Howard Nochumson, Executive Director, Washington Square Health Foundation
In a time of crisis, the usual response of the philanthropic world is to focus on the provision of direct assistance. While such a response is admirable in most crisis situations, COVID-19 presents new challenges that may call for us to go against that initial impulse. Not only are we facing a major health care crisis in the form of a pandemic, but the philanthropic community is also facing a major erosion of its asset base, greater than in 2008. As such, I believe that this crisis requires a multifaceted set of comprehensive strategies from the philanthropic community.
Large foundations with assets over $50 million should deal directly with the health care and social aspects of the crisis, either through direct grants or cooperative grantmaking structures which have already been established, either on the local or national level. These foundations have the resources to increase their current giving while maintaining their normal funding of grantees. They have the resources to be able to supplement in a meaningful way the government’s health care and social support programs.
Small foundations with assets less than $50 million should continue their funding of the current programs of small nonprofit community organizations, which will become more dependent on foundations as their usual sources of funding are diverted to the COVID-19 pandemic. Small foundations must realize that the magnitude of the health care crisis and social support necessary as a direct result of the COVID-19 crisis is beyond their available resources s. However, small foundation grantmaking can make a difference in the survival of non-COVID-19 related service providers. We need these nonprofit providers now, and will need them in the future, once the pandemic is over. If we do not save these organizations, we will have to rebuild them at a greater cost in the future.
The small foundation community must maintain its ability to provide current and future grantmaking. Foundations must develop strategies to protect their primary missions by protecting their two most important assets: their portfolios and their employees. Without either of these two assets the foundation’s ability to carry out its mission statement will decline or become unachievable. Asset management is crucial at this time, so when the market does return to the upswing foundations will have assets to participate in the growth to come. Hopefully, most small foundations have cash or short-term investments that can be used to fund foundation operations. In addition, foundations can use 990PF calculated distribution “carry-over” if available to reduce the amount of grantmaking needed to meet the 5 percent distribution requirement on a near term basis. Foundations can also take advantage of the two-year distribution rule governing the disbursement of the 5 percent distribution requirement.
Small foundations can use program related investments (PRIs) and low interest loans to help nonprofits fund operations, with a caveat that the foundation may forgive part of the loan. For example, after a foundation receives the majority of interest under the terms of a five-year loan, it could forgive principal in the last two years. This would allow the PRI recipient to use the forgiven principal for other foundation-approved activities. Washington Square treats these forgiven loan payments as a grant request, for which the recipient applies, for the forgiving of the principal portion of the grant. We term these FPRI grants, or grants made through the forgiving of principal, which allows the PRI recipient to use the forgiven funds for purposes approved by the foundation. The advantage to the foundation is that it does not have to give away the forgiven principal again in the next fiscal year. In other words, it is not added on to its distribution requirement for the subsequent year.
The maintenance of foundation staff should be a priority. The staff of small foundations understand their communities, as well as the foundation’s policies and historical giving. Under current law, foundations can deduct a high percentage of most charitable administrative expenses. Simply put, up to 90 percent of employee compensation and operational costs, except for direct and related investment expenses, can be used to meet a foundation’s 5 percent distribution requirement.
Finally, if a small foundation does need to reduce costs, there are better areas to consider. With the blessing of their boards of directors, who often unnecessarily prioritize the need for “independent opinions,” foundations could reduce the use of outside consultants for services which current foundation staff could take care of on their own. And foundations that have historically paid board fees, could suspend, reduce, or eliminate those fees, freeing up funds that could be used in the pursuit of the philanthropic mission.