Traditionally, nonprofit organizations have focused their annual budgets and fundraising on programs and necessary operating expenses. Few have budgeted set amounts for future major capital expenses or to replace depreciated assets. When it came time for a major capital expense, especially a new building, nonprofits would often seek major grants from foundations. In the past, foundations generally served as the main source of capitalization in the nonprofit sector. Since the 2008 recession, however, more and more foundations have shifted their grants towards funding operating expenses, new program initiatives and organizational sustainability.
Since the time of Thomas Malthus, an 18th century economist who predicted that the world would starve as population outgrew the food supply, economics has been called the dismal science. In today’s dismal time of the COVID-19 pandemic, perhaps it is appropriate for economics to brighten its reputation by helping to address some of the problems we are now experiencing. In particular, nonprofit organizations in the U.S. and in other countries are facing severe, indeed existential economic challenges. Many organizations have had to close their doors at least temporarily, cancel fundraising events, furlough staff, move to online operations and take other severe measures in order to survive and to comply with policies to protect public health. Others, such as foodbanks and hospitals, are hard-pressed to address new demands for services to vulnerable groups affected by the crisis.
Debt and Borrowing; Think Pieces; Crisis Management; For Research
The Ford Foundation and a number of peers - including the Doris Duke, Kellogg, MacArthur, and Mellon foundations - grabbed headlines recently announcing a plan to substantially boost payouts to support charities over the next two years financed in part by the issuance of “social” bonds totaling $1.2 billion. To some, borrowing to support philanthropic giving is a game changer. The Chief Executive Officer of the Council on Foundations referred to this decision as “the shot heard 'round the world” for philanthropists, with debt financing representing “a creative, groundbreaking innovation” (Parks, 2020). On the other hand, some might question the decision to issue debt as foundations simultaneously sit on massive endowment funds invested primarily in equities, bonds, and alternative investments. Further, if debt finance makes sense for foundations looking to leverage endowments with only limited risk to their sustainable payouts, then why wasn’t the strategy adopted during past financial crises? This brief 1) details the bond issuance by the Ford Foundation, 2) considers why a foundation would borrow to increase payout rates rather than tap its existing endowment, 3) highlights the risks associated with the strategy for foundations, and 4) explains how the use of debt is simply another tool in foundations’ increasingly sophisticated efforts to better leverage their perpetual wealth in support of mission.
Event: NCNE is cosponsoring “Financial Decision-Making for Nonprofits During a Financial Crisis: a panel cosponsored by the NCNE and the Jack, Joseph and Morton Mandel School of Applied Social Sciences
View the NCNE Video Series which was a component [...]