Wednesday, January 7, 2009

The Importance of Core Funding In This Economic Environment

One of if not the most controversial and widely discussed topics in the world of philanthropy has been "Core Funding" or "Core Operating Support". There are seminars dedicated to it, heated discussions centered around it and for many charities in 2009, survival dependent upon it.

How exactly is "Core Funding" defined? It is grants in support of a nonprofit organization's mission rather than specific projects or programs, or another way, it is funding for an organization's operations rather than particular projects. Now more than ever, charities will need their programs supported.

Let me relate a story to you. As a grant maker, we had a capital (naming) project that we were completing. We were also negotiating with another organization to begin funding a new project the following year (2009) for a four year commitment. With our assets down and therefore our five percent giving down slightly, and with the continued uncertainty in the financial markets, we felt less comfortable making that four year pledge. In conjunction with that, the charity we were in discussions with was not as sure of receiving additional funds for their capital project. They could see the impact the economy would have on this expansion. While they certainly would take our capital cash, their immediate concerns and needs were for their existing programs. They were afraid they would have to shut down services that their local community had come to rely on. Idea: How would they feel if we delayed the capital project for a year and gave them a much smaller core funding grant for 2009? After all, we were comfortable enough with the organization to discuss helping them with an expansion project, we certainly saw the benefits of the services they provide. The smaller grant would be easier for us, at least in the short run. We wondered how they would feel. Ecstatic probably does not do the answer justice.

As a member of the Association of Fundraising Professionals (AFP), a board or committee member for specific charities and as a consultant to not for profit organizations, I see the nervous faces in the grant-seeking world. Funding will be more scarce in 2009 than it was in 2008, while the need for human services is expected to increase. Projections show an estimated 7-11% of all US charities shutting their doors due to a lack of funding and there is no estimate of how many organizations that do survive will be cutting services when they are needed most.

While the debate over "Core Funding" has its place in the philanthropic world, now is not the time for words and discussiion, now is the time for action. Without their most basic needs and expenses funded, many charitable organizations will cease to exist.

Navigating the Economic Storm for Foundations and Charities

We're taught that God helps those that help themselves, but what about those that help others? During this economic crisis, foundations and charities may need help as much as anyone and instead of motivational rhetoric, they need some concrete suggestions on how to protect and maximize their endowments, continue to raise funds for existing programs as well as capital projects and manage cash flow needs.

Foundations should normally be taking a "principal protection" approach to managing their endowments, now that's more important than ever. Many endowments are down by 25-40% conservatively. Reasonable investment rates (with managed risk) are at approximately 3-4%. Given the need to donate 5% of asset value annually, many foundations are on a slippery slide to "paying down" without realizing it. Charities are looking at fundraising prospects in a shrinking philanthropic environment, their maintenance and survival just as precarious. These organizations need some real answers, let's discuss a few.

Foundations: I have been asked by foundations with endowments of three million dollars and foundations with $700 million about what to do right now to stop the bleeding in their endowments, and the answer is the same; you need to have the tough talk with your investment advisor. What exactly are you holding and what is its long term viability? Are you invested in instruments that may not be around much longer or in securities that are down with the market but have real economic and investment value, therefore sustainability and will come back over time? Areas of concern; the finance sector, US auto industry, structured mortgages and structured asset backs. Structured pieces should be scrutinized most closely. Not only should the collateral be examined but also the investment structure and the particular tranche invested in. This is not to say that all pieces are bad and will fail but rather that they need to be monitored more closely right now and possibly liquidated. Discuss sectors with your advisor that may have better short term (or long term) returns, such as utilities, phones, defense, alternative energy and consumer goods corporations. Also, the use of mutual funds affords you a "specialist" manager while inherently providing you diversification, as opposed to buying individual stocks or bonds. The costs are minimal and the efficiency and liquidity great. Many foundations are looking into short term lending to "double dip". A short term loan to one organization with cash flow needs early in the year and then the funding of a grant to a second organization later in that year after the loan is repaid is one way to maximize the impact of your giving dollar. A quickly growing approach to gaining impact is through the use of mission related investing (MRI) or program related investing (PRI), the act of investing your funds with those vehicles more aligned with your donating goals than your investing goals.

Charities: At the Econmic Storm symposium in Manhattan (11/19), it was mentioned that of the 900,000 charities in this country, the forecast was for approximately 100,000 to close their doors in the next 12-18 months. All charities should be establishing databases of foundation donors in their sector. Have an intern go to the Foundation Center (or find out if you are eligible to access it on line) and start developing a mailing list and e-blast list. Communicating with organizations that support your sector, letting them know you are out there and the work you are doing is crucial. You want to put yourself in position to receive funding from them in the event that the charities they are currently supporting fail. Even if their current grantees survive, they may add you when their asset values rise and their giving increases. Look to borrow funds to get you through cash poor times if anticipating grant funding later in the year. A 2-8 month calendar loan may be an option some organizations that are looking to get involved with you will make, allowing them to fund their own commitments later in the year. While this may not be a funding solution, it can be a cash flow solution. Finally, think smaller and "out of the box" when it comes to fundraising. Individuals may not be able to make the size donations they have made in the past, therefore smaller bites, more often through the year may get you your funds. More creative, intimate opportunities may add up over the course of the year. Instead of relying on your one large fundraiser, you may need to add 3-4 smaller ones throughout the year also enabling you to broaden your target base.

Friday, July 18, 2008

Core Funding: Why it Makes Sense!

Core funding has become a hot topic in the philanthropy world over the past few years. Those dollars that fund the organization doing the worthy charitable work as opposed to those dollars that find their way to the needy that the charity was set up to help. It is a difficult distinction to make, particularly when it's your dollars and your vision on how you want those dollars to be applied.

When I began managing the donations of our family foundation my first thoughts were "Let's find a project to work on that best fits the ideals or mission statement of our foundation". As I spoke to more and more grantees about the work they were doing and what their needs were, the recurring theme was, "We all want to help the needy, but if we can't pay the rent or keep the lights on, the vehicle to get the job done breaks down". It made a lot of sense. I started to look at it this way, if Ford comes out with a great line of autos (focus, this isn't a commentary on the U.S. auto industry), I can't invest in just that line of autos, I can only invest in Ford. Shouldn't my philanthropy work the same way? If you like the work a particular grantee is doing, though you may want all of your assets to go directly to those in need, your grantee can't stay open to do that work unless someone pays to keep the lights on and pays the rent and of course their salaries.

I think it comes down to this simple evaluation, do you trust your grantee? Not only to not mismanage the funds they receive, but to continue to balance the needs of the organization with the intended recipients of those funds, the needy. This takes a little due diligence. The more you get to know your grantee, the more comfortable you may become in their ability to manage that balance, and therefore the more comfortable you will become in funding the entire organization and not only those they are trying to aid.

Friday, February 8, 2008

"My Foundation was Invested in What???"

The NY Giants Superbowl victory was a surprise. Let me prepare you for another upset, there's a strong possiblilty your foundation has mortgage backed bonds in it's portfolio and you may be about to take a loss. So many family foundations rely on their brokers and asset managers to manage their foundation's assets. Because it's not "their money", they do not scrutinize the holdings like they would if it was "their money" and many times the brokers know this. They place higher margin securities in this portfolio for many reasons; they get paid more to, there is more internal pressure to sell these assets, and since the assets are higher yielding, it may enhance the performance of the portfolio. The problem is, they are probably AAA rated and look good, the kicker is, many times your broker or asset manager does not really even know how they work.

The rearranged cash flows from mortgage backs enables the structurer to make many different types of securities, some of which are appropriate investments for a foundation, some of which are not. If your asset manager or broker does not understand the complexities of these new securities, you may be invested in inappropriate pieces and none of you are aware. Not until there are significant defaults or interest rate shifts, both of which we are experiencing now, will you know, and by then it is probably too late.
  1. What exactly do you own? Is it collateral or is it structure? What types of mortgages?
  2. How will it perform in a volatile interest rate environment? (Prepayments/Defaults)
  3. At what price do you own it? (Extent of Premium or Discount)
Collateral is pooled mortgages, structure is taking those pools and rearranging the cashflows to create "tranches" in a deal. Find out specifically what your collateral (what types of mortgages) is or where in a structured deal your bond is. Interest rate volatility will determine what extension or shortening risk your security has. As the speeds or prepayments on your collateral change, so will the life cashflow characteristics. The price will determine your yield. If you purchased your security at a significant premium and the security speeds up, your yield will go down. Conversely, if you purchsed your security at a steep discount and the prepayments sped up, your yield would be enhanced. Knowing what types of mortgages you own, the structure they have (if any) and at what price will enable you to understand your true mortgage exposure. The bottom line is, does your broker or asset manager understand mortgages enough and are you comfortable enough investing your foundation's money in them??

Friday, February 1, 2008

Intergenerational Passage of Family Foundations

The Jewish religion calls it l'dor v'dor or from generation to generation, but it doesn't seem that simple when it comes to handing down a charitable family foundation from one generation to the next. The first generation has tremendous financial success or sacrifices to accumulate wealth. They many times raise the standard of living for their family to significant heights. They may also have certain philanthropic goals they would like to have met, specific areas they would like to have a portion of their wealth go to. They may just have a need to not be forgotten, to leave a personal legacy. Many times however, second and third generations forget the sacrifices the donor generation has made, the charitable goals they had or the legacy they intended for themselves. Those people closest to them change the game plan.

In a New York Times article (Sept. 29, 2007) entitled "Donors Gone, Trusts Veer From Their Wishes", Stephanie Strom points out how banks and most specifically large bank trust departments, abuse "orphan trusts", or those trusts or foundations with no living member to assure that the donors wishes are met. She outlines how many trust departments , which are very transient areas for large banks, manipulate these charitable vessels for their own goals, completely ignoring the wishes of the originator. In fact, many times the bank employee that has given the donor their comfort level and has the understanding of what the donor would like to accomplish, moves on and is quickly replaced by another employee with no knowledge of the situation. These asset managers also play with the principal, investing in inappropriate vehicles or finessing the cashflows for the banks best interest.

For a stranger to capitalize on a deceased donor is inappropriate and sleazy, for a family member to do so is unconscionable. Many times the donors own children wipe them from the title, eliminating their legacy. The Robert and Roberta Smith Family Foundation may become simply The Smith Family Foundation. Sons can replace the parents names for theirs, changing the previous example with The John and Joan Smith Family Foundation, and a daughter may actually take the family name off the title, eliminating the family legacy with The John and Joan Jones Family Foundation after her new married name.

Taking advantage of the deceased is nothing new, but to take advantage of those that simply want to help others, we need a higher conscience. Family members should be sensitive to say, "This isn't my legacy, it's my relative's." If it's impossible to work within the donors wish list, let the new breed of sensitive, nurturing professionals do it, for everyone's sake...the donor, the grantee, the needy.