What Role Should Foundations Play in Increasing Resources for Charities in Tough Times?

The Independent Sector
Perspectives on Accountability
September 2003

By Gary L. Yates

In a continuous wave of bad news for nonprofit organizations, states are reporting unprecedented budget shortfalls, foundation assets are plummeting, and corporations as well as individuals are cutting back their charitable donations. At the same time, with the economy shaky and unemployment at the highest levels in a decade, even greater numbers of people are turning to already-stressed charities for health and social services. Given the current situation, those of us in organized philanthropy need to consider how we can be of assistance.

The volatile markets of the past three years have resulted in negative effects on the investment portfolios of most foundations. On average, foundation portfolios have decreased approximately 30 percent and large reductions in grantmaking budgets have occurred. Given our losses, this may be prudent fiscal management; but given the times, is this what we should do? I don't think so. When foundation portfolios grew with the bull market of the 1990s, there were calls for foundations to increase their payout beyond the required minimum of 5 percent. The argument was that when times are good foundations should give more. But this concept is flawed after all, 5 percent of $10 million is more than 5 percent of $8 million. As foundation assets grow, foundations do give more, and they certainly did during the nineties. The call to have Congress permanently increase payout beyond 5 percent is also flawed and would result in many foundations spending down their portfolios, leaving less money for nonprofits and those they serve.

The appropriate time for foundations to give more is when times are bad. This is when foundation dollars are most needed and when "deficit spending" is called for. Therefore, we should maintain our grantmaking budgets during these turbulent times even though this will mean further erosion of our assets. We can't begin to make up for the loss in government funding, but we can help nonprofits "weather the storm" and, more importantly, help keep programs and services in place for the most needy in our society. Further, we should cut our operating budgets as many nonprofits have had to do before we reduce our grantmaking.

At a time when many nonprofits are struggling to survive, foundations should also significantly increase their funding of core operating support. While innovative and creative projects have their place, foundations place too much focus on them at present, with only about 10 percent of grants going for operating support. Does any funder really believe that financially stressed nonprofits will be able to effectively implement innovative projects? The answer is obviously no, and we should increase our allocation for operating support to at least 50 percent of our grantmaking budgets. Providing core operating support to strengthen infrastructure and continue the provision of existing services may not be considered strategic grantmaking by some but, under the current circumstances, it is one of the most strategic things foundations can do. Foundation money is also essential to support advocacy organizations working to preserve government support for health and human services. Because our resources are minuscule compared with government funds, one of the most effective ways to magnify the impact of grant dollars is to help advocacy groups make the case for vulnerable populations that are often without a voice in policy decisions. Core support dollars give advocacy organizations the most flexibility.

Another important step foundations can take is to stop micro managing Grantees. Under the rubric of "highly engaged" or "partnership" grantmaking, and at its extreme, with foundation staff sitting on the Grantee's board, micro management grows out of a belief in the foundation world that we know a better way than those who actually do the work. Having worked in the nonprofit sector for 25 years before going into philanthropy, I am clear that most nonprofits are efficient and effective. After conducting appropriate due diligence prior to making a grant, foundations would be wise to get out of the way and let the nonprofit do the work. For maximum impact we should make multiple-year grants and award the entire amount immediately. For example, a $150,000 grant over three years should be paid out in one check at the beginning of the grant period, providing maximum flexibility and cash flow to the Grantee. We should also streamline application and reporting requirements as much as possible to reduce administrative complexity.

These are tough times and foundations should not make things more difficult. By maintaining grantmaking budgets, focusing on core operating support, funding advocacy efforts, believing in nonprofits and making a few simple administrative changes, we can be of real assistance. The California Wellness Foundation has followed these principles for the past three years. The nonprofits we fund are most appreciative of these efforts.

Gary L. Yates is president and CEO of The California Wellness Foundation.

Copyright (c) 2003 by the Independent Sector. Posted with permission on www.tcwf.org. This article may not be published, reposted, or redistributed without express permission from the Independent Sector.