#156 Winter 2008-09 — Financial Crisis

Brave New World for Nonprofits

The current "bathtub recession" poses a drowning hazard for community development and housing groups, as philanthropic giving shrinks and foundations look beyond nonprofits for solutions to social problems.

Community-based developers have plenty of cause for concern about their futures in the midst of the current recession. For example, Ken Berger, the president of Charity Navigator, a national online rating service for charitable donors, concluded on his blog what no one wants to say or hear, that the “good news in the bad economy” is that financial retrenchment will inevitably force “smaller and less financially efficient charities” to go out of business.

Berger’s analysis is shared and even applauded in some quarters of philanthropy. Many foundation executives call for nonprofits to merge and consolidate — a nicer way of telling grantees that they would do better to go away than continue to submit ill-fated funding applications.

Potential donors counting their impending charitable donations can read the message: The small guys are on the chopping block in this economy.

Get ready for a scary new world for nonprofits — especially those in housing and community development. As nearly all pundits have said, except those promoting charitable giving, this is “not your father’s (or mother’s) recession,” substantially different than the 2001 slide prompted by Sept. 11 followed by the collapse of Enron and previous downturns.

The roots of this recession in the collapse of the financial markets are particularly significant for community developers, because financial institutions constitute a significant source of their philanthropic support and program activity.

No one should mistake philanthropic support from banks and the government-sponsored enterprises (GSEs) as a potential substitute for the necessary federal government capital flows to address the nation’s reversal in urban and rural community wellbeing precipitated by widespread mortgage foreclosures and galloping job losses. Nearly $43 billion in foundation grantmaking in 2007 accounts for only a relatively small percent of the total $306 billion in charitable giving, according to Giving USA, nor does it comprise a huge part of charitable expenditures, nearly two-thirds of which are attributable to fees for goods and services.

It should be clear to community economic development nonprofits that downticks in philanthropic support can and will have destructive impacts on their capacity to respond to cascading foreclosures and reversals of positive community development accomplishments. The old fundraising bromides for surviving the quick undulations of recessions will not work in so-called bathtub-shaped recessions characterized by a prolonged period of flattened economic activity. Today’s financial meltdown will hit community developers where it hurts, in their financial wherewithal to respond to the challenges they face in urban and rural neighborhoods.

Bankers’ Philanthropy

According to the Federal Deposit Insurance Corporation (FDIC), 22 banks have failed in 2008, compared to 27 for the period from October 2001 to the end of 2007. The number of banks on the FDIC’s unpublished “watch list” grew from 90 to 117 between the first and second quarter of 2008, up from 76 at the end of 2007 and only 45 the previous year.

Observers suggest that another 200 banks, including some surprising candidates not even on the FDIC watch-list, like IndyMac before its July 2008 collapse, may implode before this economic crisis is over. Nearly every week, there are surprising near-death experiences and off-the-cuff rescue packages, such as the most recent Treasury decision to infuse Citigroup with $45 billion in capital and guarantee more than $200 billion of Citi’s loans and mortgage-backed securities.

As damaging as those trends are for the overall economy and the flow of capital, the downward spiral of banks is devastating for community development nonprofits.

The significance of the financial sector in U.S. philanthropy is enormous. According to the Conference Board, banks were the second-largest corporate givers to U.S. groups and beneficiaries in 2006, ranking behind pharmaceuticals. Insurance companies ranked 11th, and financial firms (other than banks and insurers) ranked 15th. The impact on charitable giving from banking disarray is huge.

Consider the largest corporate grantmaking foundations as of 2006 as counted by the Foundation Center: Bank of America ranked second, behind Aventis and ahead of Wal-Mart, with $144.8 million in giving; the JP Morgan Chase foundation was fifth at $79.9 million; the Citi Foundation sixth at $73.9 million, followed by the Wachovia Foundation with $64.4 million in grantmaking and the Wells Fargo Foundation also at $64.4 million. If you add in the GE Foundation ($88.3 million in grants), now a major player in financial services, that makes six of the top 10 corporate foundations in the banking and finance sector.

Other financial-sector corporations in the top 50 corporate grantmaking foundations included the Fannie Mae Foundation, MetLife Foundation, NCC Charitable Foundation, the Prudential Foundation, the Freddie Mac Foundation, the Merrill Lynch and Co. Foundation, U.S. Bancorp Foundation, State Farm Companies Foundation, New York Life Foundation, American Express Foundation, the Allstate Foundation, and the Deutsche Bank Americas Foundation. The grant-making totals of corporate foundations, disclosed on the firms’ 990PF filings, do not necessarily reflect other forms of direct charitable grantmaking, which is not a required disclosure to the public or even shareholders.

Take the example of Washington Mutual (WAMU), prior to its collapse ranked as the top U.S. thrift by assets in 2006, just ahead of Countrywide Financial. According to the Foundation Center, in 2005, Washington Mutual’s corporate giving program handed out $44,000,000 in charitable grants for community and economic development; elementary and secondary education; housing and shelter; and human services activities.

Wachovia, until recently the nation’s fourth-largest commercial bank by assets, offers a similar story. When Wachovia acquired Golden West Financial in 2006, Golden West’s owners, Herb and Marion Sandler, donated $370 million in stock to the Wachovia Foundation, vaulting the Wachovia Foundation’s 2007 grantmaking to $96.9 million. But thanks to its subprime mortgage inventory, Wachovia is joining WAMU in being absorbed into some other ostensibly financially healthier lender.

The potential losses for grantors in the disappearance of the Wachovia Foundation’s grant-making are sobering. From 2003 through 2006, the Foundation Center tracked $161.7 million in Wachovia Foundation grants to 2,658 recipients: $48.8 million to education; $41.2 million to philanthropy and volunteerism; $30.3 million to arts and culture; $14.5 million to human services; and $14.2 for community development, housing, and shelter.

You won’t find official data on Countrywide Financial’s charitable giving on the Foundation Center Web pages, as the foundation was largely a shell and the corporate philanthropy unreported. But the Chronicle of Philanthropy uncovered $8.7 million in Countrywide’s charitable distributions for 2005, predominantly in housing and community development.

Prior to the current recession, bank mergers and acquisitions sometimes meant increases in their combined philanthropic grantmaking, in no small measure due to the Community Reinvestment Act (CRA) advocacy of activist organizations. Baseless right-wing attacks blaming the CRA for the subprime mortgage foreclosure crisis have not found much traction with the public to date, but the economy might accomplish what conservative critics have not. With banks large and small lining up for bailout survival infusions, banks could well claim that they have little available discretionary capital to deploy for CRA-linked philanthropic grant-making. It is difficult to imagine any scenarios in which post-bailout bank mergers result in increased philanthropic grantmaking. According to Lester Salamon of Johns Hopkins Center for Civil Society Studies in an interview with Nonprofit Quarterly, the economic downturn threatens philanthropic giving and the CRA itself.

The downturn cuts sharply into corporate giving across the board, beyond banks. Bottom-line oriented, corporations typically cut their grantmaking budgets when profits are threatened, not to mention when major corporate givers go out of business. Since the majority of corporate giving is concentrated in large corporations (three-fourths of corporate charitable deductions in 2005 were attributable to corporations with more than $2.5 billion in assets), the disappearance of major corporate givers substantially reduces potential grantmaking.

Philanthropic losses like WAMU and Wachovia among banks, insurance companies such as the all-but-defunct American International Group, and investment banks such as Lehman Brothers ($12.5 million in 2007 charitable giving from its foundation plus $26 million from its corporate philanthropy program) and Merrill Lynch ($20 million in grants from its foundation plus an undisclosed amount from its corporate giving program in 2007) take a huge toll on potential resources available to nonprofit community developers.

Where will bank philanthropy be during and after a prolonged recession? And after the government purchases equity positions in banks as opposed to simply buying their troubled mortgage assets? An executive vice president of the Financial Services Roundtable, Scott Talbott, believes that they will continue their grantmaking pretty much as usual, given the banks’ needs to nurture community relations. Carolyn Cavicchio, senior research associate for global corporate citizenship for the Conference Board Center for Corporate Citizenship and Sustainability, suggests that perhaps bank grantmaking might be flat into the future, but corporate sponsorships could suffer. Most people appear confident that the philanthropic programs of the Bank of America Foundation, the largest of the bank givers, will persist, despite BofA’s having swallowed Countrywide’s toxic subprime portfolio. But cutbacks across the board among most bank grantmakers — those that are left after the failures and consolidations — will reverberate into the nonprofit community development sector.

Special Cases of the GSEs

In the fall of 2008, nonprofits in the metropolitan Washington, D.C., area organized a campaign to convince the federal government to continue Fannie Mae’s corporate giving in the region. Well they should. The Fannie Mae Foundation was the second-largest grantmaker and largest corporate grantmaker in the metro D.C. area for many years. Between Fannie Mae and the Freddie Mac Foundation, now absorbed into the federal government, nonprofits in metro D.C. have to replace as much as $47 million in annual grants they previously got from the two GSEs.

Community developers might think about mounting a Fannie/Freddie philanthropic pitch nationally, as Fannie was the nation’s leading corporate grantmaker and one of the nation’s most generous foundations overall for nonprofits in the field of housing and shelter.

Between 1998 and 2004, the Fannie Mae Foundation (not counting what might have been awarded directly by the corporation outside of its foundation) handed out $119 million in grants of $10,000 or more for housing and shelter. For each of those years, Fannie ranked first or second in the nation among all foundations, not just corporate foundations, making grants in the housing arena, often surpassing the totals of independent foundations such as the Ford Foundation, the MacArthur Foundation, and the Lilly Endowment. Among the nation’s largest 1,000 or so foundations, it accounted for just about one out of every 10 foundation dollars for nonprofits addressing housing and shelter. From 1998 to 2005, Fannie’s foundation arm put more than $138 million into housing groups and projects.

On top of that, the Fannie Mae Foundation was a major grantmaker in the realm of community improvement and development, distributing $106 million through 2006. Between 2002 and 2006, Fannie put $3.6 million into the Living Cities foundation consortium and millions more directly into an array of national and regional community development intermediaries. That entire sector will be reeling, as it tries to plot a strategy for replacing Fannie’s centrality to their operations.

Reportedly, in response to the mobilization of the D.C. nonprofits, the federal government has hinted that it will make decisions on the GSEs’ future grantmaking on a case-by-case basis. Because Fannie used its philanthropic grantmaking as part of its case to avoid being hit with District of Columbia property taxes on its headquarters, it is likely that it will continue some of its D.C. grant-making as the cheaper alternative. But both GSEs suffered devastating third quarter 2008 losses — Fannie $29 billion and Freddie $25 billion — suggesting that neither of these supplicants for federal bailout money is likely to be much of an active grantmaker nationally in housing and community development for some time to come. For national grantmaking to housing and community development groups, the new status of the GSEs as money-losing appendages of the federal government means a disappearing philanthropic portfolio.

Recession-to-Depression Philanthropy

What can community developers expect from non-corporate private foundations? One would think that unlike corporate foundations, the majority of which depend on annual capital infusions from their parent companies, endowed private foundations would be able to respond to the recession with an uptick in grantmaking.

They ought to be able to do so, but unfortunately it is unlikely.

Private foundations typically base their grantmaking, even if they hew closely to the 5-percent minimal spending floor that all too many have transformed into a ceiling, not just on the past year’s assets, but on a two or three year “rolling average.” This method of calculating giving budgets helps soften the impact of immediate asset declines when blended with previous years’ increases. Unlike cash-strapped nonprofits, endowed foundations could of their own volition decide to bolster their grantmaking during down times, recognizing that during bad times, foundation giving should be increased to deal with the difficulties faced by their grantees and their stakeholders.

Yet many foundations are doing the exact opposite. Their 2009 grant-making budgets, to the extent that they are being publicly revealed, show sharp cuts rather than increases. It is clear that they are concerned with asset preservation and endowment growth as higher priorities than delivering on their philanthropic, tax-exempt missions.

Credit those stalwart foundations that realize a recession is the time for them to step forward. Among them are some historically important funders to the community development sector. The John D. and Catherine T. MacArthur Foundation, the nation’s fifth-largest foundation grantmaker in housing and 16th in community improvement and development as of 2006, announced that it will not only maintain but increase its grantmaking in both 2008 and 2009, notwithstanding what happens to its endowment in the market. On the West Coast, the James Irvine Foundation’s President and CEO, James Canales, announced plans for a counter-cyclical increase in the foundation’s 2009 grantmaking despite a precipitous decline in its endowment. Among the newer, tech-oriented funders, the Omidyar Network pledged to increase its investments per organization by a sum that could amount to an average of $1,000,000 above what it awarded in 2006.

Such counter-cyclical leadership is unfortunately rare. The William and Flora Hewlett Foundation posted an unsigned statement titled “A Note on the Economy,” disclosing plans for a reduction of 5 to 7 percent in its 2009 grantmaking, deeper than the 3- to 5-percent cut that the foundation had announced to the Chronicle of Philanthropy. In Seattle, the Marguerite Casey Foundation, which funds many grassroots groups, announced a cut in its 2009 grants budget. Most grantmaker associations such as those serving Baltimore, Washington D.C., and Indiana have conducted surveys of their members indicating that a substantial majority plan to cut back on their 2009 grant-making.

As a sector, foundations have not followed the lead of MacArthur and Irvine. On Oct. 10, the Council on Foundations, the national trade association for foundations, issued an open letter to its members with advice on what they should do to “step up in these circumstances…without raising unrealistic expectations.” The three pieces of advice? Look for creative ways to help nonprofits “weather…this storm”; play a “convening role” for stakeholders to discuss solutions; and pay special attention to the loss of philanthropic resources because of “mergers and consolidations that are the inevitable products of economic restructuring,” specifically, to advocate with the feds for the continuation of Fannie’s and Freddie’s $47 million for metro Washington D.C. The letter contained not a word about what foundations should do with their own grantmaking to nonprofits during the recession.

The original draft of the open letter, obtained by this writer, called for a different public profile for philanthropy: “(W)e are asking every Council member to consider making a public pledge that you will maintain or increase your grantmaking in 2009 at this year’s level despite the economic downturn.” Rather than following the leadership of MacArthur and Irvine, the Council gravitated to the lowest common denominator.

Clearly many grantmaking foundations are focused on protecting their assets, guarding the corpus against invasion, and adopting strategies meant to ward off too many supplicants. Long advocates of nonprofits’ merging and collaborating, foundations now have a golden opportunity to see the simplification of their grantmaking environments fulfilled. For some, the economic crisis facilitates a concept of “strategic grantmaking” of making fewer, larger grants, a recession practice predicted by nearly half of recently surveyed members of Washington Grantmakers.

The “fewer/larger” strategy leads to nearly unavoidable consequences, as articulated by philanthropic expert Joel Fleishman of Duke University, who wrote in Effective Foundation Management (Rowman & Littlefield, 2007): “(T)hese few large grants can hardly be made to small, emerging, or community-based organizations, for they are not large enough to absorb such huge sums. The large grants, therefore, must be made to big, established, ‘safe’ grantees.” Without a doubt, the majority of CDCs, hardly large and well-capitalized, are not going to be on the priority lists for these few, large foundation grants.
At an Election Day forum in Washington sponsored by the Urban Institute, New York University professor of public service Paul Light predicts three potential scenarios for the nonprofit sector under these circumstances: a “significant withering of existing nonprofits,” running deficits and compelled to survive “on the edge”; a “winnowing approach” resulting from “decisions by funders about who goes under, who doesn’t, who is aligned and incentivized to enter strategic alliances or not”; and a reawakening of the sector, the latter given only a 30 percent chance by Light. He is straightforward about what he sees from the foundation sector:

“(O)ne of the things we’re not talking about very aggressively is what we can do to help distressed nonprofits, and I don’t hear that conversation in foundation-land at all. What I hear in foundation-land is, ‘Thank God the time has come when we can get rid of some of these poorly performing nonprofits, and eliminate some of this duplication.’ “

This recession is not the same for philanthropy as previous economic slumps. There are no ceteris paribus extrapolations from past philanthropic recession grantmaking as foundations in this downturn consciously pursue strategies designed to concentrate grantmaking on larger organizations. For the thousands of nonprofit community development corporations and other related community-based organizations, many will not make it through this strategic sieve.

New Philanthropic World, New Administration

The Obama campaign platform called for fully funding the Community Development Block Grant program, creating public/private business incubators, increasing funding for Community Development Financial Institutions (CDFIs), supporting the creation of an affordable housing trust fund, creating 20 “Promise Neighborhoods” apparently modeled on the Harlem Children’s Zone in New York City, expanding AmeriCorps and other community service slots from 75,000 to 250,000, and putting funding into new programs for social entrepreneurship. Assuming that the tanking economy plus the remnants of the Bush administration’s tax cuts and funding rescissions do not combine to undermine President Obama’s policy initiatives from the get-go, the Obama campaign platform contained much that should support the work of rural and urban community developers.

But in this economic freefall, will typically smaller community development nonprofits have the capacity and wherewithal to take advantage of the Obama administration’s nonprofit-eligible initiatives, or will they be watching from the sidelines as larger, well-heeled nonprofits-or perhaps even socially minded for-profits-grab the lion’s share of resources?

With philanthropy, there is movement not just away from small nonprofits, but even away from relying on nonprofits per se as the logical and preferred vehicles for the delivery of foundation resources. The chair of the board of the Council on Foundations, Ralph Smith of the Annie E. Casey Foundation recently told Nonprofit Quarterly that he sees foundations becoming “sector agnostic”:

“Many of us believe that foundation philanthropy is at its best when its resources are directed toward pursuing, finding, testing, demonstrating, and promoting solutions for the most pervasive and urgent social problems. In other words, foundation philanthropy is in the solutions business and can succeed only if and to the extent it is willing to pursue solutions wherever it finds them, regardless of whether they are in the public, private, or social sector. As a consequence, the assumed exclusive relationship between foundations and nonprofits has become much less so. Foundations are going to support and invest with a much wider range of partners than in the past.”

Smith’s prediction ought to scare the bejeepers out of many nonprofit community developers. His language is the mantra of social entrepreneurship in the nonprofit sector, but with the nonprofit sector accent mark deemphasized and diminished. While hardly new, this philanthropic movement away from nonprofits in favor of a sector-agnostic approach is gaining favor. It links into the Obama administration’s plans through two of the platform’s core nonprofit proposals, the creation of a “social investment fund network,” seeded with federal funds to leverage private capital for “local innovation,” and a “social entrepreneurship agency,” ostensibly for building nonprofit capacity and effectiveness.

As the Obama transition has emerged, there has been more focus on social entrepreneurship as the jewel in the new administration’s nonprofit agenda. But the social entrepreneurship agenda could become a license for funders-philanthropic and government-to live out their sector agnosticism.

For example, Obama transition team member Michelle Jolin has proposed expanding the definition of “charitable”: “Because business entrepreneurs are increasingly using for-profit investments to produce greater social good — especially in the areas of microenterprise, health care, and the environment — the federal government needs to identify, catalogue, and remove outdated tax and other rules that likely constrain innovation and impact.”

Among foundations, the argument has resonance. The Council on Foundations has been vigorously recommending since 2007 legal authorization for philanthropic support for L3C corporations-limited-profit for-profit entities organized with a principal purpose of engaging in socially beneficial activities.

To his credit, during the campaign, Obama consistently discussed social enterprise in the context of combating domestic poverty. With rampant, cascading job layoffs and mortgage foreclosures bursting through the subprime market into conventional mortgages, the poverty challenge left to Obama by the outgoing Bush administration may well take us back to the days of Michael Harrington’s The Other America. But Harrington’s 1962 book propelled the administration of John F. Kennedy to make the fight against poverty everyone’s business. In philanthropy, it led to innovations by the Ford Foundation and others that gave rise to the best elements of community action programs and community development corporations.

President Obama and his congressional colleagues have to ratchet poverty up on the national agenda, dropping the politically expedient campaign rhetoric that privileged the plight of the middle class. The nonprofit sector has to be the new president’s ally in galvanizing the nation’s attention to the burgeoning poverty in our midst. That has to include rethinking what the nation is doing with its charitable expenditures, a huge proportion of which don’t reach, much less benefit, the poor.

The unfortunate reality is that much of charitable giving goes to nonprofits that serve the economic interests of the affluent givers rather than lower-income people and minorities, hardly a strategy of spreading the wealth.

If community developers really want to mobilize about social change, they will have to press President Obama to remember the multiplicity of his campaign commitments — and the nonprofit sector that believes in social change will have to live its message. If they are going to be effective in that advocacy, foundations will have to step up to the plate and open the vaults to their capital so that social change is not starved of the resources it needs. When Obama and Biden take office on Jan. 20, 2009, the work of community developers will have only just begun anew.


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