Charitable groups steel themselves for economic downturn, inflation
Inflation causes givers to be more cautious, but family foundations are built to withstand bumps in the road
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These are “interesting times” of the wrong kind, with disease, war, political upheaval and supply-chain issues contributing to economic uncertainty and a dip in the markets. At the same time, the needs of health, education and social services are growing.
Will Canadian philanthropic foundations be able to meet the demand?
Somewhat surprisingly, “this is a good-news story,” says philanthropy advisor Gena Rotstein, a certified Family Enterprise Advisor and co-founder of Karma & Cents Inc. in Calgary, which she describes as a “social impact lab for philanthropists.”
“Most family foundations, if they’re well managed, are designed to weather storms like this,” Rotstein says. “Last year a whole lot of people made a whole lot of money, and most family foundations are fairly conservative on their investment portfolios; they’re designed for the long term and they don’t make investment or funding decisions based on a single year.”
The largest foundations should not feel the pinch, concurs Marvi Ricker, managing director of family philanthropy and legacy with BMO Family Office in Toronto. However, she says, “inflation is going to be a bit of an issue for the ones on the lower end of the spectrum.”
In 2008 and 2009, most foundations lost between 30 per cent and 40 per cent of their assets temporarily, and they had trouble meeting their disbursement quotas, Ricker says. But today, so far, “the only thing inflation is doing is causing people to be cautious about new commitments.”
“From our data, foundations have experienced good returns over the last decade,” says Jean-Marc Mangin, president and CEO of Philanthropic Foundations Canada, a Montreal-based group that represents private and public foundations. “Inflation and increasing market volatility will lead to fewer returns for some, but it’s really too early to say how family foundations will be affected overall.”
Long-term investment and disbursement planning
Family foundations can take advantage of their long-range vision to put good practices in place, says Rotstein, who helps clients make sure their disbursement strategies match their available capital. Operating on a three-year, project-based funding cycle is one approach that can help them keep their commitments manageable, she says.
“The other key thing is knowing your ‘why’ – why are you doing this to begin with?” Rotstein says. “We always say we don’t care what your budget is; we want to understand why you want to do this and what your time horizon is.”
This understanding helps foundations and their advisors make wise plans to shepherd their resources through changing economic conditions.
An upcoming liquidity event with tax implications is one of the factors that might have an impact on the time horizon, Rotstein says, or a foundation that has a sunset clause (a limit to the number of years that funds can continue to be disbursed after the founder dies). Outside factors, such as election cycles with their attendant legislative and regulatory changes, can also drive the timeline.
“This is really about planning and dialogue,” she says, “really knowing who your grantees are, taking the time to come up with a business plan and getting to understand your why, because that’s what’s going to drive your investment and disbursement strategies.”
Creative approaches to philanthropy
Larger foundations and the ones that have been around for a while have been through this before, Ricker says. She notes that a common tendency is for new foundations, in their first burst of enthusiasm, to overcommit themselves.
“Back in 2008 and 2009, some people had to defer grants because they just didn’t have the liquidity, but at the moment we’re not into that kind of a situation yet,” she says.
A good strategy to maximize impact is investments related to the cause, Ricker says. “For instance, if you were interested in housing security, you might also give that organization a loan at a lower rate to help them build the facility, and then, if something goes wrong, that loan can be turned into a grant.”
A key lesson of the 2008-2009 recession is the importance of the counter-cyclical nature of philanthropic giving, says Jean-Marc Mangin. This means that when the economy falters and foundations see a drop in resources, the needs of recipient communities go up.
“When the going gets tough, the giving must continue, if not increase,” he says. “This was not the case in 2008-2009, when philanthropic giving by foundations experienced a decline. However, all data points during the pandemic indicate that giving has increased.
“The charitable sector relies on the grants from foundations and, increasingly, foundations are making long-term impact or mission-related investments.”
Broader influence of family foundations
He makes the point that “foundations are much more than the pots of money they manage and grant out; they can and do contribute to the common good in many other ways. Foundation leaders are increasingly understanding the power they hold and using it to advocate for the communities they serve, such as for increased government supports or more equitable public policy.
“While philanthropy should not and cannot replace governments,” he continues, “it can mobilize quickly to support innovative solutions in communities and also to inform evidence-based policies based on these experiences. Canadian philanthropy is coming to understand that our future ability to meet growing needs requires creative and integrated approaches.”
Thus, even if Canada’s family foundations were to lose some of their funding clout as we move through this stage of the country’s economic life, they would still be very much a force for good.
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