Wall Street Meltdown Will Hit Charities When Cash Is Most Needed

October 15, 2008       Mark Hrywna      

Nonprofits can expect to get hit from all sides when it comes to the most recent meltdown in the financial sector.

Douglas Bauer, senior vice president at Rockefeller Philanthropy Advisors, calls it a “triple whammy” for nonprofits as a result of the historic collapses of some of the nation’s oldest financial service firms. The “triple whammy” is the potential decline in revenue for nonprofits from three major players – government, corporate and individual donors – all stemming from the same crisis: the housing and subprime mortgage market collapse.

Generous corporate givers might pull back on giving as companies try to survive, while nonprofits can expect less from government since state and city tax revenues will take a huge hit with financial firms losing billions in mortgage losses. And with thousands of positions to be cut at these firms, individuals certainly can’t be counted on to give as much as in recent years.

Not only does Lehman Brothers Foundation have a $20-billion endowment, but the company, like Bear Stearns, encouraged a culture of giving among employees. “Without question, it’s a big loss to not have Lehman around anymore,” Bauer said.

Corporations donated $15.69 billion during 2007, with foundations kicking in $38.52 billion, according to Giving USA, an annual assessment of giving prepared by the Center on Philanthropy at Indiana University for the Giving USA Foundation. Individuals gave $229.03 billion during 2007, according to Giving USA.

The generous contributions to nonprofits coming from Wall Street assuredly will be dramatically curtailed. “That’s a huge issue for the nonprofit community that’s come to depend on the generosity of those on Wall Street,” Bauer said.

Tax revenues from Wall Street have an enormous impact on New York City as well as the state. “It’s not just corporate or individual gifts, but the reduction in tax revenue that supports a lot of social services delivered by the nonprofit sector,” Bauer said.

The acquisition of Merrill Lynch by Bank of America brings together two financial giants that have been very important and influential corporate citizens, both locally and nationally, Bauer said. “Here’s hoping that one plus one equals two, and not one, or 1.5, which tends to happen in mergers,” he said. “I hope they find a way to continue to have an impact on issues they care about.”

A slew of nonprofits in New York City and beyond have benefited from grants by the Lehman Brothers Foundation over the years: the Alzheimer’s Association, Children’s Aid Society, Cold Spring Harbor Laboratory in Long Island and MŽdicins Sans Fronti�res/Doctors Without Borders.

Two years ago, Lehman Brothers pledged $6 million to help establish the Lehman Brothers Lung Cancer Research Center, part of the Lung Cancer Research Institute at Weill Medical College of Cornell University. In 2006, the Robin Hood Foundation was awarded a three-year, $300,000 grant, Teach for America received a $1 million grant toward its general operating budget, and DonorsChoose.org received $1 million over two years for principal sponsorship of its Chicago, New York and San Francisco Web sites. Most organizations either declined to discuss the situation or were unsure how they might be affected.

For private community foundations, Bauer said the question will be whether to spend more knowing that times are tough, or less trying to keep the endowment where it is, and continue to grow. The benchmark for a foundation is to meet the 5-percent payout, take care of investment fees and stay ahead of inflation. “That’s 8 to 12 percent return each year. That’s tough to do, and you’re not hearing that in these markets,” Bauer said, expecting some belt tightening of foundation spending next year.

As the peak giving season approaches, Bauer expects that, in general, donors will stick close to those charities that are very important to them – those that are need-to-do versus the nice-to-do. “There’s not a lot of new support for new organizations simply because the money is not there,” he said. For example, Bauer said if someone is a board member of a museum, they’ll continue to support it but maybe cut back on giving to their alma mater because they realize the local food bank is an important group to support since it provides the most basic and necessary of needs.

City Harvest, which received $100,000 in 2007-08 from Lehman Brothers Foundation, raises almost 40 percent of its annual budget between November and January. “Some of us in the nonprofit community will see a marked increase in the need for our services as the effects of the Wall Street crisis cascade outwards — and City Harvest is in that group. It’s definitely going to be a challenge to serve more people with potentially fewer dollars,” said Jilly Stephens, executive director of City Harvest.

The field of philanthropy has to carefully think about whether it is the social safety net because government’s discretionary spending will be reduced, Bauer said. “Not that philanthropy can step in and fill that void, but what part of that void will it fill,” he said, or will it make sure that safety net is not completely disintegrated. “It’s an interesting discussion and debate for the sector to have,” Bauer said.

“One can hope that this is the worst of it, and if in fact it is the bottom, we start to come out of it,” said Bauer, adding that perhaps it’s a similar situation to the 1987 stock market crash when Wall Street had a correction, and the market enjoyed a great run after that, coming out stronger.

The Nonprofit Finance Fund (NFF) offers three recommendations for nonprofits that might be threatened by the financial crisis:

Review and optimize three critical aspects of financial assets: Cash deposit risk, concentration of investment risk, and concentration of revenue risk. If a reliable revenue source seems questionable, consider ways to diversify revenue sources. Avoid over-diversification, i.e., new and multiple lines of business, that could give rise to “mission creep,” carry high entry costs, and frequently increase fixed costs. Make contingency plans for downsizing if you know or suspect you will lose funding. Nonprofits frequently use furloughs, small across-the-board salary reductions, and consulting arrangements to offset temporary revenue reductions. However, if it looks like funding has disappeared for good, consider partnering or merging with other complementary or similar organizations but be wary of partnerships that could ultimately increase costs. NPT