Our organization, the Aviv Foundation, recently got an unexpected call from a grantee. The nonprofit, we were told, would not be able to meet its target number of participants for a particular program because it couldn’t afford the travel expenses associated with the project. The grantee was reaching its fundraising goals, but the cost of travel had gone up so quickly that the money it raised was no longer sufficient to cover the program’s expenses.
Unreliable purchasing power is just one of the countless risks inherent to social-change work. Some of these risks are best borne by the nonprofit, such as shifting circumstances that render a strategy ineffective or promising leaders who depart for new opportunities. Certain financial risks, however, should be absorbed by philanthropy, not grantees.
High rates of inflation have made headlines for months. Consumer prices in the United States increased by more than 8 percent in the 12 months ending July 2022, although they were flat in the month of July itself. Food prices jumped almost 11 percent, and energy prices rose by more than 30 percent. As a result, grantees are paying significantly more for expenses such as supplies, travel, and — often most sharply — staff. Several organizations we support have told us that they won’t reach the goals they proposed when applying for funding because these costs are so much higher.
The grant making at the Aviv Foundation, where Adam is executive director and Steven is on the board, is heavily informed by research showing that multiyear grants provide organizations with greater certainty, more flexibility to try new approaches that take time to develop, and an increased likelihood of long-term success. However, unexpectedly rapid increases in prices threaten these goals. When inflation is high, costs outpace the expected grant income, undermining the reason for making a long-term grant in the first place.
That’s why we have come to believe that in times of unexpected inflation, foundations should increase payments during the latter years of a grant. The Aviv Foundation recently did just that, increasing the 2022 payments on most of our U.S. multiyear grants by 4 percent.
This means that a $200,000 grant we made in 2021, with expectations to pay $100,000 in 2021 and $100,000 in 2022, is now a $204,000 grant, with the 2022 payment increased to $104,000.
It was difficult to choose a rate for how much to increase our payments this year, and we considered a host of factors. The headline inflation reported in the media reflects the increases in costs for a typical American household. Of course, the organizations we fund have different types of expenses than households, and it’s difficult to know exactly how quickly the costs of these organizations have increased given all the variations and complexities that each face.
Salaries and benefits make up about half of our grantee’s budgets. According to the Bureau of Labor Statistics Employment Cost Index, those expenses increased by 5 percent during the 12-month period ending in June, compared with an average of just 2.5 percent a year during the previous 10 years. Other costs, including food and energy, have risen much more quickly.
Moving from this data to our decision to increase grants by 4 percent was admittedly not particularly scientific, but it struck us as reasonable. We expect to revisit this decision in future years based on the realities of the U.S. economy and what we hear from grantees about their experience with inflation and with our supplementary funding.
We realize that this one-time increase will not on its own solve the problem of rising costs. We hope, though, that it serves as one small piece of a larger puzzle and that other foundations will follow a similar course.
Foundations that support international grantees, as we do, also need to recognize that they, too, are subject to changing economic environments. For example, we fund several organizations in Israel, where the value of the dollar has fallen significantly in recent years. We have come to recognize that making grants in U.S. dollars regardless of the local currency can unintentionally change the value of the grant.
To mitigate this, we guarantee the exchange rate on multiyear grants that will be spent outside the United States. If the dollar is weaker by the time we make our payment, we increase it so the organization gets the amount it expects in the local currency. If the dollar is stronger, we make the payment as originally scheduled, so the organization gets the benefit. A foundation might also consider making grants in a local currency, if budgeting practices make that feasible.
Approaches such as these allow grantees to:
- Better plan for the future with additional certainty against financial risks built into multiyear grants.
- More effectively demonstrate how well their ideas work, free from concerns that a grant’s reduced purchasing power will affect outcomes.
- Hold less cash in reserves as a buffer against changing economic environments, allowing them to invest more in their core mission.
Most important, such policies allow foundations to live up to their own missions — providing grantees with the resources and tools they need to pursue social change and helping them worry less about how they’ll manage current and future financial challenges.
