Grants' Tomb?

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The stock market was crumbling in late August, but, even though they had hundreds of millions of dollars at stake, the managers of some of New York’s largest charitable foundations were playing it cool.

No panic, no stammered conversations with board chairmen, no “Sell, sell, sell!” shouted into the handsets. Just a slightly raised eyebrow.

Or, at least, that’s what they like to emphasize. But ask them about their Internet habits.

“Yeah, I’ve bookmarked Bloomberg,” said the vice-president of one local housing funding group. “On a personal note, I check [the on-line stock ticker] every two hours,” admitted Mike Pratt, a program officer at the Scherman Foundation, which funds local civil rights and housing programs.

If you hadn’t noticed, this is the decade of the nonprofit, due in large part to an unprecedented eight-year bull market that has fattened foundations and led to local government surpluses. Yet nobody was talking much about what might happen when the boom collapses. That changed in August. By the end of the summer, the Dow Jones Industrial Average had lost all its earlier gains in 1998, dismal news for investors accustomed to ballooning stock prices.

The flux of capital markets may not, at first glance, have much to do with New York City’s neighborhood groups. But in this city–more than anywhere else–nonprofit budgets are intimately bound to Wall Street. Stock market instability threatens two of the most important lifelines for local groups–foundation grants and city government contracts.

Unlike national nonprofits, which get most of their money from individual donors, New York’s housing and social service groups are heavily dependent on contracts from local government, which in turn are dependent on taxes generated from the financial markets. Progressive funders–which support grassroots activism and underwrite much of the innovation in the nonprofit world–have Wall Street to thank for sizable gains in foundation assets.

It’s put lefty funders in the same boat as portfolio managers, points out foundation consultant David Kallick. But it takes a market downturn to bring that to light: “Suddenly,” he says, “for a few days at least, everybody’s a capitalist.”


Seduced by historic high returns from the stock market, foundations have moved more money from safe, low-yield bonds to equities, which have recently produced double-digit annual returns. Most foundations now have about half their money in the stock market, according to the Council on Foundations; the biggest invest two-thirds.

Over the last eight years, foundation endowments have blossomed. The most recent statistics show that in 1996, assets grew 18 percent–up a total of 37 percent from two years earlier. “The fact is, money [has been] rolling in,” says Stephen Viederman, president of the Jessie Smith Noyes Foundation. “If you’re figuring a five percent payout, and the income stream is at twenty percent–you figure it out.”

The Internal Revenue Service requires foundations to give away money equal to at least five percent of their endowment each year. That means a huge windfall for nonprofits. Nationwide, foundations now give away more than ten times as much money as they did 20 years ago, according to Foundation Center research. In 1996 alone, grants increased 13 percent.

In one of last year’s most graphic illustrations of the power of the stock market, the Ford Foundation, the nation’s grand patriarch of charitable giving, was demoted to second-place by the $12.7 billion Lilly Endowment, founded with millions of shares of the pharmaceutical giant Eli Lilly & Company. Fueled by sales of the anti-depressant Prozac, Lilly stock nearly tripled in value during the past two years. The foundation’s response: an unprecedented $42 million grant to the United Negro College Fund.

Local foundations have also begun to step up their largesse. After years of solid financial gains, the board of the New York Foundation, a prominent funder of grassroots groups, agreed to revise their funding policies this year. The foundation increased their average grant size, and extended the funding cycle from three to five years.

“We had a lot of conversations on the board level about the importance of responding to the difficult times the city was going through,” says Maria Motolla, the acting executive director. “There was really something unconscionable about not doing something differently when we were doing so well financially.”


So what happens if the stock market tanks? Economic disasters abroad have yet to hit home, and few expect a sudden deep recession here. But it does look like the days of the unstoppable bull market are over.

Foundation fund managers pride themselves on being sober investors, diversifying their portfolios with bonds, Treasury bills, even real estate and oil. Yet stock gains have been the primary fuel for the funding boom, and more than a few grantmakers admit this summer’s volatile market gave them pause.

“In a year where we felt confident we could increase our level of funding, we are [now] less confident,” says Pratt. Still, like Pratt, most directors say a bear market would cause them to slow the rate of increase in new grants–not cut back or withhold grants. In any case, a funding slowdown would be at least two or three years in the future.

Historically, foundation funding follows the overall performance of the New York Stock Exchange. After 1987, when the Dow Jones average fell by 22.6 percent, grantmaking was subdued, increasing by 7 percent in 1988, but only 2 percent in 1988 and 1990.

Since the severe world recession and oil crisis of 1973-1974, foundation giving has increased every single year. Chris Bell of the Pinkerton Foundation says only a “worldwide disaster” would hurt grantmaking. “It’s not too much of an issue,” he explains. “If the market drops as much as it did [at the end of August], we’d still have a lot more money than we did five years ago.”

In fact, none of the dozen foundation officials contacted by City Limits planned to cut back this year’s giving because of the summer’s lousy market. Nor did they report that their fund managers were yet shifting money out of equities. “Most of us are sitting and watching,” explains Hayden Foundation President Jilda Wray. “The effect is not immediately felt.”

But they can’t help but be sobered by the story of the W.K. Kellogg Foundation, which funds public health, education, and youth development. Like Lilly, Kellogg essentially has one source of money–140 million shares of stock in the cereal company, according to their 1997 annual report. When the company’s stock plunged this year after profits collapsed, the endowment lost about a third of its value.

The foundation compensated for the losses, managing not to cut any grants or lose any staff. “What we plan this year is concentrating our resources on focusing impact and enhancing existing programs,” says Kellogg communications director Karen Lake. “Our goal now is to achieve greater levels of effectiveness with what we’re already funding.”


Since New York’s regional industry is money itself, a market collapse would hit a major source of city and state tax income, even as it dampened foundation spending.

The scenario is not new. But New York City’s increasing dependence on Wall Street tax revenue is. According to state Comptroller Carl McCall, the financial sector now accounts for 17 percent of the jobs in New York City.

In the wake of the October 1987 market crash, Wall Street losses caused 35,000 layoffs, a downturn in local spending, and a significant loss to city coffers. New York City’s addiction to the financial services sector has only grown since then. McCall reports that about 37 percent of the wage growth in the city since 1991 is from finance jobs.

The city’s Independent Budget Office, analyzing the 1987 crash, predicts New York City would now lose a total of $426 million in tax revenues in a comparable downturn. The loss would eliminate 1999’s projected budget surplus and deepen the deficit expected in fiscal 2000.

So should a true bear market set in this year, the city budget would be tightening up at the turn of the century, just as foundation outlays scaled down and federal devolution and welfare limits took hold. Federal government support for community and regional development nonprofits is expected to decline by about one-third by 2002, according to a Foundation Center analysis led by Lester Salamon, director of the Center for Civil Society at Johns Hopkins University.

Foundations have been able to compensate for part of federal downsizing: Salamon calculates that grants offset about 22 percent of federal reductions. But, as nonprofit directors point out, covering government gaps isn’t what they should be doing.

This may be the most significant legacy of a market slowdown–a freeze on risk-taking and innovation. Traditionally, foundations fund programs and agencies that are too experimental to fit into government contract guidelines. That includes combative advocates and nontraditional programs within larger government-funded organizations. Foundation money, like individual donations, often comes with fewer strings attached, encouraging creativity.

“A lot of the time, [foundation money] is used to seed new programs, and test out new ways to deliver services that the government doesn’t see yet,” explains Citizens’ Committee for Children Executive Director Gail Nayowith.

A sharp market downturn could kill nonprofits’ favorite innovative projects, and rob the agencies of much of their flexibility and freedom. “The question is, what happens when the government cuts back and says the free market will provide, and the market’s not doing well either,” Nayowith says. She describes the crippling years of the early 1990s, when government cutbacks came on top of a deep recession: “You lose the capacity for innovation, you lose the capacity for system reform, you lose the capacity to do the kind of programming that needs to be done, because all you do is survive.”

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