Nonprofits and Foundations Need to Be Prepared for the Effects of Inflation on Services, Operations, and Endowments
If you’ve ordered Girl Scout cookies this year — or still plan to — expect to pay more and to wait longer for delivery of the more popular varieties, such as S’mores and Samoas. The Girl Scouts are “earning a new badge in global economic turmoil,” as the Wall Street Journal puts it.
Supply chain disruptions and inflation are creating challenges for the annual cookie sale campaign, which produces 70 percent of the revenue for the nonprofit organization’s regional councils. An East Rochester, N.Y., troop leader told the
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If you’ve ordered Girl Scout cookies this year — or still plan to — expect to pay more and wait longer for delivery of the more popular varieties, such as S’mores and Samoas. The Girl Scouts are “earning a new badge in global economic turmoil,” as the Wall Street Journal puts it.
Supply-chain disruptions and inflation are creating challenges for the annual cookie sale campaign, which produces 70 percent of the revenue for the nonprofit organization’s regional councils. An East Rochester, N.Y., troop leader told the Journal that she has begun giving lessons on inflation to the 10- and 11-year-old Scouts to help them explain what’s going on to irritated customers.
The Girl Scouts are probably not the only organization in the philanthropic world facing problems because of inflation. According to the Bureau of Labor Statistics, prices in the United States are now rising at an annual pace of 7.5 percent and could go even higher. As a result, the cost of providing services or operating buildings will increase while the amount of money donors have to give away decreases. Moreover, since the inflation rate hasn’t been this high in 40 years, most people leading philanthropic groups have little experience dealing with the problem.
Economists think of inflation as a decline in the purchasing power of money. At first, the Biden administration blamed pandemic-driven disruptions in production for temporarily raising prices. But as the economy recovered, prices continued to go up. Policy makers and many economists now believe inflation was at least facilitated by federal stimulus spending during the pandemic, which put so much money into circulation that consumers and businesses could pay more for purchases. Reversing this trend will take time and require curtailing government spending and possibly adopting stringent measures, such as hiking interest rates to reduce borrowing and credit card use.
Meanwhile, the philanthropic world, along with everyone else, will have to learn to live with higher prices. Nonprofits, for example, may be forced to raise salaries to attract or retain workers whose own living costs have gone up. Paying more for groceries or gasoline could take a toll on charities that need to make these purchases to serve clients. Hospitals or schools that need to buy new equipment or improve their facilities may have to accept higher interest rates on loans. And if, like the Girl Scouts, an organization earns a large share of its revenues by selling products or services, it may face greater buyer resistance to increased prices.
Impact on Government Aid
Other sources of income will also be affected. For legal or political reasons, restricting government spending on entitlements like Medicare and Social Security, defense, and payments on the national debt is usually difficult. As a result, belt-tightening efforts tend to fall on so-called discretionary programs, such as Head Start and community economic-development projects, which often support the activities of nonprofit groups.
To offset the impact of inflation, organizations with endowments will need to get higher returns on their investments. From 2016 through 2020, a sample of 705 higher-education institutions earned an average of 5.1 percent annually on their assets after expenses, according to the National Association of College and University Business Officers. In today’s economy, that would become a loss of 2.4 percent after adjusting for inflation.
Impact on Foundations
To avoid deeper cuts, large nonprofit organizations can reduce how much they take from their endowments for operating income.
But that is not an option for private foundations. Federal law requires annual distribution of 5 percent of their assets, usually averaged over several years. Although investment earnings were higher in the past two years as the stock market soared, during the previous decade the endowments of private foundations grew at an annual rate of 8.4 percent, according to a 2020 survey by the Council on Foundations and Commonfund. Unless donors make additional contributions, these organizations now need to earn 12.5 percent to offset inflation and meet their distribution requirement without dipping into their assets.
For many years, advocates have urged Congress to increase how much private foundations must spend. If inflation remains high, such efforts are likely to face greater opposition. An alternative approach — issuing bonds to raise money for additional grant making, which was deployed in 2020 by several foundations — is also unlikely to win more adherents. As Ford Foundation‘s president, Darren Walker, noted at the time, what made that approach attractive was the “very low” cost of borrowing for “highly rated institutions.” That has changed.
Inflation will also erode the value of individual donations. Facing higher prices for essential purchases, ordinary givers are unlikely to increase contributions enough to compensate for lowered purchasing power. Wealthier donors who hold assets that are vulnerable to inflation, such as fixed-interest bonds, may have to cut back their giving. While property owners are more likely to be protected from inflation, converting their wealth into gifts is more difficult. In 2020, according to “Giving USA,” giving by individuals grew by just 1 percent after adjusting for inflation. With inflation much higher last year, the kind of decline normally seen during recessions seems possible.
How much impact inflation has on philanthropy will ultimately depend on how long it lasts and how high it climbs. With the Omicron pandemic surge diminishing, supply-chain problems easing, and more workers returning to the labor force, inflationary pressures could lighten. Last year’s economic growth, especially in the stock markets, has given philanthropy a financial cushion that might soften the effect of higher prices. Nonprofit leaders can shift their resources to reduce damage from inflation, such as by putting more money into interest-bearing accounts or deferring actions that would require them to take out loans. They may also need to make difficult operating decisions, such as replacing staff with technology, to lower costs.
But these are short-term responses. If inflation were to last the better part of a decade and reach double-digit levels, as happened in the 1970s, the consequences would be severe for philanthropy and American society as a whole.
This is uncharted territory for most nonprofit leaders today. But learning quickly how to navigate inflation may soon become part of the job description. Just ask the Girl Scouts.