Grant Maker Dilemma: Spend More Now or Protect Shrinking Endowments?

To rush money to its grantees affected by the coronavirus, the Mary Reynolds Babcock Foundation went counter to that Wall Street truism that investors should “buy low and sell high.”

The foundation last week decided to send all of its grantees $10,000, cram two years of grant making into the current year, and send up to $250,000 to coronavirus response funds across the south. On top of that, the foundation zeroed out interest payments on all of its program-related investments and converted 20 percent of some of its loans to grants.

To do all of this, the foundation needs to cull about $14 million from its endowment just when the stock market seems stuck in the basement.

“We’ll have to sell assets to move a bunch of this cash, and we’re doing that at the lowest point in the stock market in a long time,” says Justin Maxson, Babcock’s CEO. “That’s a big financial hit because we won’t be able to ride any future increases,” he says, “but when things are at their worst is when we need to lean in.”

In the early days of the crisis, Babcock is one of several foundations that have already announced their intention to spend more on their grantees during the upheaval even if it means using assets from shrunken investment accounts.

Maxson says even more cash may be on the way.

“We know it’s early days, so we wanted to be out of the gate fast with flexible resources,” he says. “The board is aware we may need to do additional grant making.”

In addition to trying to help grantees in a tough situation, Maxson is very aware of the message that doubling up on grants sends to other grant makers. Historically, most private foundations have stuck pretty close to the federal mandate that grant makers direct 5 percent of their assets each year to charitable activity. Babcock’s increased payout has a “storytelling” dimension, Maxson says, that is designed to help other foundation leaders gather the courage to risk their endowments on the crisis.

Setting an Example

Others in philanthropy are making the same entreaty. Dana Kawaoka-Chen, executive director of Justice Funders, a California group that pushes foundations to promote social justice, published a blog post urging foundations to distribute the fortunes sitting in their endowments. In the Chronicle, an opinion piece written by Aaron Dorfman, CEO of the National Committee for Responsive Philanthropy, and Ellen Dorsey, executive director of the Wallace Global Fund, says foundations would be making a grave mistake if they retrenched during the crisis.

Philanthropy historian Benjamin Soskis followed up with a piece that called into question the orthodoxy of the 5 percent payout rate. Too many foundations, he suggested, hew close to the minimum.

That was even true during the Great Recession, according to a study conducted by the Urban Institute. The majority of foundations with assets greater than $1 million experienced minor or no change in payout rates during the downturn.

Emergency Support

Mary Reynolds Babcock Foundation

Like Maxson, Jennifer Ching, executive director of the North Star Fund, would like to serve as an example to her peers. North Star is a public charity and not subject to the federal payout rule. But in the face of the coronavirus pandemic, the New York grant maker has liquidated about one third of its operating reserves. Last week North Star announced more than $1.7 million in grants, including nearly $1 million in emergency support for current grantees and automatic grant renewals for 67 organizations.

Whether or not North Star can raise money to replenish its reserves is a matter of faith, Ching says. But she sees the increased payouts as laying the groundwork for community organizations that are trying to create a post-Covid-19 world where progressive ideals like workers’ rights and affordable health care have a chance to flourish.

“This is not the time to make a few tweaks,” she says. “This is not the time for business as usual.” Rather than sitting on billions of dollars in aggregated wealth and dribbling out grants to make incremental change, she says, philanthropy should “throw down because we have an opportunity to change the course of history.”

Whether to Spend Down

In its more than a century of existence, the Rockefeller Foundation’s endowment has survived, and grown, through market panics, extended depressions, and world wars.

In setting up his philanthropy, John D. Rockefeller allowed future boards of directors to revisit the whether the foundation should exist in perpetuity. Ellen Taus, who served as Rockefeller’s chief financial officer during the Great Recession, says the option of a more aggressive payout, or even a spend-down, was on the table as foundation leaders considered their response to the tanking markets.

Instead of rushing money from its endowment to its grantees, the foundation worked to minimize a drop in grant payments, which did not decrease nearly as much as the value of its endowment.

Taus says a spend-down might be the right answer for some foundations. But to do so suggests that a foundation has absolute certainty that the current crisis is more pressing that some unknown catastrophe looming in the future.

“That’s the beauty of private foundations in the United States, that they provide the ability to have a very long outlook,” she says. “So it isn’t about this year, next year, or even the next decade.”

Lesson Learned

The Irvine Foundation in California has responded to the pandemic and fears about an extended economic downturn by creating a fund to help nonprofits survive in times of financial turmoil.

The $22 million Recession Resilience Project combines $2 million in emergency cash for general operating support to grantees in Irvine’s programs that support workers, career development, and specific regions of California. An additional $18 million will be used to help those groups develop and implement plans to stay afloat during a recession. The remainder of the effort has been earmarked to help grassroots groups achieve economic stability.

The foundation was planning on announcing the effort in June as a program that would prepare nonprofits for an expected downturn. Instead, the pandemic prompted Irvine to switch the focus to weathering the storm and roll it out several months early.

Don Howard, Irvine’s president, says the foundation will be able to follow through on the commitment without dipping into its endowment.

The reason, Howard says, stems from the foundation’s response to the Great Recession. When the economy tanked in 2008, Irvine didn’t put together a big response, a lack of action that made a profound impact on the board.

To ensure that Irvine would be a bigger help during the next downturn, the foundation altered how it budgets for large, multiyear projects and keeps a significant portion of its annual grant-making budget unallocated. Money for big projects is set aside in a protected part of Irvine’s portfolio. That way the foundation isn’t caught flat-footed, and programs can be fully funded if there is a downturn.

“We’ll see how the recession and the pandemic continue,” he says. “We’re not averse to going into the corpus, but we planned so we didn’t, at least at this first phase of the crisis, have to do that.”

Money for the Future

Larry Kramer, president of the Hewlett Foundation, on Tuesday said that the foundation would maintain its current grant making budget for the year but would not be allocating new funds. (The Hewlett Foundation is a financial supporter of the Chronicle of Philanthropy.)

Like Irvine, Hewlett is able to keep grants level because of lessons learned during the 2008 recession, Kramer said in a letter posted on the Hewlett site. Following the downturn, Hewlett put money in an “unallocated” budget, meaning that when its endowment shrinks because of declines in the market, it can use the unallocated dollars to cover grants it has already committed to making.

Kramer stressed the value for future grant making of holding onto the foundation’s endowment rather than selling off at a time when it has lost value. The plan, Kramer wrote, should allow the foundation to absorb a 20 to 25 percent loss in value before it has to consider cutting grants.

Immediate Needs

Each year the MRG Foundation’s grants are tiny compared with the million-dollar contributions made by larger charities. But during the pandemic, the Portland grant maker would like to serve as an example to big foundations by directing a big chunk of its reserves to immediate charitable use.

Days before Oregon Gov. Kate Brown ordered residents of the state to stay at home, Se-ah-dom Edmo, executive director of MRG, got board approval to direct $300,000 in emergency funds to its grantees. The checks range from $1,000 to $10,000. That’s not a lot, but for the grassroots social-justice groups the Portland grant maker supports, it may mean staying afloat.

“We’re releasing that money as an example of what should be done in philanthropy right now,” she says. “Holding onto millions and billions of wealth while folks’ lives are at stake is not what philanthropy should be doing.”

Dark Thoughts

The pandemic has been difficult for many of the people Trans*Ponder serves. The social support group for transgender people serves as a “resource hub” for about 1,000 people who are looking for social services, counseling, and peer support, says Oblio Stroyman, Trans*Ponder’s grant director. Many people who have connected with the group are unemployed or work in the hard-hit services industry. Many may not have a safe place to shelter in place.

Some have been waiting for more than a year for gender-reassignment surgery and are being told to wait for an undetermined time because coronavirus treatment is overloading hospitals.

“Now all the sudden, maybe they’re having a lot of dark thoughts,” Stroyman says.

It’s been hard to keep up, Stroyman says, which is why it was such a welcome surprise when MRG re-upped the group’s $10,000 grant.

“It’s exhausting, but MRG reached out to us even before we had a chance to ask.” Stroyman says. “They said, ‘We see you, we appreciate you, and we know this is hard.’ "

For Edmo, the choice is clear “Holding back right now is immoral.”

Correction: A previous version of this article said that Justin Maxson is the Mary Reynolds Babcock Foundation’s president rather than its CEO.