Canadian Foundations and Tough Economic Times - A Comment.
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In this comment I encourage foundations to be more active in the current difficult economic times. Many are working hard with their partners in the sector to do just that.
With the global meltdown of financial markets, we have seen some Canadian public and private foundations lose substantial amounts of the market value of their endowments. Although this is only on paper, for many it has been quite shocking.
Some of these foundations have excess room in their disbursement quota and are not legally obligated to expend funds this year or next year. For those foundations that are not legally required to disburse funds, and are legally allowed to encroach on capital, I would ask them to seriously consider that if the downturn is as serious as some have projected that their funds disbursed now could be far more valuable than funds disbursed later in an economic boom. Not only are the needs of charities greater but the needs of their beneficiaries are greater as well.
Other foundations have no excess in disbursement quota, perhaps a deficit and are concerned that they will not be able to disburse both this year and next without encroaching on capital. Some of these have ten-year gifts that created the “endowment” and in many cases did not anticipate encroaching on capital even if it was to satisfy the disbursement quota. This is not really a CRA issue. It is a public guardian and trustee issue and careful consideration needs to be given to the trust document. In some cases an application to court may be necessary. Others have no restriction on their ability to encroach on capital but they are not interested in encroaching on capital because their capital has been substantially reduced and they may be asking/lobbying for special dispensation from CRA to deal with this situation. Some will be looking to CRA to provide a reducation in disbursement quota. CRA has a Form T2094, Registered Charities: Application to Reduce Disbursement Quota. Specifically, they don’t want to be required to spend their 3.5% disbursement quota requirement.
Of course, many foundations have invested in a manner that they received a far higher rate of return in previous years but interestingly, many just disburse 3.5% irrespective of the amount of money they are able to disburse. The Department of Finance and the Income Tax Act does not require that the foundations disburse more when they have a very good year.
I realize that if there is one thing that most people can agree on is that the disbursement quota system is complicated and may not be achieving what it was set out to accomplish. I realize that Department of Finance is looking at revising the disbursement quota. But I don’t think that this is really an issue of disbursement quota. I think it is an issue of who is prepared to do what when times are tough and who got proper advice when setting up their endowments. In many cases a special purpose trust, private foundation or an isolated endowment is not the appropriate vehicle for philanthropic giving - despite the fact that some organizations use them as a cookie cutter approach to philanthropy.
In these tough times some foundations will do more, some will do the same with less, some will do less and others will do nothing.
It is difficult for private and public foundations to look at their monthly statements and those declines from the height of the value of the portfolio and the value of the stock market. It hurts.
However, some charities because of reduced government funding, reduced donations and reduced funds from foundations may see a 10 - 20% decline in their revenue over the next year or two. Some may have to lay off some of their staff and curtail their programs in a time of increased need. However painful it is for a foundation to look at a monthly statement, I guess I feel more empathy for the boards of operating charities and their CEO’s who may have to lay off staff and cut programs just when the need is greatest.
It is interesting that Warren Buffett when deciding to give the Bill and Melinda Gates Foundation by far the largest gift anyone has ever seen, he had only one significant stipulation. He required that the funds could not be accumulated and donations in his lifetime must be spent in the year of donation and over and above the 5% US disbursement quota required already of the Bill and Melinda Gates Foundation . As well, donations after his death needed to be fully spent within 10 years of his death. Warren Buffett is an interesting individual and certainly knows a lot more about finances than many. He was more impressed with the idea of having a meaningful impact on the world’s greatest problems rather than tying up capital in perpetuity.
In these difficult economic times, it would be more beneficial if foundations focus less on what is the minimum that can be disbursed after talking to their corporate lawyer, accountant or financial institution, but rather on how can they best contribute to making our society better in these tough economic times.
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Charity Village did an interview with Hilary Pearson, president and CEO of Philanthropic Foundations Canada. I think it is a great response from some of the biggest foundations to this difficult situation.
CV: Given the current economic situation, how do you foresee the instability impacting foundations in Canada? What does the potential impact mean for the sector as a whole? And what do you feel nonprofit leaders can/should be doing during this turbulent time to meet those challenges?
HP: I’ll speak for my membership, which is most of the larger private foundations in the country, but by no means all. There’s 96 members in all. The gist of what I’m hearing is: “We’re holding the course in 2009. We’ve seen this before; cycles come and go and we’re not going to panic.” Most of them are not under the same restrictions as community or public foundations that have donor provisions such as having to preserve capital, not encroach upon it, and hold onto it for perpetuity. Also with community foundations, they have a commitment that if market value goes below the book value of a gift, they can’t make any disbursements. This is why many community foundations have had to stop dead. They may still have the capacity to give but donor agreements have limited them. Private foundations, especially ones that have been around for a while, can encroach on capital, don’t have donor restrictions, and actually have more tools at their disposal. They all suffer the same dismal returns on investments but they can say, at least for now, that it doesn’t mean they need to cut back. We have the money and can encroach on capital or can find other ways of using assets to support grantees and communities.
The situation can get really horrible in 2009 because a lot of charities will not only be losing foundation money but will also be losing government money and individual donations. But if you have a good business plan and a contingency reserve, can grit your teeth through it, you can probably make it. I think the foundations themselves will have to assess whether they need to do a triage and support the organizations that they think are critical that they’ve invested in. It’s important to be as creative as possible and it’s not just about money. As a foundation, you can also make space available, you can convene people, you can share some back office structure with charities. It’s an investment in social capital, not just about the grants.
This situation is going to really test leaders, no doubt about it. One thing I have to say in favour of nonprofits is that, on the whole, our demographic in terms of leadership is a senior one. And you want an older leader who’s seen some of this before, who can stay calm and reach out and find resources in other ways. I think the nonprofit sector has a lot going for it in a crisis. It’s used to doing a lot with a little. There’s going to be quite a lot of flexibility and imagination and the ability to tap into all possible resources that one may not see as much of in the private sector. So I think, in this circumstance, while it’s a bad story for everyone, it may be a better story for the nonprofit sector in terms of quality of leadership.
This is where networking and the Internet and the ability to go through umbrella or infrastructure organizations is really important. I’ve already participated in a number of conference calls with leaders in a number of organizations. We can look to each other and learn from each other and we can share that information with our members. Again, the fact that infrastructure was created through the early years of this decade is going to be helpful. This is when those organizations and networks will have to come into their own.