Cover Story

We've all heard reports about the financial setbacks experienced in recent months by many foundations across the country. The David and Lucile Packard Foundation is down 75 percent; Ford Foundation—down 29 percent; The Pew Charitable Trusts—down 19 percent; Charles Stewart Mott Foundation—down 14 percent; and Fidelity Charitable Gift Fund—down 10 percent. In short, billions of dollars in assets have been lost and, as a result, millions of dollars in potential grants will not be allocated.

Photo © Getty Images/Stewart Cohen

Traditionally, private foundations are established with large endowments that are intended to cushion them from the ongoing burden of raising funds for programs and operations. Given a self-perpetuating revenue base, private foundations have the ability to make decisions without external dependence or pressure. They have the freedom to make long-term commitments, take unpopular positions, and support risky or innovative approaches.

Nevertheless, endowments do not assure insulation from economic downturns or bear markets. Foundations' annual budgets are tied to the current value of their asset bases, and whether foundations can expand grantmaking and programs is always going to be based largely on investment performance.

So, how are foundation trustees and executives responding to significant reductions in their asset bases?

What are the practical steps they are taking to address dramatic drops in funding capacity?

And, how are they preparing their institutions to endure future market shifts and financial uncertainty?

Tracking the Trends

This article is based on a report commissioned by the board of directors of a family foundation—the Flintridge Foundation in Pasadena, California—that has lost approximately 30 percent of its endowment value. Flintridge's loss was all the more challenging because it was on the heels of a period of sustained financial growth and expansion of the foundation's programs and staffing.

Before making any decisions, the Flintridge board of directors wanted to know how other foundations were coping with similar circumstances. Most of the published media reports on the subject focused on the extent of foundation losses and did not get into the actual approaches that foundation leaders were taking to address them. Wanting to make an informed decision, the board commissioned a scan of foundations in their region that had also experienced losses in order to identify concrete options for what to do. Following is a summary of the findings.

More with Less The nine foundations involved in the survey range in size and type from large private foundations to small family foundations as well as the local community foundation. In addition to traditional grantmaking, some sponsor award programs for individuals or run technical assistance initiatives for nonprofit leaders.

Foundations Participating in the Study   Ahmanson Foundation    Lee Walcott, vice president   California Community Foundation    Judy Spiegel, senior vice president of programs   Crail-Johnson Foundation    Pat Christopher, program officer   The California Wellness Foundation    Gary Yates, president and CEO   The Durfee Foundation    Claire Peeps, executive director   Joseph Drown Foundation    Wendy Schine, vice president/program director   Pfaffinger Foundation    Mary Tower, president   The Ralph M. Parsons Foundation    Wendy Hoppe, executive director   Whittier Family Foundation    Linda Blinkenberg, executive director

All of the foundation executives interviewed express deep concerns regarding the many current economic challenges facing nonprofit organizations. Among those they specifically flagged:

• severe government funding cut-backs                         
• reductions in corporate support and volunteerism                         
• increased costs of service provision                         
• increased need from constituencies                         
• potential reductions in contributions from individuals due to decreases in their discretionary income and net worth.

The foundation executives are motivated by an overarching desire to minimize the negative impact on nonprofit organizations. They see that they share the same challenge as nonprofit leaders: to do more with less.

Hedging Bets on Payout Levels

Almost all of the foundations we talked to are trying to keep the grantmaking budget as high as possible. None of them plan to reduce annual allocations below the 5 percent minimum payout rate, even though most had the option of doing so given higher payout rates in previous years (i.e., exercising the regulations for multi-year averaging).

Some foundations are maintaining the dollar level of their grantmaking, which will significantly increase the payout percentage. For example, according to Wendy Schine, vice president and program director of the Joseph Drown Foundation, "The board made a conscious decision to maintain the foundation's level of giving through next year even if it means dipping into the corpus. Board members do not want to hurt the nonprofit organizations they seek to serve before the foundation has suffered itself." However, she added that if the market continues to slide, the board may have to consider future reductions in giving to meet its fiduciary responsibilities.

Gary Yates, president and CEO of The California Wellness Foundation, reported, "The board is committed to stay the course for 2002. This means a payout of more than 6 percent in 2002, which will result in more dollars granted in 2002 than in 2001 even though the foundation's endowment has decreased by 9 percent." In the future, if the market continues to falter and the foundation's endowment suffers further losses, the foundation's next steps "are a big question mark," says Yates.

Other foundations that have experienced large losses plan to reduce their annual payout rate to the 5 percent minimum. They've concluded that this shift is necessary to maintain their spending power over time, and they're waiting for the economy to swing back.

Lee Walcott, vice president of the Ahmanson Foundation, explains it this way: "The foundation was fortunate to give at a higher rate when the market was strong and our investments were performing well. We will not be able to make contributions at the same rate in the coming years."

Cost-Cutting Measures

Many foundations flatly stated that they could not continue with "business as usual." Several are significantly paring their administrative expenses in order to reduce annual expenditures.

"If we are asking nonprofit leaders to do more with less funding, we need to bear some of the weight of the bad economy and find cost savings internally," stated Wendy Hoppe, executive director of The Ralph M. Parsons Foundation. In Wendy Schine's words, "We have to make sacrifices first before we diminish our support for grantees."

Along those lines, here are some of the cost-cutting measures adopted by the foundations we talked to:

Freeze open positions. Several foundations have decided not to fill positions vacant from staff departures last year. Some have instituted a formal hiring freeze. They recognize that this will place strains on current staff and are making changes in the way they operate in order to make do with less staff.

Freeze salary and benefits. Parsons foundation's Wendy Hoppe is looking into a number of possibilities for reducing personnel costs, including providing benefits in lieu of salary increases. Another approach is to test employees' interest in part-time vs. current full-time employment. One foundation cut professional development, including travel, conferences and memberships.

Partner with similar organizations. Several small foundations have found that collaborating with other organizations cuts costs significantly. Two of the family foundations interviewed share offices and staffing with other foundations or with the family business. The California Community Foundation frequently provides professional and administrative services to small family foundations. Thus, small grantmakers do not have to hire their own staff or run an office.

For example, Linda Blinkenberg, executive director of the Whittier Family Foundation, manages a small staff that collectively oversees 11 related family foundations that vary in size and scope. When sharing office space and staff are not possible, foundations have found ways to collaborate with other grantmakers and service providers. The Pfaffinger Foundation, for one, collaborates with seven nonprofits to provide outreach and referral services to constituents.

Cut less-essential positions and expenses. While none of the foundations interviewed have initiated layoffs, other foundations have reduced their overall staff size by consolidating program or administrative positions. They have streamlined the workload so that fewer staff can be involved.

A number of foundations have targeted specific functions—communications, in particular. Some have decided not to print an annual report, and are relying on their websites to publish information. However, communication remains a vital function, according to foundation executives (see "Staying Focused," below).

Some foundations already have such small staff and very low administrative expenses that there is little to cut; even so, such belt-tightening really can't make up for the losses that foundations have experienced over the past year. In some cases the only option is to find reductions in the grantmaking budget.

Back to the Basics

All the foundations that reduced their annual allocation budgets had to make difficult choices regarding eliminating entire program areas or instituting across-the-board spending cuts.

After careful evaluation, a number of them chose to phase out specific programs in order to sustain the level of grantmaking in other critically important program areas.

Due to the dramatic increases of the bull market in the past decade, many foundations were able to broaden their traditional guidelines to serve a wide array of related issues and new constituencies. Now, these foundations are reassessing their grantmaking and looking back to their core missions.

For example, The California Wellness Foundation has been a pioneer in defining violence as a health problem and thus, during the past decade, has supported a variety of youth development programs as successful diversions to violent behavior.

While the foundation will continue to fund violence prevention programs in the future, given its diminished resources and critical needs of the field, it will place highest priority on providing core operating support to health organizations and services.

The California Community Foundation has identified the types of institutions that will be ranked higher for foundation funding: those that have suffered the most severe cutbacks in governmental funding and that are essential to community life (e.g., health, education and social welfare).

In recent years, some foundations had created formal programs to provide encouragement and mentorship to new philanthropic sectors, in the hopes of leveraging their visibility and expertise to increase the level of giving in America. Now The David and Lucile Packard Foundation and Charles Stewart Mott Foundation have both cut grantmaking initiatives devoted to nonprofit research and promoting philanthropy. Packard will now concentrate on its central issues of the environment, population planning, and children, youth and families. Yates stated that Wellness had been supporting similar efforts to expand philanthropy through its Special Projects program area. Now it will "look more closely at philanthropic affinity groups asking for project grants."

A number of foundation executives are refocusing their grantmaking to target specific constituencies that are closest to the spirit of their missions. The Pfaffinger Foundation will tighten its focus on grants that best reflect its mission of helping the working poor cope with unexpected financial emergencies. The Parsons foundation will make fewer grants to large institutions and will give more to small and mid-sized organizations, especially those that are grassroots and well-grounded in their communities.

Several foundations plan to provide the majority of their support to organizations that have received at least one grant in the past. These foundations are relying on the strength of the established relationship; such grants involve fewer risks because the organization has already proved its capacity to use the foundations' funding well. They believe that new grants to organizations they have supported in the past will build on previous investments, hopefully creating a larger, cumulative impact. In addition, known grantees require less staff time for researching organizations and funding requests.

Fewer Large Grants or a Wider Spread?

It seems there are just two ways to go with grantmaking: Make the same number of grants as in previous years, thus awarding smaller amounts, or reduce the number of grants, thus maintaining the average size of awards.

Both the Drown and Ahmanson foundations want to maintain the breadth of their grantmaking in order to support as many meritorious organizations as possible. Drown has reduced the average size of its grants and increased the number of grants awarded.

Ahmanson has also made it a priority to fund organizations that are vulnerable to current economic challenges. At Ahmanson, Lee Walcott outlined the foundation's decision to reduce the number and size of major grants (more than $250,000), which have tended to support larger organizations.

"This way," he says, "we can provide the same number of grants under $100,000 that serve the region's many nonprofit organizations."

In addition to reducing the average size of its grants, Parsons will be making fewer multi-year awards. The board made this decision when it realized that almost half of its 2002 budget had already been encumbered by multi-year grants. The foundation hopes that this new emphasis on grants for projects that last 12 months or less will add flexibility and responsiveness to their grantmaking.

Others would argue in favor of more multi-year commitments in a down economy. In the words of Whittier Foundation Executive Director Linda Blinkenberg, "We prefer to make multi-year commitments and to focus on building close, ongoing relationships with fewer organizations that have a track record of success."

On a practical note, The California Wellness Foundation discovered three years ago that it greatly reduced the administrative costs of both the foundation and the nonprofit organizations it supports by issuing a single check for the full grant amount at the beginning of a multi-year granting period.

The multi-year funding provided stability to the organizations and to the programs receiving the support; they could count on the core investment. The grantees gained tremendous flexibility in managing their project objectives and added resources to address unforeseen circumstances (due to the interest income from investing the grant).

Foundation staff also saved a lot of time in bookkeeping and grants tracking. When the foundation tested the program, it found that it did not incur any greater risks or lose accountability usually thought to result from periodically dispersing grant funds. Accountability was maintained through annual interim reports and staff site visits.

The Durfee Foundation would also rather reduce the number of grants than the size of the award if its grantmaking budget needs to be cut in the coming years. Claire Peeps, executive director, explained that "the award size is based on the needs of the organization and the threshold that can make a difference. Reducing the size might jeopardize the impact."

Flexible Capital

Many foundations are placing greater emphasis on core operating support. Pat Christopher, program officer of the Crail-Johnson Foundation, says, "We try to be truly responsive to the nonprofit organizations we fund. We're very comfortable providing general support and trusting in the nonprofit leaders to direct it where it can have the most benefit."

The Joseph Drown Foundation has also been providing increasing numbers of grants for core operating support. Wendy Schine elaborates that this type of funding provides maximum flexibility to organizations and boosts them through hard times.

Like a number of other foundations, The Ralph M. Parsons Foundation has shifted its focus away from funding capital expenditures and towards providing unrestricted general operating support. Both the Ahmanson and Crail-Johnson foundations agreed that they are encouraging organizations seeking capital campaign support to "come back later" as their focus turns to more immediate needs.

Many foundations are increasing their funding for projects that enable nonprofit organizations to gain new skills that could enhance institutional sustainability. This type of funding has been difficult to raise in the past. Now, many grantmakers are expressing a new appreciation for capacity-building grants. Judy Spiegel of the California Community Foundation emphasized the need to help "critically needed agencies" with technical assistance, capacity building and core operating grants.

To Seed or Not to Seed?

Although funding "innovative strategies," "seed funding for new ventures," and support for "emerging organizations" were popular in the 1990s, most of the foundation people we talked to this fall said that they are now less receptive to providing start-up money for new projects or organizations.

That's because, in times of scarcity, they want to make sure that good organizations and programs continue to be available to the community. These funders say they're more inclined to sustain already-established organizations and reputable programs that have a track record of success.

On the other hand, Claire Peeps says The Durfee Foundation remains committed to seed funding for new programs and new organizations. Given its mission to support unconventional, creative, and risk-taking projects, she says, the foundation board is even more dedicated now to seed funding as other foundations are moving away from it.

Rethinking Investment Practices

Almost every foundation we talked to stated that they have thoroughly reviewed their investment strategy and have further diversified their portfolio in order to improve asset value.

Of the foundations interviewed, at least one has retained new investment consultants and two have changed or are in the process of changing their investment portfolios. Another foundation decided to review its portfolio more frequently (now, quarterly) to better respond to current events. The Ahmanson Foundation, founded with assets from family businesses (H.F. Ahmanson & Co. and Home Savings & Loan), long ago developed a divestment policy so that it would never be susceptible to drops in a single company or sector.

Two family foundations have traditionally received regular contributions from family members. For example, family members involved in the Crail-Johnson Foundation will maintain the amount of their individual contributions to the foundation, which will help stabilize the foundation's endowment and its grantmaking activities.

Consistency and Transparency

The foundation executives interviewed provided some overarching suggestions for grantmaking colleagues to keep in mind as they try to respond to the needs of the nonprofit community while having decreased funding to do so.

First and foremost, grantmakers should understand that the nonprofit organizations that they fund are facing similar challenges and choices. Sensitivity to this situation can be expressed with more open communication.

Nonprofit leaders can benefit greatly from advanced communication regarding reductions in a foundation's grantmaking budget or changes in grantmaking programs, eligibility, or proposal guidelines. Expanding two-way dialogue will deepen community relationships and give foundation staff the opportunity to be responsive to the most important needs identified by constituents. It can diminish overall anxieties and reinforce a sense of common enterprise.

Additional assistance and goodwill can be achieved if the foundation maintains a predictable level of grantmaking activity.

Especially during these volatile and unpredictable economic times, a foundation's ability to continue its grantmaking activity as consistently as it had previously can play an important role in stabilizing and strengthening the nonprofit sector.

The Market Always Cycles

Two staffers at older family foundations—both established more than 50 years ago—noted they'd survived several turbulent economic periods that negatively affected both personal assets and foundation endowments.

They've learned to trust that the foundation's asset base will recover, as it has before.

Gaining the long-term perspective may be more difficult, but essential. As Wendy Schine of the Drown Foundation and Lee Walcott of the Ahmanson Foundation both noted, "foundations are here for the long haul."

What the Flintridge Foundation Decided to Do

The board remains deeply committed to continue its work in all four program areas. It also decided not to reduce its current year (2002) budget or pledges for multi-year commitments.

It has consolidated staffing: One program officer was let go and responsibilities divided between three other program staff; a receptionist and a clerical position were combined; and another staff person was let go.

The board charged staff with looking deeply at what is essential in each program area and recommending cuts (starting in 2003) for what is not. The foundation's values and mission are important references in identifying cuts. Already staff reports that it is finding more effective, creative and valuable ways to deliver its services.

The board plans to meet in a one-day retreat with staff to review proposed 2003 cuts and to consider the course beyond 2003. Decisions will be based on evaluations of the programs and the foundation's understanding of the relevancy and value of the programs to its constituents.

—L.D.

Eight Reduced-Asset Strategies

1. Maintain a strong payout level.

• Maintain grantmaking budget at last year's dollar level (dipping into principal)                         
• Maintain a similar payout percentage (reducing the payout total)                         
• Cut payout to 5 percent minimum payout level

2. Cut administrative expenses.

• Freeze open positions                         
• Freeze salary and benefits                         
• Cut less-essential positions                         
• Partner with similar organizations                         
• Cut other administrative expenses through greater use of technology, streamlining and omission of ancillary functions

3. Focus on core competencies.

• Focus programs more narrowly according to mission, with few exceptions                         
• Cut a percentage of funding from all program areas                         
• Cut a specific program area in order to maintain funding in other program areas                         
• Target funding to highest priority agencies or issues                         
• Support past grantees

4. Select breadth or depth.

• Retain the number of grants awarded, but make smaller grants                         
• Reduce the number of grants, but maintain the same average size                         
• Give one-year grants                         
• Make multi-year grants

5. Redirect funding for maximum flexibility and long-term sustainability.

• Provide general operating support                         
• Provide capacity-building grants                         
• Support established organizations and projects

6. Revise investment portfolio.

7. Increase annual revenues through contributions to the foundation.

8. Create a transparent organization.

• Maintain open communication with constituents                         
• Establish a consistent pattern                         
• Maintain a long-term perspective

—L.D.

Staying Focused

In coping with significant asset losses, the foundation executives interviewed provided three overarching suggestions for funders to keep in mind:

1. Communication. Maintaining open communication, both in-coming and out-going, with constituents helps nonprofit leaders who are struggling to do more with fewer resources. If reductions in grants or changes in guidelines are anticipated, foundations should inform their constituents and communities as early as possible in order to help them plan for the future and have realistic expectations. Moreover, foundations should be receptive and responsive to current pressing needs identified by nonprofit leaders. Open communication and two-way dialogue can go a long way to diminishing overall anxieties, establishing a sense of common enterprise, and maximizing the opportunities to have a strong impact.

2. Consistency. With market forces creating an unpredictable economic environment, it is crucial for foundations to establish consistent grantmaking and programming patterns that can be sustained over a period of time.

3. Perspective. Over the history of the philanthropic sector, numerous foundations have survived economic storms and dramatic endowment reductions, and remain vital and strong. For newer foundations, gaining this long-term perspective may be difficult. Young funders may find it beneficial to contact colleagues at older institutions for guidance and reassurance that foundations can be "here for the long haul."

—L.D.