When it comes to charitable giving, the United States is the world's most generous nation. Hooray for us, but such munificence is being sorely tested in the wake of wholesale portfolio markdowns that are putting a dent in our collective philanthropic intent.
Various reports point to a slowdown in charitable giving. According to the Center on Philanthropy at Indiana University, the number of gifts of $1 million or more given to charities by individuals fell by 33% in the last half of 2008 from the same period the year before. That was the second-biggest drop in the last half of a year for the past decade, trailing only the 35% drop in 2001.
Meanwhile, market losses are hurting many foundations' ability to do their jobs. A January survey conducted by Citi Institutional Consulting and the Association of Small Foundations found that more than 60% of foundations expect to alter their grant-making and spending plans because of market declines. Their grant budgets will drop from 10% to 50%.
Stats on 2008 charitable giving won't be released until June, but most observers expect it to top 2007's total estimated giving of $306 billion. This year could be a different story, though, because as it's shaping up now, it could be one of those rare year-over-year decreases in philanthropic donations.
In inflation-adjusted dollars, charitable giving increased an average of 4.3% annually in years without a recession during the 40-year period from 1967 through 2007, according to Giving USA Foundation. During this period, giving dropped an average of 1% during recession years.
"2009 will be worse than 2008," says Kim Wright-Violich, president of Schwab Charitable, a national donor-advised fund based in San Francisco. "You have to remember that last year people had appreciated securities to give until about August."
Traditionally, appreciated assets are the main philanthropic vehicle of choice thanks to their tax benefits. But with most securities seemingly under water these days, that's not an option for many folks. "The bad news is that not being able to take advantage of some capital gain avoidance will have a chilling effect on charitable giving," Wright-Violich says.
Still, Americans aren't becoming a bunch of grinches, and the nonprofit world won't disappear (although a shake-up might be unavoidable).
"Even if donations go down 15% to 20% from $306 billion, that's still a huge number," says Eileen Heisman, president and CEO of National Philanthropic Trust, a national donor-advised fund in Jenkintown, Pa. "I think we're seeing a lot of people pausing, but people are still gifting-albeit more modestly and less frequently."
Charitable giving in the U.S. has consistently amounted to roughly 2% of gross domestic product, says Wright-Violich, adding that Great Britain is a distant second at about three-quarters of 1%. "The good news is that avoiding taxes ranks only fourth or fifth among reasons that motivates charitable giving," Wright-Violich says. "That said, if you don't have the tax advantages it costs you more to make the same gift, so you can't afford to give as much. The size of gifts is impacted somewhat because more people will be giving cash." In 1999, cash constituted 8% of contributions to Schwab Charitable; in 2008, it was 58%.
Indeed, cash is king right now when it comes to donations. Kevin McGrath, sales and marketing vice president at Renaissance LLC, an Indianapolis-based company that sponsors and administers charitable giving programs, says in years past when the equity markets were down donors could pick up the slack with real estate donations, and vice versa when real estate was down. With both asset classes in the tank, cash is a more popular option. "There's some benefit to cash, such as simplicity of transfer," McGrath says. "And if you make a cash contribution to charity you can offset up to 50% of your adjusted gross income versus 30% for contributions of securities."
Heisman says she's seeing more donors cutting back on their support by contributing only to the core charities that mean the most to them.
Diane Pearson, a planner at Legend Financial Advisors in Pittsburgh, says clients with personal ties to their gifts have remained steadfast givers during the downturn. For example, one of her firm's clients is a family with a daughter who passed away at a young age, and they give an annual scholarship in her name to her college alma mater.
Meanwhile, Pearson sees little client demand to form charitable trusts. "Interest rates don't make them attractive to set up right now," she says. That's because trusts are often set up based on a set dollar-distribution amount based on a percentage-type return from the assets in the trust. With most equities in the red and a limited amount of fixed-income vehicles producing good yields, she says it's not a good time to put a lump sum into a trust to get a small annualized dollar amount.
William Hewitt, chief marketing officer of the DonorFirst program at New York-based Crown Philanthropic Solutions, says financial advisors can help clients find better ways to manage their charitable gifting. That can include setting up programs such as donor-advised funds that engender an annual gifting commitment, or finding offbeat ways to donate assets. "That means aggressively re-evaluating what can be a gift," says Hewitt, whose company created a technology platform to facilitate improved communication between donors and nonprofits. "Do they have old limited partnerships they want to get rid of? An antique car or a boat?" Hewitt has heard stories of people donating items such as cattle and other livestock, horses, roller coasters, merry-go-rounds, sailboats and coin collections. "As long as a foundation is capable of evaluating, receiving and transferring that asset, and then liquidating it, it's OK as long as it's an appraisable asset."
A charitable pledge is a legally enforceable document in most states, although most nonprofits don't go after donors who fall behind unless they think the donors are being totally irresponsible. "It's generally a bad idea to alienate people who give you money but have fallen behind due to difficult economic times," says Melissa Berman, president of Rockefeller Philanthropic Advisors, a philanthropic services company in New York.
Charitable organizations are often willing to restructure pledges with longtime donors who've made multiyear pledges but can't follow through because of financial hardships. They can stretch out the length of the commitment from, say, three years to five years, or find an alternative way to fund the commitment. "For donors facing economic difficulty, stretching out pledges with nonprofits has been going on privately for decades," Berman says.
The recession could lead to consolidation in the nonprofit space, which saw explosive growth in the past 30 years. "The number of organizations has grown from something like 800,000 to 1.6 million," says Bruce Boyd, principal and managing director in the Chicago office of Arabella Philanthropic Investment Advisors. "I don't think the philanthropic community can sustain that level of activity."
Boyd says nonprofits are laying off people and cutting programs. One trend he's seeing is new alliances, mergers and restructuring among nonprofit organizations. He adds that his company is brokering a merger between two prominent, long-standing Chicago nonprofits that is expected to close by late March.
A potential wrench in the philanthropic machine could come from Obama administration proposals to reduce the tax deduction high-income taxpayers can take for charitable gifts and to boost the top personal income tax rate on people with incomes of $250,000 or more.
The Center on Philanthropy estimates that if Obama's proposals were in place in 2006 (the latest year that itemized deduction data are available), total itemized charitable giving among people with incomes above $250,000 would've sunk 4.8%, or $3.9 billion. The organization noted, however, that changes in personal income and wealth have a bigger impact on giving than tax rates. Its research finds that a 100-point change in the S&P 500 equates to a $1.85 billion change in itemized charitable giving, both on the upside and downside.
Times are tough and could get tougher, but even if philanthropy takes a short-term hit, many in the industry don't view it as a crisis situation because the country will keep digging into its pocket--even if it isn't quite as often or as deep.
"Americans are extremely generous in bad economic times," Berman says.