The current health, economic and social crises our country is facing has inspired many to help during this time of urgent need. We’ve seen increased interest from foundations and their investment committees to consider ways they can make an impact with their capital, including raising grant budgets above the IRS’s 5% required distribution, creative financing structures such as loan guarantees and low-interest lending, and utilizing local banks to ensure loans are reaching disadvantaged communities.
While the nation is facing systemic issues that have been magnified by Covid-19, the increased interest in giving is part of a “philanthropy cycle” that often mirrors an economic one. Foundations generally adhere to an established budget until challenging circumstances heighten the demand of community need, like now, when they are faced with a decision to either “meet the moment” and increase charitable contributions or solidify their longevity and maintain payouts to account for decreased investment returns and uncertainty moving forward.
As more philanthropic organizations assess their grant making moving forward, here are four key considerations to guide their decision-making process.
1. Original Intent And Purpose
When deciding how to allocate a foundation’s resources in times of immense need, it is important not to lose sight of the foundation’s purpose. Often, foundations are formed to be a vehicle to bring the family together and pass on shared values, and while philanthropy can help highlight the importance of generosity, promote stewardship and teach financial literacy, participating in the operations or board of a foundation requires commitment and engagement. And, as new generations take over leadership roles, they may not have a personal connection to the original donor or a passion for the charitable intent, which may cause their commitment to subsequently wane.
This presents an opportunity to think about the foundation’s future. Two scenarios are likely: more philanthropy now and sunsetting the foundation as interest, engagement and funding winds down, or hiring professionals to run the foundation in perpetuity.
2. Mission Alignment
Similar to a foundation’s intent, families should factor in their nonprofit’s mission when evaluating their spending practices. Certain foundations are founded with specific goals (e.g., cure a disease, end childhood hunger, etc.) while others have broad mandates that allow flexibility to allocate capital where they see the greatest potential for impact. For instance, if the mission focuses on social and racial injustice, food insecurity or global health, the 2020 events may call for an increase in philanthropy now. But if the mission focuses on humane societies or fighting Alzheimer’s, the current environment may prompt a decision to maintain current funding levels and opportunistically increase philanthropy when appropriate.
Having said that, there are significant demands for charitable dollars in all sectors throughout the economic and philanthropic cycles referenced. And as we have seen firsthand with the collateral damage caused by the coronavirus pandemic, no matter their mission, foundations can find relevant and influential destinations to allocate grant money and help people and causes in need.
3. Leverage Governance Documents
If foundations are looking for greater direction, governing documents and previous meeting minutes are a great source to assess for when and how to increase giving. Ideally, governance documents will outline the foundation’s position on giving above the 5% required distribution threshold. Therefore, we encourage newly created foundations to engage in spending discussions and formalize agreements into the bylaws and governing documents of the foundation. As with most governance, it is preferable to address “what if” scenarios before necessary as doing so removes much of the emotion or conflict that could ensue.
Another component of governance is a foundation’s support classification. We have had more conversations as of late with foundations about shifting from program support to general operating support to ensure funding continuity since the pandemic stifled the ability to fundraise in person (e.g., charity dinners, auctions, etc.). General operating support allows for investment in an organization’s mission rather than specific projects or programs (e.g., salaries, overhead, technology, marketing, etc.) to promote longevity for their organization.
4. Mapping The Financial Future
Unsurprisingly, for many foundations, their finances and financial impact will be the determining factor as to whether they alter their spending budget. To help provide foundations with a holistic view, it is prudent that families understand the impact of various spending rates on their endowment. The below figure presents a hypothetical scenario analysis to determine how an additional dollar spent today could affect the future value of the foundation and subsequent grant amounts and operating support in the future.
While the majority of foundations are built for perpetuity, we have seen increased interest from philanthropists to adopt the “spend down” mentality. As momentum grows, so have the stakes, and foundations have an opportunity to determine how they leave their mark on society. If the issues an organization is trying to solve require urgent action, then a dollar of philanthropy today is more valuable than a dollar of philanthropy in the future. Foundations must consider this “time value of philanthropy” when determining whether making a significant impact today, when it is needed most, will benefit society and outweigh the need for grant capital in the future. The circumstances have changed, and foundations should consider doing so as well.
Brad Harrison is co-head of impact investing at Tiedemann Advisors. Jill Shipley is head of family governance and education at Tiedemann Advisors.
