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Check-Up Clinic: Foundation Giving

Posted: 6/11/2020

Click here to read on Chronicle of Philanthropy

Ford and Other Funds Issue $1.2 Billion in Debt So They Can Give More Now

by Dan Parks

Pictured at leftFive foundation leaders who plan to plan to give away substantially more this year and next are the Ford Foundation's Darren Walker; MacArthur's John Palfrey Jr.; Mellon's Elizabeth Alexander; Kellogg's La June Montgomery Tabron; and Doris Duke's Edward Henry.

The Ford Foundation and other top U.S. grant makers plan to give away substantially more this year and next with a plan that includes something exceedingly rare: issuing bonds to boost grant making.

The plan also involves the MacArthur, Kellogg, Mellon, and Doris Duke foundations.

Ford plans to issue $1 billion in debt in the form of 30- and 50-year notes, allowing it to distribute at least 10 percent of its assets over the next two years, Darren Walker, Ford's president, said in an interview with the Chronicle. The foundation had planned before the crisis to give about $550 million in grants this year.

MacArthur plans to issue $125 million in bonds, and the Doris Duke Foundation will issue $100 million in bonds, Walker said.

Kellogg will boost its payout by $300 million, and Mellon will increase payout by $200 million, although those two foundations haven't determined yet whether they will issue debt to do so, Walker said.

Mellon's $200 million boost will go to nonprofits in education, the arts, and culture and will add to the $300 million the grant maker had previously planned to spend this year, according to a news release from the foundation.

"We cannot allow the crises of today to sideline the unfinished work needed to move us toward a more robustly engaged, diverse, and culturally inclusive country tomorrow," said Mellon's president, Elizabeth Alexander.

The foundation has a $6.5 billion endowment.

Pressure to Give More

Walker has been spending recent weeks urging grant makers to do more to help nonprofits. On Monday, the Chronicle published an opinion article he wrote in which he said:

"We cannot do the minimum when faced with the overwhelming threat to the survival of nonprofits and, by extension, our democracy. Foundations must use the full arsenal of tools and assets at our disposal, including our flexibility, ingenuity, and longevity. Imagine if each of our institutions distributed three or four extra pennies on the dollar. The impact would be significant."

Many foundations have responded with additional funds and flexibility for grantees already.

A new report from the Center for Effective Philanthropy found that most nonprofits that receive grants are seeing steady or increasing support from foundations.

Walker said the need to provide more money to nonprofits became obvious in March as nonprofits pleaded for more funding to meet increased needs.

"The impetus was all the feedback I was getting from program staff who were hearing from grantees, and I was hearing from grantees," Walker said. "It became clear in March that we had to do something."

The foundation's investment committee warned that it wasn't the right time to dig into the endowment, when equity prices were low. Although the stock market has rebounded strongly, Walker said, it's "inevitable" that it will decline again.

Walker said he expected the debt to carry an interest rate of 3 to 4 percent, far lower than the foundation's historical returns on its investments.

'Shot Heard 'Round the World'

Kathleen Enright, CEO of the Council on Foundations, an organization that represents many of the nation's grant makers, said the announcement was the most significant new development in her 25 years working in philanthropy.

Enright said borrowing makes a lot of sense right now, rather than dipping into endowments, because interest rates are so low. Ford will be able to repay the debt when asset prices have rebounded.

"They think that the rates of return on their investment are going to beat the rates on financing, and I think that's right," she said.

With an endowment of $14 billion, Ford will be considered a safe bet by investors, and rates on the bonds will be extremely low, Enright said.

"This is the creative, rule-breaking philanthropy we need right now," she said.

Phil Buchanan, head of the Center for Effective Philanthropy, agreed the announcement was groundbreaking.

"It's great to see this kind of leadership," Buchanan said. "It's an unprecedented time, and this is an appropriately unprecedented response."

Issuing debt to boost payout is a potent new tool that foundations can use to be a countercyclical force during hard times, Buchanan said.

Buchanan said there's no doubt that Ford's move will have a big impact on other foundations, both in terms of encouraging them to give more and coming up with creative ways to make that happen. (Buchanan was one of a group of nonprofit leaders who wrote an open letter urging foundations to give more.)

Antony Bugg-Levine, chief executive of the Nonprofit Finance Fund, said the move makes sense because spending more money now, at a moment of societal crisis, when many nonprofits are in danger of failing, will pay big dividends for many years to come.

"Spending over the next two years will be especially important to enable many nonprofit organizations to make crucial advancements for their communities and social issues," he said. "What a wasted opportunity for foundations to sit on the sidelines at this crucial moment because they face resource constraints that they could solve by issuing long-term debt at historically low rates."

Bugg-Levine said he hopes the announcement forced other foundation board members to ask themselves why they aren't doing the same thing. (Bugg-Levine, a key player in advancing impact investing by foundations, previously worked for Walker at the Rockefeller Foundation, and Ford provides grants to the Nonprofit Finance Fund.)

Expertise in Finance

Unlike most foundation chief executives, Walker knows a lot about finance. Before moving into philanthropy, he worked the Union Bank of Switzerland (UBS).

Walker said he approached about 10 foundations that didn't have living donors about his debt idea since many philanthropists could choose to put more money into their own foundations without using the debt approach.

Of those that declined to participate, "a couple were philosophically opposed to the idea. Others were working on ways to increase their payout in different ways," he said.

Walker said the idea of issuing debt to deal with a time of emergency doesn't have to be limited to large foundations with sophisticated financial operations. Smaller foundations could pool their resources to hire the help need to make it work.

He said that his board, in approving the debt issuance, cited a "once in a century" crisis and that there would be a bias against issuing more debt in the future to avoid building up too much in liabilities.

Walker said he believed that creative approaches to increasing payout might help thwart efforts by lawmakers to impose tough rules about how much to distribute every year. Several hundred donors have called on Congress to require foundations to give at least 10 percent a year during the pandemic recovery.

"The greater risk here for foundations is doing nothing," he said. "We could have had imposed upon us policies that are far more harmful than issuing debt."

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