Posted on August 11, 2011

Foundations Concerned About Possible Double-Dip Recession

While last week's first-ever downgrade of the credit rating on long-term U.S. debt could lead to higher interest rates on borrowing, its effects on foundations and nonprofits remain unclear, the NonProfit Times reports.

Many are worried that Standard & Poor's subsequent downgrade of agencies linked to long-term U.S. debt such as Fannie Mae and Freddie Mac and recent volatility in the stock market could put pressure on nonprofits. Bradford Smith, president of the Foundation Center, told the Times that if the downgrade were to lead to higher interest rates, it could make it difficult for states to borrow money, and with state budgets already strained, any additional budget cuts could come at the expense of nonprofits. Moreover, should recent stock market volatility cause investors to lose confidence and pull their money out of equities, foundation endowments — and giving — could fall as a result. "But it takes a crystal ball to predict that," Smith added.

Still, the wild up-and-down swings in the market and the real possibility of a double-dip recession could affect donors' perceptions in ways that affect how much they are willing to give, said Lisa Hall, president and CEO of the Calvert Foundation. For nonprofits, the biggest challenge is the difficulty of aligning services and staffing to fluctuating funding levels. "It's quite a balancing act," said Hall. "But where we have seen nonprofits get in trouble in prior downturns is when they've continued to provide programs and services when they didn't have the funding to cover their expenses."

Rick Nelson, chief investment officer at the Commonfund Institute, noted that the credit rating downgrade is reflective of real problems in the economy. And because endowments tend to have a longer time horizon and more equity risk in their portfolios, "greater volatility tends to create greater headwinds for foundation and endowment portfolios," he said. Even though interest rates are abnormally low and government-issued debt is still a safe asset, "with the downgrade and a rally so far in government bonds, clearly [the markets] are riskier until these debt issues get solved in a meaningful way."