal-stimulus buffet while moaning that the federal government is ignoring them and that proposed limits on tax deductions for charitable contributions will hurt them.

And foundations continue to squeeze out crocodile tears about the decline in the value of their investments, forced tears that cloud the vision of foundation officials so badly they cannot read the bank statements showing they still control vast wealth.

That wealth, which givers donated to foundations to support charitable causes, is not the personal piggybank of foundations’ boards and staff, or an investment portfolio for perpetuating their personal power.

Despite the drop in its value, foundations can and should use that wealth to address the urgent needs of nonprofits and the communities they serve, needs that are escalating in inverse proportion to the free-fall of the U.S. economy.

Foundations need to do a lot better.

In “Philanthropy at its Best,” released last week, the National Committee for Responsive Philanthropy prescribes benchmarks designed “to assess and enhance” grantmakers’ impact.

Saying the largest U.S. foundations give only one of every three dollars, for example, to benefit “the economically and socially disadvantaged,” the watchdog group wants every foundation to make its board more diverse, and to invest at least half its annual giving in meeting the needs of low-income communities, communities of color and marginalized groups, and one-fourth for advocacy, organizing and civic engagement.

Foundations should in fact be required to give more of their assets in return for the generous tax breaks they and their donors enjoy, and they should indeed be pushed to give more to groups mainstream philanthropy often ignores.

And instead of griping about the plunge in the value of their assets all the way to their expensive luncheons and gala dinners, foundations should be digging deeper than ever to address urgent social and global problems that simply are getting worse in the economic crisis.

But forcing foundations to pick their boards and make their grants to better reflect the complex demographics of the communities they serve would betray the free choice in which democracy and the charitable marketplace are rooted and on which their survival and success depend.

And where would the mandates stop? Should foundations also be required to make their boards and grants better reflect the broad range of spiritual belief, political affiliation, sexual orientation and cultural taste in their communities? And who would be the final judge of whether the makeup of the board and grants was correct?

The pain and suffering the economic crisis is causing for millions of people, including the most vulnerable among us, underscore the need to foster a charitable marketplace that will expand and improve giving and its impact, and produce the most effective solutions to our most urgent social problems.

That requires a charitable marketplace that is open, competitive and fair.

Nonprofits must be free to develop the strategies and partnerships they believe will strengthen their operations, more effectively serve their clients, and better engage givers.

Foundations and individual givers must be free to invest in the charitable causes they choose.

And because they have failed to show they can police themselves, nonprofits and foundations must be subject to tougher regulation that is even-handed and requires they be more open and accountable for the way they do business.

Regulations also must require that foundations pay out a bigger share of their assets in grants.

Foundations now must pay out only five percent of their assets each year, and they can count overhead costs as part of that payout.

In donating their assets to foundations, givers dedicate those assets to support charitable causes, and receive big up-front tax breaks in return.

Instead of sitting on their assets, foundations should give more of those funds to the charitable causes they were donated to support.

In a collapsing economy, the tired claim by foundations that paying out more of their assets will force them out of business rings hollow, whiny, self-serving and plain selfish.

With Washington policymakers at a loss to know how to fix our malignant economy and overwhelming social problems, foundations and nonprofits need to get over their sense of entitlement, face reality and make their operations and programs leaner and smarter.

Moving beyond their belief that their cause alone entitles them to the support they need, nonprofits must prove their value and effectiveness in a fiercely competitive charitable marketplace that will get only more cut-throat as the economic crisis deepens.

Foundations, which do not get a license to operate virtually unchecked simply because they control donated wealth, need to stop making empty promises that they can police themselves.

Instead, foundations must start giving the taxpaying public a full accounting of their operations and a fair return on the tax breaks they and their donors enjoy.

In the face of the damage the imploding economy is causing, the indispensable role the giving sector plays in addressing social and global problems has never been more clear.

Playing that role effectively will require that givers and nonprofits alike stop complaining and instead develop strategies and partnerships that can succeed in the charitable marketplace.

Shakeout rumbling in giving sector

By Todd Cohen

The economic meltdown is starting to set off shockwaves in the charitable marketplace, and plenty more are likely.

In early February, Silicon Valley Community Foundation announced it was laying off 14 percent of its workforce and closing its San Jose office, while the company that manages the endowment for Harvard said it would cut 50 jobs, or roughly one-fourth of its staff.

Small nonprofits are not filling jobs.

Fund drives at local United Ways are falling short of their goals.

Foundations large and small, shaken by big declines in the value of their endowments, are talking about reducing or delaying their grantmaking.

A growing number of foundation executives say they expect the economic crisis will trigger the shutdown of a growing numbers of nonprofits, possibly even in epidemic proportions.

And one in five nonprofit executive directors who responded to a new poll by Bridgespan Group say mergers could play a role in how they try to cope with crisis.

Bridgespan says the poll is in line with its new study that finds a total of over 3,300 nonprofit merger deals in four states over 11 years, the same rate as in the for-profit sector.

Sadly, Bridgespan says, those mergers were made not to reach longer-term strategic goals but in response to financial distress or leadership vacuums.

“If economic conditions continue to deteriorate, more and more nonprofit leaders will likely consider” mergers, says William Foster, a Bridgespan partner.

The writing is on the wall.

Yet few nonprofits seem able or willing to see that the massive failure of the U.S. economy is going to inflict deep pain on the giving sector, pain that many nonprofits are not prepared to take and for which their lack of preparation will be partly responsible.

If they do not move quickly to streamline and strengthen their operations, services, message and fundraising, and to focus relentlessly on engaging and connecting with their supporters, nonprofits are going to be in big trouble.