Q&A talks about the state of nonprofits with Joseph Fortuna, a senior vice president with Morgan Stanley in Hartford.
Q: What’s the state of charitable giving? How have nonprofits fared since the Great Recession?
A: According to the Urban Institute National Center for Charitable Statistics (NCCS), we have experienced the fourth consecutive year of growth in annual giving since the unprecedented two-year drop of 2008 and 2009.
Giving USA estimates that 2014 individual giving will be $335 billion, putting us close to the 2007 high-water mark.
During the four-year period prior to 2008, 4.3 percent of nonprofits with $50,000 or more in annual revenues ceased operations, according to NCCS. During the four-year period after the 2008 market decline, 5 percent of charities closed.
While this increase is significant, it is not at the level many have predicted. There may be several reasons for this resilience, but I believe that the trustees and executive staff of many of our nonprofits are extremely effective and increasingly familiar with operating in crisis mode.
Survival has to be a result of strong governance and effective use of disciplined investment policy and spending. I also believe that the rise in collaboration among similar-missioned nonprofits has resulted in healthier organizations with stronger leadership, boards and better fiscal strength.
Q: You have said one challenge nonprofit’s face is marrying prudent spending with an appropriate endowment investment policy. How can a nonprofit build an endowment that withstands good times and bad?
A: Endowments must be managed in a manner that will provide stable (short-term) and sustainable (long-term) support for the nonprofit organization. The stable support should bring a level of predictability to the organization, allowing for annual planning and budgeting without a great deal of volatility.
Sustainability, the key objective for all nonprofits, is protecting the future purchasing power of the original funds that make up the endowment. Demand for a nonprofit’s services are highest during economic downturns, which is also when their asset levels are at their lowest. Given this challenge, the key to a stable and sustainable endowment rests with the ability to align investment policy with spending.
This delicate balance is further impacted as individual charitable donors also experience the financial stress of market declines, thus, tightening their purse strings and decreasing individual giving.
This leaves foundation and endowment officials with the difficult task of matching their budgetary needs with the resources available to meet those needs.
Adopting a prudent spending policy is among the most powerful tools available to smooth out the potential fluctuation in annual spending that results from market volatility.
Q: Are there certain nonprofit segments that are performing better than others? Why do some nonprofits outperform others?
A: Among all charitable subsectors, 2013 saw the largest portion of donor giving directed toward education, according to the 2014 U.S. Trust Study of High Net Worth Philanthropy. Charitable donors gave more to this cause than to religious, arts, basic needs, health, international and environmental services.
Interestingly, the closure rate for nonprofit organizations during the post financial crisis period was highest for international organizations, while arts and environmental nonprofits were less likely to close than all other types of nonprofits.
Organizations that are able to build to an annual revenue of $1 million or more are far less likely to be forced to cease operations during a financial crisis as they are in a position to provide short-term stability and a level of long-term sustainability that can weather the storm, according to NCCS.
This is true across charitable subsectors and not dependent upon mission. A major contributing factor to strong performance is governance.
Though the most effective governance strategies will vary from organization to organization, charity watchdog groups and auditors agree that instituting a culture with policy and procedures is a best practice and leading indicator of prudent governance.
Q: How does an aging population affect nonprofit giving? What other changes are we seeing in the way people give to charity?
A: As the Baby Boomer generation settles into the wealth distribution phase of their lives, a strategic engagement around philanthropy replaces an investment strategy for wealth accumulation.
Timothy Prete, a business partner of mine for over 20 years, assists ultra-high net worth families in all matters related to wealth management and financial services. He has seen many of his family clients shift the focus of their quarterly wealth management investment meetings towards a discussion on creating a strategic charitable giving plan.
Charitable giving is not reserved for only those looking to distribute wealth. According to the National Philanthropic Trust, online giving grew in 2013 by 13.5 percent, a trend that is likely to continue as media and social networking brings world events and needs to us immediately.
While this convenience appeals to all ages, the target audience for much of this philanthropy is directed towards Millennials.Â