Change is in the Air: The Economic Crisis Affects Everything
The economic crisis is challenging long held assumptions in all the facets of our lives. After a lost decade in the financial markets, retirement portfolios are no higher than they were before the dot com boom and bust. The real estate market has likewise reduced wealth challenging the notion that homes are a means to middle class wealth. Higher Education is seeing significant reduction in their endowments and beginning to realize that the rate of increase of tuition over the last three decades is now putting education out of reach for many in the middle class. Similar unsustainable inflation rates in the health care industry will almost certainly require significant austerity measures in the next few years. Despite the growth of the health care industry, it fails to cover 47 million Americans with insurance (and perhaps many more as a result of the recession.) Universal health care insurance is almost assuredly on its way. The spike in oil prices and the change of consumer behavior provided what could be the final nail in the coffin for the American auto industry.
In short, everything is on the table. No current economic assumption will go unturned in reconstructing our political economy, including our underlying our assumptions about how philanthropy ought to work. While much emphasis has been placed on how nonprofits will need to change (including merge, share services and act in network) relatively little emphasis has been placed on the financial engine of the sector, the foundation community.
First, its important to understand that as soon as personal, corporate or family wealth gets converted into a foundation, that the assets are held and managed in the public trust. The donors of the wealth can certainly determine the charitable purpose of the wealth, but nonetheless the resources are owned by the general public for the benefit of the public good broadly defined. Many foundations treat resources as their own because they have been enabled to do so by the lack of a regulatory regime within the sector. Nonetheless, foundations resources are actually in the public domain and open to public scrutiny.
The underlying economic assumption of foundations was that strength was a growing endowment built upon a diversified asset base including treasuries, corporate and municipal bonds, stocks, and in some cases real estate, commodities and rights to other natural resources. The fact is that in most cases, foundations have handed their wealth over to the Wall Street money managers who are in a large part responsible for the speculation in the financial and energy markets that have caused so many of the problems. Indeed, when a foundation sends its money to Wall Street to be managed, such money is subject to the whims of global capital flows that fueled subprime lending, the creation of confusing debt instruments consisting in part of these subprime mortgages and speculation in the energy markets that saw the oil bubble of this last summer. In many cases, the invested assets work against the expressed social justice principles in which the foundations ascribe. In a rising market, foundations could justify investment portfolios because greater returns in the market allowed for greater resources in the nonprofit sector. When that same market reduces assets by 30% and more, such justifications are empty and require a fresh look at how foundation wealth ought to be invested.
The Opportunity to Double the Foundation's Impact
Most efforts at greater regulation have targeted the grant making of foundations. Foundations are required to pay out at least 5% of the principal of the endowment on an annual basis, but there are no laws about how and in what foundations invest their endowments. My central argument is that foundations could immediately double their local impact by investing a small percentage, perhaps a similar 5%, in local business sector. By investing locally, foundations could ensure that money flows within the local economy supporting small business that fuel 2/3 of the job growth within our economy.
In Boston, investing locally could mean investing in minority owned businesses many of which are suffering or shuttering in the current economic crisis. Foundations could also invest in the growing green industry. With the federal stimulus coming for greener infrastructure, foundations could fund local firms to be in the best position to take advantage of the federal stimulus.
To enable such investment, there would need to be Local banks have structured themselves to make similar decisions regarding lending on a daily basis. One possible investment criteria, is that the small business will have received financing from an accredited local bank (Most local banks are relatively unscathed by the crisis because of their prudence in money management). Perhaps foundations could invest in a loan pool managed by banks as a means to get credit flowing into local businesses immediately.
Another alternative would be to find or to establish a venture capital firm with an emphasis on funding local businesses with reasonable expectation of reasonable rate of return (Could it be any worse than the last decade in the financial markets?). Such a firm could make traditional investments in green and other social responsible businesses with an opportunity for scale and extensive growth, while also providing a micro-lending arm that could target mom and pop type establishments. Micro lending programs abroad have demonstrated low default rates and significant impact on economic growth. Applying such lessons locally could spur similar returns for the local economy and the foundations.
No matter what the investment vehicle, foundations could be a catalyzing force that helps unfreeze credit markets by ensuring that money immediately flows into local economy creating jobs while ensuring that money flows within local economies. By investing their endowments in local economies in amounts equal to their grant making within the sector, they could double their impact in the communities that they serve.