Foundations Were Ready For U.S.
Downgrade, Fear Double-Dip -
08/09/2011
(edited)
The NonProfit Times
By: Mark Hrywna
The first-ever downgrade of long-term U.S. debt on Friday threw more uncertainty into any potential economic recovery just as charitable giving was creeping back to pre-recession levels.
While the downgrade will lead to higher interest rates on borrowing it also could have a ripple effect on other ratings, putting more pressure on state budgets, and in turn more nonprofits that depend on them. And the massive sell off in the markets the fueled fears of a potential double-dip recession.
According to Bradford Smith, president of The Foundation Center in New York City, there are two ways the downgrade can affect nonprofits. First, it could mean raising interest rates, which would put further pressure on state budgets and their ability to raise money. With states already in a tough situation, he said it if it gets tighter, many budget cuts could come at the expense of nonprofits.
Second, if this week's volatility turns out to be more than just a market correction, foundation endowments could get a big hit, as they did in the 2008 recession. If endowments take a big enough hit, foundation giving could fall in response, just as giving was beginning to climb back to pre-recession levels, Smith said.
From an operational standpoint, the downgrade really has no impact on endowments and foundations, or their ultimate beneficiaries, said Rick Nelson, chief investment officer at Commonfund Institute in Wilton, Conn. "It's been a non-event from that standpoint," he said.
"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P's report said.
Lisa Hall, presidents and CEO of the Bethesda, Md.-based Calvert Foundation, said there is a concern about the possibility of a "double-dip recession." If it does lead to a protracted downturn, it would have an impact on nonprofits throughout the country, she said.
Hall said she has the sense that the stock market volatility of the past two days have resulted in unrealized losses, which could affected people's perception of their wealth, therefore how much they're giving they're willing to do.
The biggest challenge for nonprofits will be to make sure they maintain services that are consistent with the funding they are receiving. "It is a challenge for nonprofit because they obviously want to serve the needs in their community. To be in this for the long run, they have to make adjustments to services they provide and staffing, so they're ready when funding comes back and grants more readily available," she said. "It's quite a balancing act, but where we see nonprofits get in trouble in prior downturns is when they've continued to provide programs and services when they didn't have the funding to cover their expenses."
Despite the unprecedented developments, Hall said, "fundamentally, we have the same underlying structure and financial condition that we had last Thursday, before this downgrade occurred."
Most foundations that have endowments have perpetuity on their side to weather the storm but since their spending rates are based on their rates of return, it could be more challenging to make grants to nonprofits, he said.
Endowments have a longer time horizon and have more illiquid assets and equity risks in their portfolios, Nelson said. The indirect effect is that "greater volatility tends to create greater headwinds for foundation and endowment portfolios," he said.
What effect the downgrade and current market volatility will have is still unclear for the time being and will take time.
