Friday, January 9, 2009

Welcome 2009. The Challenge to New York Philanthopy!

Remarks presented this morning to the board of directors of the Association of Fund Raising Professionals (AFP) - New York chapter.

Good morning everyone. Good bye to 2008. And welcome to 2009. May it be better. I will keep this as short as I can so we can enjoy some discussion. In the current AFP national e-newsletter Paulette wrote in part as follows:

We now have the opportunity to show just how critical the nonprofit sector is to our communities and our world. But as we do so, let’s be sure not to forget about the important role of ethics and trust. People give because they trust they can make a difference. Let’s continue to be keepers of that trust with every interaction we have with donors.

On that note of inspiration I thank the Society for Cupidity and Malfeasance – SCAM - for making today’s presentation possible. Their man of the year is alleged con man Bernie Madoff. Madoff says he “made off” with $50 billion over nearly 40 years while honoring his muse Charles Ponzi, he of the 1920s stamp scandal. Sixteen separate SEC and other investigations could not prove Madoff was running a fraud.

The relevance of Madoff to this discussion is obvious. An unknown amount of what he stole once belonged to grant-making foundations like JEHT and Picower. These and so many other foundations and generous, caring individuals supported the charities you and I serve; in several cases charities lost serious money. It is also clear that some of the institutions that lost out with Madoff didn’t even know he was holding some or all of their money. However I find our Bernie a compulsive braggart; my personal view is that actual losses will be far less than $50 billion.

Much apparently represents paper loss – as well as paper profit that never existed. That may offer high net worth taxpayers a shot at refunds on taxes paid on mythical gains. On the other hand I doubt that anyone who realized ill-gotten profit over time is now going to step forward to admit it given all the talk about “claw backs” that theoretically at least could be gone after by IRS. Even now your organizations or clients may be getting conscience money. You may have been getting it right along. How would you know?

Meanwhile like me most of you have been touched indirectly by the recession –personally and professionally, not necessarily by Madoff but by the general downturn in the markets. Madoff is but a pimple on the great Wall Street butt. BB – beyond and before Bernie - an estimated ten trillion dollars of wealth went bye-bye last year - maybe more. Though there is unrealized paper loss here too - make no mistake: real people lost real money.

The collapse of the housing markets, the commercial banks and the investment houses got us where we are today. It was all caused fundamentally by rapacity: Wall Street’s obsession with quick profit over prudence. Even before the Madoff story broke on December 11th most investment portfolios were down 20-40%. The Dow was down 33% for the year. When you think about it the root differences between Madoff and Wall Street in general are not readily discernible: Greed trumps judgment and experience. It sucks in people and entities that assuredly know better.

What does this mean for philanthropy in our New York metro market? That of course assumes I know. But we have to begin somewhere.

Let’s start with the huge wealth transfer coming by 2015 - trillions of dollars passing to succeeding generations, at least some of which would have made its way to charity. You’ve all heard about the wealth transfer just not recently. The data came from a landmark study conducted some years ago by Paul Schervish and John J. Havens at Boston University.

In preparing this talk I e-mailed Paul and asked him if the Schervish-Havens wealth model would have to be revised. He gave me permission to quote his response and said that:

“From 1950-2006 the annual real rate of growth in wealth was 3.3%+. That covered a period of 9 recessions. Our estimate is based on only a 2% real annual rate of wealth growth. More importantly, there is no such thing as certain prediction that involves complex and diverse human agency. People can view the great growth in wealth from 1990 through 2006 (with 2000-2002 interruption) and then become greedy and dishonest and carry out risky behavior. In the end it is hard to be more prescient than Greenspan, Democrats and Republicans, derivative makers and brokers, and home buyers. The bigger question, I think, is how to achieve all the government spending without undercutting economic growth and taxing our children to death.”

He also added that they are doing a piece that will appear shortly in Trust and Estates Magazine. In any case real wealth growth is now in a minus mode. As for Greenspan he was horrendously wrong and admitted it in sworn Congressional testimony!

The local story is a huge sucking sound: hundreds of thousands of gasping New Yorkers, maybe even a million or more, who lack good economic options. An estimated 150,000 of them used to work in the financial markets – or are on their way out in the next few months. Poor New Yorkers have long depended on a fragile economic structure dressed in the trappings of affluence if not real wealth. But now the nonprofit economy is serving people who have never before had to avail themselves of the frail social net our private health welfare and social service agencies provide. They are now consumers of a shrinking product: the ability of our charity network to meet the demand. One example you’re all aware of is food banks. But human services in general have been clobbered.

Giving USA reported last July that US charitable giving in 2007 was $306.3 billion. That would make the estimated New York philanthropy handle $76-92 billion. How much of New York philanthropy was exposed in Madoff’s claimed $50 billion steal is obviously an unknown number and maybe never will be known.

My close friend and colleague Nancy Raybin (who is the new chair of Giving Institute) - and I - estimate that the New York metro area philanthropy market may account for 25-30% of all US charitable contributions. However this has never been systematically studied as far as I know. A few years ago as chair of Giving USA Foundation I tried to interest NYRAG in having its members sponsor such a study New York is still the largest concentration of wealth in the world - at least until good hard data refutes it. I got nowhere. But this work should be done. Perhaps AFP-NY can take up the cudgel.

Market forecasting is of course a fool’s game. As an investor I long ago learned nobody knows anything until after the fact but even a broken clock is right twice a day. So I’ll jump right in! What will philanthropy’s near term look like? In an address to AFP-NY’s luncheon meeting in December consultant Ted Hart prophesied that individual giving would drop 3-5% this year, foundation giving 5-7% and corporate giving 6-10%. I asked Ted in an e-mail where this provocative data came from and he e-mailed back that it came from his company; in other words he guessed. But it is clear that he looked back at the actual recession data over several years as published by Giving USA. So he could be right. Or not.

Our data covers roughly 40-45 years. Boiled down we see percentage losses nationally that are not far off from Ted’s estimates. But my reading of the data also shows that philanthropy is a trailing edge in declining: i.e., we feel the effects of recession somewhat later than the general economy. Foundation lags for example are not felt for up to a year or more. Drops in individual and corporate giving are more sensitive and are felt more quickly. However the data also seem to show that philanthropy is a leading edge in recovery, meaning we come back faster than other sectors of the economy.

For a very rough approximation of what we might be facing as we march bravely into 2009 let’s for the moment make three assumptions: first, Ted is right; second his projections do indeed extrapolate to the New York market; and third New York philanthropy comports to the national data model on foundation, corporate and individual giving. Living individuals account for 75% of the money, bequests 7%, foundations 13% and corporations 5%.

Applying and rounding to the New York estimate of $76-92 billion in charitable gifts for 2007:

Living individuals now account for $57-69 billion. At a 3% drop the numbers are $55.3-66.9; at 5% $54.65.5. The other numbers are billions as well:

Bequests - now at $5.3-6.4 decline to $5.1-6.2 at 3% and $5-6.1 at 5%.

Foundations now show $9.8-12.9. A 3% drop takes them to 11.6-9.3; a 5% slide goes to $9.5-11.4.

Corporations would be $3.8-4.6 under our model but with a 3% fall go to $3.7-4.4 and at 5% to $3.6-4.3

This may not be pretty. Yet if this were all giving was about it still would not be the end of the world as we know it though the hit to New York City’s nonprofit economy is likely to be higher for several reasons. In addition to the increased demand for social services Wall Street earnings and profits have accounted for about 20% of City tax revenues that are already way down and may decline further as unemployment continues to rise. That has to include some of your smaller and mid-market donors.

Second a substantial majority of the City’s 20,000 nonprofits are human service agencies most of which rely heavily on government funds to meet their budgets. Human services are where demand is the greatest. As those government grants and contracts shrink human service agencies will have to shrink as well. The place to make meaningful cuts is in labor - typically 70% or more of an agency budget. Though these workers are not for the most part highly paid many will have to be laid off thereby contributing to an already dismal scenario. For example at Women’s Prison Association, of which I am to become president next Tuesday, we have already cut our budget 20% and laid off about 20% of the staff.

One important problem affecting human service agencies in particular is that though legally private they are de facto public, essentially functioning as conduits for government money. Unhappily many have developed a dependency culture; private fund raising is weak. Most lack technical know-how, they lack boards with clout and they do not have a broad base of individual givers – though many once did. Where they have penetrated philanthropy most is with foundations that as we know are - or will be staggering. It is a little late and not the best time to tune up for private fund raising but they have little choice.

Nonprofit organizations depend on their boards of trustees for leadership, stewardship and action. I speak to this as a consultant serving boards as well as a trustee of three estimable nonprofits – one national, two local. That said by definition a board is a long, thin, wooden object. We all know one, few board members like asking for money in the best of times; and two, it doesn’t take much to discourage them. Depending on your organization the CEO usually reflects the board mood. Once in a while a good CEO sets the board mood.

In the last several months, and especially the last several weeks I have seen a deer-in-the-headlights look in boardrooms. Beyond the 1000 yard stare decision making is on hold. Organizations are having difficulty figuring out what to do next given that economically we are in the loo or at least circling the drain. In my long career I have been through war, fire, flood, recession, high hem lines and low; Nixon who presided over the most severe inflationary spiral since World War II, and Bush the Younger of whom there is nothing more to be said.

So here we are. Despite the bad news there are indeed positives and opportunities for the near term; I have some thoughts to leave you with for the long term and I’ll get to them soon.

But for now repeat after me:


Go ahead say it.


· Even if the data cannot be pinned down for lack of academic inquiry I believe we can agree that in this market, despite the worst, we are still sitting on a huge pile of money. Much of it is discretionary. For example if we go back to the level of philanthropy in 2000 we would be talking about $275 billion in inflation-adjusted dollars of which the New York market would have been nearly $68.7 to $82.5 billion dollars! At that time this was the largest amount of money ever reported raised. What is different now is less the money and more the mood!

· Who’s got it? The biggest challenge we face as consultants and staffers is to comb our donor files. Not to be brutal but who’s really wiped out and not a prospect this year regardless of their previous giving history? Who has been “Madoff-ed?” Who’s left? That’s where your time goes. Because for the most part you will be cutting back on acquiring new donors this is an opportune time to concentrate on exploring the existing data base – especially that vast dark space between $10,000-100,000 that no one ever seems to have time to examine in sufficient depth.

· Despite Madoff and the tanking markets high net worth donors are mostly still high net worth donors and they need to be asked. Most may be complaining but thy will still give especially if they are already wedded to your cause. Signing them up as new donors to your organization may not work as well as it has before. From what I can see or report anecdotally most charities held up fairly well in all categories last year: major gifts, planned gifts, mail and events. This year may be harder and expectations may have to be readjusted as I have already said. But I am a great believer in keeping at it.

· Planned giving is an opportunity. An estate’s worth may decline but many of your donors will still have significant net assets posthumously. They must either will them away or give them to Sam. Most of the time we are not as assertive as we should be in going after planned gifts because cash now takes priority. This may be the year to re-think how we concentrate our time.

· Despite the well publicized and humongous money losses and large number of layoffs huge bonuses were paid out on Wall Street and elsewhere at the end of the year; maybe less than in other years, and maybe not to 20 or 30 alpha dogs at the very top.

· Corporate giving may be hurting but keep in mind that none of the reported data measure cause-related marketing. CRM is the fastest growing area of corporate “philanthropy” and often represents considerable unmeasured goods and services output for charity’s benefit.

· Many huge fortunes are not related to the stock markets. There are people who actually make things and people who actually deliver services. Often these people are not significant stock market investors. They retain money in their businesses instead. Like the Yankees!

· This is stuff you folks know very well. But I have been reminding my clients that their mission trumps all else. Beyond that I admonish them to … :

- Stick to basics; there are no magic fixes

- Face up to budgeting reality

- Cover the money you’ve got; only then go after the new donors

- Collect good intelligence

- Research thoroughly: most files are much richer than anyone knows

- A lower gift is better than no gift

- Ask for more. You may be pleasantly surprised.

McCain was right: the fundamentals are sound. Just not at the moment. Planning for the turnaround is important because things do evolve. When will the recession end? It will end when it ends.

For the longer term I have a five-point “philanthropy platform.” Time won’t permit as much discussion of this as I would like but perhaps we can to get to some of it later.

1. A White House Conference on Philanthropy during the second year of the Obama administration. (It will take a year of planning). The last such was in 1975 when the Filer Commission a Rockefeller funded endeavor issued a signal report on American philanthropy. Much is the same. Much has changed. Though I can think of major philanthropists like Gates or Buffett I really can’t think of a truly national leader, a person who stands out as a spokesperson for private philanthropy - as a process, as an aspiration, as a promise. Ted Turner came close some years ago when he excoriated his fellow billionaires for their stinginess relative to their wealth. I call it the “myth of philanthropy.” We need to talk about it in a national context.

2. Require foundations to increase their payout rate from 5% to 7%. This is not an enormously popular idea among the major foundations of course. Grassley has mumbled about it; it has gone nowhere though it has been talked about for years. The foundation lobby is very strong. The nonprofit community has done an absolutely crappy job of advocacy. It is scared to death of offending foundations for obvious reasons and hides behind the idea that by law they are not allowed to advocate – which is simply not true. Activist Robert Egger has written about what I would call the “Nice-Nervous-Nelliness” of US charity. His remarks – published in Financial Times in April of 2008 should be required reading in every nonprofit boardroom, every executive office and every development office. In a word, writes Egger, “charity must harness the power of politics.” Go to to access this ground-breaking essay. Read it yourself and pass it around.

3. No private foundation can exist for more than two generations. Gates for example is doing just that. But this is entirely voluntary and should be law. At the end of 50 years the assets must be distributed to charities or transferred to an independently governed community foundation. Based on 2007 data foundation giving was $38.5 billion. Assuming a 5% payout this is an aggregate caucus of $770 billion in idle capital. The debate is whether the use of nearly a trillion dollars can be better optimized.

4. Institute a sliding charitable deduction or tax credit. I am no economist and I may be getting at this incorrectly. What I intend is to differentiate between real charities - like human service agencies - and others that though equally worthy: arts, education, environment, et. al. – may not fit a definition of “true” charity. Perhaps this could be related to budget size ion the likely sloppy reasoning that larger organizations have an easier time raising money. An example would be hospitals afforded 501-c-3 status that provide minimum real charity care often less than one per-cent of a $500 million or even a billion dollar budget. When I brought this up at a conference on food, hunger and democracy held at Baruch last December Bob Egger said from the podium “we don’t know each other but we have the same mother!” I liked that.

5. Federalize charity registration requirements. Don’t emulate the SEC but do get the states out of this business. They have screwed it up royally. The regulations are a hodge-podge of regulations with huge loopholes. Virtually nothing has been done to eliminate the bad guys and the rest of us are stuck with multi-state registrations, high cost and so on. It would not be much to extend the IRS’ responsibility given its 990 responsibilities.

Thanks so much for sharing your time with me. I look forward to our Q and A.

No comments: