The stock market may be roaring to new highs, but the nation’s biggest foundations expect to be cautious with their grant making for the rest of the year, according to a new Chronicle survey based on data from 192 funds.
Only 28 of the 81 foundations that provided The Chronicle with grant-making estimates plan to lift their spending during 2013.
Assets Still Down
Like retirees, foundations tap their savings to cover their spending. And the requirement that foundations distribute 5 percent of their assets, on average, every year (including administrative costs) means that a meaningful portion of foundation assets were spent during the recession and did not benefit from the market’s recent upswing.
The 192 foundations studied are among the nation’s largest. Of them, 92 provided 2012 asset figures and they were worth $183-billion, or about a quarter of the wealth held by the nation’s 76,000 foundations, according to the Foundation Center in 2011.
Foundation assets in 2012 were 21.8 percent lower than in 2007, after adjusting for inflation, for the 87 organizations that provided data to The Chronicle for both years. The total assets were $167.6-billion at the end of 2012, compared with $214.2-billion in 2007.
Once bitten, twice shy seems to be the mantra for many foundations—especially for those that were hit the hardest during the downturn.
The Starr Foundation spent heavily during the recession to meet grant commitments, even as its endowment, which once topped $6-billion, took a big hit due to a large holding in AIG stock.
Now Starr is adopting a more conservative posture, projecting a 15-percent drop in grant making from the $73-million it awarded in 2012. The spending decline comes despite a 7-percent rise in the endowment last year, pushing its value above $1.3-billion.
Florence Davis, Starr’s president, says its board chose to reduce grant making to ensure that the foundation doesn’t become overcommitted once again.
“The global economy is unstable, the markets are irrational, Washington is paralyzed—need I say more?” Ms. Davis says. “We are trying to be prudent in the face of a lot of uncertainty.”
Total assets for the 92 foundations that provided The Chronicle with two years of data rose 3.9 percent in 2012. The median foundation had assets worth $728.8-million, meaning that half had more and half had less.
The “smoothing” strategies that many foundations use to set spending are tempering the growth of grant-making budgets, even as assets rise, says Melissa Berman, chief executive of Rockefeller Philanthropy Advisors.
Many foundations set their budgets by taking an average of assets for the three prior years. “That helped nonprofits tremendously during the worst of the downturn,” Ms. Berman says. “But the downside is that funding is not growing as fast in the recovery. A short-term increase in the markets isn’t enough to change the spending.”
Cutting Multiyear Support
Aaron Dorfman, executive director of the National Committee for Responsive Philanthropy, warns that excess caution may hurt foundations’ effectiveness.
A report released by the watchdog organization in November found that foundations cut their multiyear grant making by more than 20 percent in 2009 and 2010, while keeping the proportion of grants going to general operating support flat.
Some charity advocates have called on foundations to increase both types of giving as the economy continues to sputter to help nonprofits hit by increasing demand and declining government support.
“Foundations are nervous about fluctuations in the market,” Mr. Dorfman says. “But when they make the decision to reduce multiyear giving, they’re prioritizing the needs of the foundation over the needs of the grantees.”
The John A. Hartford Foundation is among those that cut multiyear support during the recession.
When the markets plunged in 2008 and 2009, the foundation had to rescind about $25-million from multiyear grants that it had previously approved, says Francisco Doll, the foundation’s grants manager.
Hartford, which has long supported curricular changes so that aspiring nurses and doctors receive better information about geriatric care, is now shifting most of its new grant support to front-line providers caring for elderly patients.
Hartford awarded grants worth $35.8-million in 2012, up from just $2.7-million in 2011, although it plans to drop back to just under $15-million this year.
“We saw the light at the end of the tunnel in 2012,” Mr. Doll says, “so we started developing new grants as well as reinstating old awards.”
$500-Million for Patient Care
Other foundations are also starting new efforts. Eighteen foundations in the Chronicle’s survey said they started a new grant-making program in 2012.
Last summer, the Gordon and Betty Moore Foundation started its first new program since the fund’s inception, in 2000.
Moore plans to spend $500-million over the next decade on its patient-care program, which seeks to eliminate preventable harms and unnecessary costs in the health-care system, in part by getting patients and their families more involved in their own care.
“We strongly believe that having not only patients but also their families more engaged in their own health care has enormous potential to improve the quality and safety of care,” says George Bo-Linn, who heads the Moore program.
The program’s first grant, worth $8.9-million, will help the Johns Hopkins University’s Armstrong Institute for Patient Safety and Quality enlist systems engineers to improve processes in intensive-care units so that patients are more likely to receive the right therapies and treatments.
Joel Fleishman, a professor at Duke University and an expert on philanthropy, says foundations that have an interest in innovation are wise to shift spending toward bold projects like Moore’s new patient-safety program.
Such efforts can lead to historic breakthroughs, he argues, citing the Robert Wood Johnson Foundation’s successful push to expand the 911 emergency-response system in the 1970s.
“Foundations are the only pools of capital in the social sector that can be used for innovation, because there aren’t any claims on their assets,” Mr. Fleishman says. “It may sound hardhearted to say that foundations should not be depended on to meet basic needs, but I think there’s a greater benefit to society if they do the things that only they can do.”
Rare Gains
Investing in innovation might be challenging for the vast majority of foundations that have yet to regain losses suffered during the downturn.
Of the 87 foundations that provided data for both 2007 and 2012, only five have increased their assets.
Two of the five—the John Templeton Foundation and the William Penn Foundation—received large donations from founding families.
A third, the Conrad N. Hilton Foundation, moved assets from another significant fund into the foundation. A fourth, the Morris & Gwendolyn Cafritz Foundation, sold a large real-estate holding at a big profit.
The fifth gainer, the Otto Bremer Foundation, holds 85 percent of its assets in a single banking institution—which wouldn’t have seemed like a prescription for success in 2007, the eve of the financial crisis.
Nevertheless, the foundation’s ownership of the privately held Bremer Bank, which has more than 100 locations in the upper Midwest, has allowed the foundation to expand grant making while many of its peers have been forced to cut back.
Brian Lipschultz, a Bremer foundation trustee, says the bank must pay a regular dividend to the foundation to help cover its annual grant making, which adds a “cautious overlay” to the bank’s operations.
“In spite of the financial debacles, Bremer Bank operated very successfully and has a stronger financial position today than in 2007,” Mr. Lipschultz says.
That success allowed the bank to make grants worth $36-million in 2012, up from $32.2-million, after adjusting for inflation, in 2007. The foundation has tapped its growing endowment to start a new grant-making focus on youth homelessness, an increasingly serious problem in the upper Midwest.
Sluggish Returns
Even amid the surging stock market, it’s not clear that foundations set up to stay alive forever will be able to increase the size of their endowments, as many did in past bull markets.
Ms. Berman notes that with interest rates at historic lows, bonds offer only modest yields. Meanwhile, returns from the hedge funds and private-equity funds that are common in large endowments have also been disappointing in recent years.
“Many chief investment officers are hard pressed to recover from the recession without putting too much risk into the portfolio,” Ms. Berman says.
Limited Lifespans
Most of the large foundations in The Chronicle’s survey are set up to operate in perpetuity.
Of 90 foundations that provided data on their life-cycle plans, 74 say they don’t expect ever to close, while just six will plan to shut down at a set time.
But Ms. Berman and others say the rocky returns of recent years are prompting more foundations, particularly family foundations that typically aren’t large enough to be included in The Chronicle’s survey, to set a limited life for their funds.
That structure can allow a foundation to focus on its mission without worrying as much about the whims of the financial markets.
“If you have the opportunity to make a real impact in the near term, it might make more sense to spend down than to wait,” says Phil Buchanan, president of the Center for Effective Philanthropy and a Chronicle columnist.
Even some of the largest foundations are reassessing their policies.
The Bill & Melinda Gates Foundation quietly decided in recent months to move up its timetable for spending the assets of the foundation from 50 years after the deaths of both founders to only 20 years after they both die.
Jonah Goldman, a foundation spokesman, says Bill and Melinda Gates want to act more quickly to tackle problems related to poverty.
“They are confident that others will step forward in a similar manner to identify challenges in the future,” he says.
The board of the Starr Foundation, whose endowment has declined more than 75 percent from its peak, has also discussed the possibility of spending all of its assets and closing, Ms. Davis says.
But for now, the fund will continue with its regular grant making, which in recent years has focused on research related to stem cells and cancer.
“Are we open to spending down if something with real lasting impact comes across our desk?” Ms. Davis says. “Sure we are.”
Sarah Frostenson and Marisa López-Rivera contributed to this report.