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.