By Dan Gross, Managing Director
Arguably, the biggest ongoing challenge facing charitable foundations is how to balance spending now versus saving for the future. This challenge was no more evident than in the early part of 2020. With both Main Street and Wall Street reeling from a global pandemic, charitable institutions faced two competing options. Should they accelerate or even increase their current spending levels to address the devastating health and economic consequences of COVID? Or, given the material decline in endowment values resulting from the March sell-off in both equity and credit markets, should they take a more ‘wait and see’ approach in deciding whether to spend in excess of what was originally budgeted for 2020.
The actual levels of charitable spending in 2020 won’t be known until final reporting and analysis occur next year. Nevertheless, based on what has been reported to date and what we are hearing from our own philanthropic clients, it appears that many foundations, including the very largest funders in the U.S., are digging deeper into their pockets in 2020 to help in addressing the increased needs of people, places, and programs in light of COVID. Also, some foundations have pledged to being more flexible in their philanthropic response to COVID, allowing grantees greater latitude in deciding how best to put foundation contributions to work.
In June, the Ford Foundation announced that it was taking the unprecedented step of issuing social impact bonds to raise $1 billion in funds for combatting the effects of COVID. Bond proceeds will enable the Ford Foundation to pay out 10% of its endowment value in 2020 and 2021, double the level of grantmaking required by law. Other leading private, corporate, and community foundations are following Ford’s example by bolstering planned philanthropic support for this year and next.
Exponent Philanthropy, a member organization of funders, surveyed its members and found that just under 50% of foundations planned to increase spending this year in response to COVID-19. Of this group, about four in ten planned to give a certain dollar amount more while one in five will increase their overall payout rate. About 40% of survey respondents plan to fund nonprofits outside of their typical portfolio because of COVID. The Center for Effective Philanthropy reported that nonprofits who rely on foundation funding are experiencing greater stability in funding than those relying on other revenue sources, with 70% of nonprofits surveyed expecting to receive the same or greater financial support from foundations in 2020.
Donor Advised Funds (DAFs) have become a charitable venue of choice for a growing number of individuals and families. Fidelity Charitable reported an increase of over 30% in grantmaking volume and 18% in grantmaking dollars from their DAF accounts for the January 1 – April 30 period versus the same time last year. Giving was especially strong to the human resources sector, including to organizations helping address food and shelter insecurity.
A survey of Pathstone foundation clients provides further evidence of higher spending by charitable institutions this year. Comparing activity three-quarters of the way through 2020 to the same nine-month period in 2019 shows an increase in spending of 18% year over year and the payout ratio amidst this sample increasing from 4.2% to 4.6% of assets.
According to Giving USA, foundation giving reached a new height at $75.7 billion in 2019 and is likely to set another record in 2020. Charity, in general, has surpassed levels seen during the GFC in 2008. While encouraging trends amidst a global public health crisis, even more resources are needed across the giving spectrum to address the economic fall-out from COVID, particularly among poorer communities who have been disproportionally impacted by the pandemic.
At Pathstone, we understand that philanthropy is one of the most important decisions our clients have to make, and we look to support them in their charitable activities to help them meet their objectives. Further, our Select Institutions practice brings 20+ years (including legacy organizations, Federal Street Advisors and Convergent Wealth Advisors) of dedicated experience in serving private foundations and public charities, including not just endowment management but also holistic support in setting spending policies, aligning their endowments with their philanthropic values, and generally helping them successfully carry out the mission of their organizations.