One session at the Exponent Philanthropy National Conference this past fall prompted a question that I’ve continued to ponder.
I attended the session “A Framework for Foundation Investing in a Low-Return Environment.” Full disclosure: As a relative newcomer to philanthropy, I often feel anxious in discussions about organizational budgets and investing. But it’s an important part of my role as a program officer to understand how investment strategies impact our foundation’s ability to make sustainable grants responsively and effectively.
The session offered a market analysis and a summary of factors that will likely inspire a market downturn in the next 2-5 years. It was helpful to learn some questions I should be asking our investment advisors and discussing with our board’s finance committee. But one question seemed harder to answer: What should we be doing for and with our grantee partners to ready them for a market downturn?
As I think about a likely downturn in the market—you can only go up for so long before a correction, I am thinking about how our foundation needs to prepare to continue to support the advocacy and service providers that are essential to advancing our mission when we will be earning less interest on our corpus.
I reached out to Carol Cantwell of Fun with Financials, a consulting firm that provides financial tools and training to nonprofits and foundations, who offered some helpful perspective.
Build reserves and make it acceptable for organizations to use them
Carol noted that, “The very best way to prepare grantees for a market downturn was actually three years ago by giving general support grants that allow grantees to build their own reserves. It needs to start way before the downturn.” I liken this to the adage: The best time to plant a tree is twenty years ago.
Carol also offered some important insight into the ways funders often think about financials and how it impacts our grantees’ ability to respond to market changes. She stressed that funders need to get comfortable with grantees smoothing out inevitable ups and downs with reserves. Often times, funders expect a balanced budget model from grantees that doesn’t allow an organization to build reserves for the inevitable downturns and funding shrinkage. She stressed that funders shouldn’t be afraid of seeing deficits in grantee budgets, especially during downturns, because they are not always bad.
“When times are good,” Carol notes, “funders often penalize groups that have reserves or a robust budget and don’t fund them because they think they don’t need it. But if the groups are building reserves so they can weather market storms to continue their programs, funders are doing them a disservice.”
Take a longer view
My conversation with Carol expanded my thinking about working more with grantees through the normal economic cycles that we live in instead of just thinking about how market performance impacts our portfolio or how we should fund groups during one funding cycle.
This long-term investment strategy in nonprofit organizations coincides with successful long-term market investment strategies—investing in the long term for steady growth despite the inevitable fluctuations. We should think hard about how our short-term investments in certain organizations impact their long-term potential for creating systemic change. Sometimes giving a multiyear general support grant doesn’t feel exciting or new, but if we tie grantees’ hands during a market downturn, we’re limiting their ability (and ours) to achieve our most critical missions.
I continue to reflect on these ideas and hope that Exponent Philanthropy will foster more conversations about how funders’ expectations about nonprofit financials can limit their success and viability during challenging economic times.
Kate Ingersoll is program director of the Brush Foundation, a private foundation committed to funding the reproductive health, rights, and justice movement in Ohio.
Carol Cantwell is the founder and chief fun officer of Fun with Financials, a consulting practice dedicated to building the financial health of the social justice sector. Carol strives to integrate practices throughout organizations and networks that improve financial strength and solidarity to increase the political power necessary to achieve social change.