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October 09, 2008

Philanthropist's Guide for Rainy Days

Ray Fisman
Lambert Family Professor of Social Enterprise
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Nonprofits around the country are wondering how they will weather the economically turbulent days ahead. If a recession — or worse — hits, charities can expect to see their contributions decline along with the incomes of the individuals and companies that fund them (conventional wisdom among economics researchers is that a 10% decline in income generates around a 4-8% drop in giving). Government funds won’t take care of the shortfall, as budget-balancing states cut back, as well.

Some charities have a “rainy day fund” that they will use to cover their deficits; some will even choose to eat into their endowments. But few organizations have the billion-dollar cushions of the Harvards and Yales of the world, and endowments’ returns are being hit by the market decline, too. This leaves no option but to cut back on programs — a cruel irony since for many nonprofits hard times are precisely when their services are needed most.

In the current environment of greater needs and lesser means, what's a philanthropist to do? First and foremost, the current environment underscores the importance of giving thoughtfully and strategically. The best predictor of someone’s choice of charity today is whichever one he wrote a check to last year. But this isn’t a time for philanthropic inertia — a dollar given to one organization means one dollar less that’s available to give to some other, potentially more worthy cause, what economists refer to as the opportunity cost of funds.

Think hard about the biggest problems out there to be solved and survey the charity landscape for organizations that most effectively address your chosen set of needs. The focus should be on outcomes: How many indigents were fed by a soup kitchen? How many unemployed — who would otherwise have remained jobless — were taken off the welfare rolls by a job training program? And what did it cost to generate these outcomes? Identifying and funding the “highest productivity” charities is more important than ever. With increasing number of watchdog organizations as well as large foundations carefully assessing charities’ activities and publicizing the results, it’s possible for even smaller donors to evaluate and compare potential beneficiaries and to give strategically.

Economic hard times may also be cause to reprioritize what you see as the greatest needs. The arts are an eminently worthy cause, for example, but art museums’ needs do not wax and wane with economic cycles in the same way that those of social service organizations like soup kitchens and homeless shelters do. So, at least while times are bad, you may wish to reshuffle your giving portfolio to focus on causes designed to buffer the impact of economic downturn on those most affected.

Organizations with sizeable reserve funds may not face the same financial crunch right now as those living hand-to-mouth. For years now, Harvard alums have been questioning the merits of writing checks that effectively get direct-deposited into the school’s 30-something billion dollar endowment. With rising needs elsewhere, the case to be made for giving to the fat cats of the nonprofit world becomes ever-harder. It’s hard to imagine that Harvard’s students or faculty, cushioned as they are by an outsized endowment, will face see too much of a cutback in services in the days ahead, even in a worst-case economic scenario.

Finally, think about how much you can really afford to give. I’ve already argued that whatever you choose to give, you should do it strategically. But if you truly want to practice strategic philanthropy in tough economic times and have the means to do so, practice “countercyclical philanthropy,” giving more when the needs are greatest.

A version of this article also appeared on Forbes.com.

Photo credit: Oblivion Ratula

Comments

by Marianna Macri | October 10, 2008 at 2:49 PM

As usual, an insightful, inspiring post by Professor Fisman! In order for philanthropy to really be meaningful, we should be focusing on organizations where both the need for and the effectiveness of contributions are greatest. Some things to consider when evaluating efficiency might include: a charity's ratio of program expenses, fundraising expenses, or administrative expenses to total operating cost; its rate of growth; and perhaps also its uniqueness or lack of "competitors" in the nonprofit arena. For anyone interested in researching "high productivity" and high-need charities, the Web site Charity Navigator is a great resource... It rates charities based on organizational efficiency and capacity, and has a nice section detailing the methodology for this.

by Bill R. | October 16, 2008 at 9:57 AM

I think that a philanthropist must also consider how wisely an organization uses its funds. Our company comes into frequent contact with organizations from across the spectrum and I find that the organization's willingness to face reality and reprioritize needs is a good indication of how effectively funds may be used. We've found that most charities that use our free online GIS mapping tool http://www.policymap.com at least look at alternatives to spending a great deal of their endowment unnecessarily.

by Michel | November 19, 2008 at 9:09 AM

Is there any analysing the correlation between stocks market and non-profit? Thank you

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