By Maria Mottola, Executive Director of the New York Foundation - They played that happy music again on National Public Radio this morning. When Marketplace reports on the stock market performance, it plays either "We're in the Money" if the market went up or "stormy weather" if the market went down. Sometimes it plays "Don't mean a thing if it ain’t got that swing" which reminds us that no one really knows what’s going on with the market’s performance.
National Public Radio has been playing the happy music quite a bit lately, so why are you still hearing from foundations that grant budgets are still down? Don't foundation investment committees listen to NPR?
Here's how most foundations determine how much funding to distribute each year. First, take into account the IRS requires foundations to distribute a certain percentage to qualify as tax exempt. Five percent is the pay-out requirement but that can include certain administrative expenses related to programs. What happens is that most foundations use a three year average of how their endowments performed to determine what the grants spending should be. It took awhile for me to make sense of this. Why wouldn't a foundation give out more money in a year the endowment made more money? In fact, if a foundation did that, you'd have to do the reverse as well - give out far less money in years the market did poorly. If you based year grants budget on market performance year by year, giving would be as volatile as the markets and there would be no way for grantees to know that money they received one year could be counted on for the next.
Averaging helps "smooth out" all the ups and downs of market performance and gives foundations a reasonable shot at planning ahead for consistent giving.
Though the market has done pretty well these last few months, most foundations will continue to have smaller grants budgets than they did before the market tanked in 2007. That's because, when determining what the average endowment was over the past three years, 2010 and 2011 still include the highest numbers from before the crash. When we start to do planning for 2012, those high numbers fall off and we'll be left with an average of some pretty dismal numbers from 2007, 2008, 2009.
So don’t be confused by the happy music. For most of us, its too soon to celebrate an economic recovery.
For more information on foundation giving and trends, see "Moving Beyond the Economic Crisis: Foundations Assess the Impact & Their Response" from the Foundation Center.