Fear Not: Foundation Giving to Remain Strong in 2020

I have enjoyed calling the upcoming economic crisis the Great Suppression. This is because the reduced economic activity we are enduring is not caused by anything seriously wrong with the U.S. economy.

The economy is strong. The increased unemployment we are seeing is a side effect of efforts to protect our population from the COVID-19 virus. Accordingly, we can expect the economy to bounce back quickly...especially if the current stay at home orders are reversed soon.

In this crisis, grant writers will be one of the occupational groups to be the least impacted by the economic crisis. Part of the reason is that grant writers are used to working on their own - either in an office or at home. In addition, one of the most significant factors which bodes well for grant writers this year is that the vast majority of foundations, that is the private non-operating foundations, are required to keep making grant and other contributions despite the hardships associated with the COVID-19 virus.

This is called the “payout rule.” With certain exceptions, private non-operating foundations must distribute five percent of the value of their net investment assets each year in the form of grants or eligible administrative expenses, with certain exceptions. The rule was created to prevent foundations from receiving assets but never actually making charitable distributions with them. Remember the donors who established these large foundations received a huge tax break and often tax free income for themselves and their families too. The payout rule is just the government's way of extracting an economic price for these enticing tax benefits. 

This familiar, if complex, rule is getting additional attention from foundations looking at the first quarter of the year amid the economic downturn associated with the COVID-19 pandemic. Grant writers and their employers or clients are undoubtedly asking themselves what do the rules require? And what does this rule mean this year for foundations and the nonprofits dependent upon them?

The good news is that giving in 2020 will not be seriously affected by a slowed economy because distributions must be based on an endowment’s monthly averages throughout the previous year, 2019.  Nevertheless, we should be prepared to deal with the fact that the diminished value of foundation investments at the end of the year and into 2021 could affect giving beyond 2020.

In other words, because of the way complex distribution rules are structured, the short-term outlook for non-profits depending on foundation funding looks very good. In 2021, however, we estimate payouts will drop due to a decline in the stock market associated with a reduction in economic activity connected to COVID-19. 

The bottom line is that foundation payouts will remain strong throughout the rest of the year. It behooves charities to apply for this money now. All things being equal, these same foundations will not be as generous a year from now. Accordingly, it is smart for grant writers to redouble their efforts and maintain their productivity. Ironically, they will be among those least impacted by the crisis and among those most central to mitigating its impact.