Shaken to Their Foundations

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In post-recession America, winning grants for community development and social service efforts is more competitive than ever. The challenge is different but equally difficult for the foundations that make the grants.

For a broad range of grant makers, investment income is down and donations are smaller, according to the Foundation Center. U.S. foundations’ assets plunged more than 17 percent in 2008, the start of the recession, and gifts to foundations fell by almost 16 percent. In fact, funds from all sources—public and private —are scarcer, and community needs are on the rise.

That’s a big problem for front-line responders—community development corporations, food banks, housing counseling agencies—who rely on grants to fund many of their programs and much of their operations. It’s also problematic for the foundations themselves, which must identify emerging issues and community concerns, as well as promising approaches for tackling them, with leaner resources than in past years.

Given these developments, the Federal Reserve Bank of Cleveland recently set out to talk with foundations and other grant makers throughout the Midwest. We began the conversation by posing some key questions: How are funders managing and making their funding decisions in tough economic times? What are the potential impacts? What works? What doesn’t? With tighter budgets now a given, figuring out the answers and delineating ways to channel resources toward common goals is imperative.

In sum, we learned that grant makers are tightening their belts with innovation, increasing focus, collaboration, and plain hustle.

Today there is stepped-up concentration on so-called “strategic” grants, which take on wider problems in multifaceted ways.

And intriguingly, we were told of a small but sure shift in the kind of grants foundations are considering. Whereas in past years, grants tended to focus on responding to immediate needs, today there is stepped-up concentration on so-called “strategic” grants, which take on wider problems in multi­faceted ways. True, the dollar amounts of grants for strategic efforts account for only a fraction of the overall flow, but even so, the change has the makings of an interesting experiment that could well play a role in the future of grant making.

Community challenges

Ohio has weathered the recession fairly well compared with other states, but funding challenges still have mounted. According to a recent report by the Ohio Grantmakers Forum, total charitable giving in Ohio dropped from $6.5 billion in 2008 to $5.9 billion in 2009, a 10 percent decrease. Ohio individuals gave 7 percent less in 2009 than in 2008, after a decrease of 11 percent the year before. Foundation giving, as a component of all charitable giving, decreased by 8 percent from 2008 to 2009.

More than one-third of respondents to the Foundation Center’s 2012 Foundation Giving Forecast Survey said they had reduced giving in the past year. Meanwhile, government funding for many social service and community development programs has also decreased. This leaves foundation grantees with fewer resources to operate, much less to deliver programs and services to their constituents.

And the needs of constituents have only grown with the recession and slow recovery. Some foundations have seen an increase in homelessness and hunger. Foundations almost uniformly identify as challenges the quality of public education and its ability to connect with workforce preparedness programs, as well as the disconnect between workforce training programs and the skills required for available and future jobs.

Other challenges vary by region:

  • In Springfield, Ohio, funders are concerned about vacancies and real-estate-owned property—foreclosed homes that have gone back into the lender’s hand, and often sit vacant for long periods. They are also concerned about dental coverage for low- to moderate-income people because many dentists in the area do not accept Medicaid and local hospitals no longer house dental services.
  • Cincinnati funders are concerned about the deterioration of the quality of life in city neighborhoods—the lack of access to quality food, limited public transportation, and fraying infrastructure.
  • Pittsburgh funders are concerned about the poverty of growing numbers of households headed by single African-American women. And the list goes on.

Addressing the challenges with different types of grant making

The types of foundations are as varied as the types of challenges regions face. They range from large and small private and family foundations to corporate and community foundations. For instance, the ever-present United Way has lately been balanced in many locations by smaller “giving circles,” in which individual members pool their money and jointly decide on projects to fund.

Foundations are 501(c)(3) charitable organizations whose missions determine their funding priorities and the types of grants they award. Although differences in the foundation world make it difficult to generalize, we observed that foundation grants fall into two general buckets—responsive and strategic.

The larger bucket is made up of responsive grants, which in some cases are awarded to organizations that submit proposals requesting funds for a specific purpose, usually to address immediate or shorter-term capacity, capital, or community needs. Some grants are seed money meant to help organizations start new programs. A small number are unrestricted; in other words, the organization determines the best use of funds. There are also challenge and matching grants and those that contribute to the endowment funds of nonprofits.

Many foundations have responded to the economic downturn by trying to do more with less through responsive grant making. To accomplish that, many are directing grantees to engage in “intelligent retrenchment”—to focus on delivering on their core mission and dropping anything beyond that. Funders are also encouraging grantees to share resources, collaborate, merge, find alternative revenue streams, and even to pursue social enterprises.

But increasingly, foundations are looking at opportunities for initiating strategic grants according to the priorities of their leadership or in partnership with other organizations. Foundations make strategic grants, which tend to be long-term, to address their communities’ tough systemic issues. As we traveled Ohio talking with foundations, we noted an uptick of interest in strategic funding and initiatives on the part of community foundations in small towns with big-city problems. The goal is to make a lasting impact.

Keith Burwell, president and CEO of the Toledo Community Foundation, highlights its Overland Park Community Engagement Project initiative. Through it, the foundation invests in neighborhood and residential improvements to bolster the industrial redevelopment of an 111-acre brownfield site that was once home to a Jeep factory. While encouraging new businesses to locate in the neighborhood, the foundation also focuses on training and employment for residents. In addition, the foundation has initiatives on education, human trafficking, and low-birth-weight babies.

Another promising strategic and collaborative initiative, funded by the Dayton Foundation, is Learn to Earn, a program similar to College Promise. It coordinates education providers and nonprofit partners to support children’s readiness to learn by kindergarten and young adults’ ability to earn a living after they graduate.

Many funders are also sharpening their focus with “place-based” or “hyper-local” strategies and investing in the community development and human capital needs of specific neighbor­hoods. The St. Luke’s Foundation in Cleveland, for example, formerly involved in programs that fell under the broad “human services” umbrella, has decided to concentrate on three issues: urban health, urban families, and neighborhood revitalization.

Another example is the Columbus Foundation–funded Weinland Park Collaborative, a partnership of many agencies and organizations working with residents to improve the housing, safety, education, employment opportunities, and health outcomes in the Weinland neighborhood. Heinz Endowments in Pittsburgh is also using a comprehensive, place-based approach and is committed to multi-year investments in two neighborhoods.

Again, these approaches might best be described as a move toward more strategic, holistic grant making.

A good example of strategic grant making at its best is Living Cities, a partnership of 22 funders and financial institutions that supports efforts to better the lives of low-income individuals, the cities they live in, and the systems that affect them. The Living Cities Integration Initiative recently awarded the Cleveland Foundation close to $15 million in grants and loans to support wealth-building programs and residential and commercial development in the University Circle neighborhood. The Integration Initiative’s focus on Cleveland and four other cities is based on the notion that a multipronged, long-term, place-based investment will yield the strongest results. A local example is the Fund for Our Economic Future, a 16-county collaboration of funders and other partners working to advance Northeast Ohio’s long-term economic competitiveness through strategic grant making, research, and civic engagement.

Grants that provide food to families are of course crucial, but in the long run, it is more crucial to provide grants to end the root causes of hunger, such as poverty, joblessness, and neighborhood decay.

Even though the dollar amounts going to strategic investments remain a small part of foundations’ total giving, the subtle shift could signal a big change in the way they operate. Grants that provide food to families are of course crucial, but in the long run, it is more crucial to provide grants to end the root causes of hunger, such as poverty, joblessness, and neighborhood decay. In the case of the Overland Park effort, for example, the tradeoff is to reduce geographic scope in the interest of making a larger impact in a single area.

Impact—it’s about connecting the giving

The boomlet in strategic grant making wouldn’t be possible without foundations’ effort to be more collaborative than in years past. For example, late last year, five Ohio foundations joined with Grantmakers in Health to award funds enabling the Ohio Department of Health (ODH) to hire a grant writer who secured $1 million for the Prevention and Public Health Fund Coordinated Chronic Disease Prevention and Health Promotion Program.

“Today, there are more ways for people to exercise their philanthropic impulse,” says George Espy, president of the Ohio Grantmakers Forum (OGF). “Until recently, most philanthropy was conducted through foundations and by bequest. Now there are more living donors than ever before.” For this reason, and because of the increasing numbers of giving circles and individual philanthropists, foundations need to be better at connecting with each other and with other funders.

That’s the premise behind the OGF’s new education initiative, in which foundations jointly leverage funds to educate public officials about the impact of current state law on students’ performance. OGF and many foundations comment on tax policy that could adversely affect charitable giving, such as capping the charitable deduction and not renewing expiring provisions of the IRA charitable rollover.

Established in 1984, the OGF is a membership organization of foundations, corporate contributions programs, and other Ohio philanthropists. It is one of 33 staffed regional associations of grant makers in the United States. Ohio has more than 3,000 foundations, most of them independent rather than corporate or community organizations.

The OGF’s membership of about 200 foundations has combined assets of close to $11 billion, and it awards more than $735 million annually—70 percent of all grant making in the state. In addition to organizing events and programs, the OGF is active in policy, advocating on behalf of its members and educating them on the potential impact of state and federal policy issues on philanthropy.

It’s through connecting and sharing information that collaboration happens. A case in point was a September 2012 meeting in Toledo convened by the Cleveland Fed and the Ohio Grantmakers Forum and hosted by a regional network of Northwest Ohio Funders. At the national level, the Funders’ Network is a group of foundations concerned about sustain­ability, land use, and community impacts. The group sponsors events and organizes working groups of funders for shared learning on timely topics. Working groups aim to enhance funders’ knowledge of best practices in different areas and to influence policy. Because their interests are aligned, a number of Reserve Banks have participated in meetings convened by the Foundation Network’s working group on restoring prosperity in older industrial cities.

“It’s important that networks have means for connecting,” says Espy. “It’s a means for more effective philanthropy and a way to make a bigger impact on issues.”

Metrics—determining need and measuring success

You can’t manage what you can’t measure, but for grant makers, measuring is easier said than done. It takes a long time to see improvements, so metrics must look at the long horizon. Grant makers are undertaking several efforts for improving their metrics to better reflect the new way of strategic grant making.

For example, many community foundations, United Ways, strategic grant makers, and others interested in effecting long-lasting change have developed new methods for determining funding priorities and evaluating success. The United Way of Central Ohio created an agenda for community change around 10-year “Bold Goals” for education, income, health, and neighborhoods. This agenda guides funding decisions and measures progress toward the “Bold Goals” against pre-determined “leading indicators.”

The United Way of Allegheny County, Pennsylvania, employs a similar model called Community Impact, which focuses on three key areas: helping children and young adults to succeed; providing financial stability for families; and assisting the most vulnerable populations. The collective-impact approach has been used by community foundations to engage a variety of stakeholders in a common agenda that addresses needs such as public education reform, economic development, and job creation.

Even with well-thought-out strategies, however, determining success and evaluating effectiveness is a tricky, expensive, and fluid business. Outcome measures can be defined for strategic grant making, but they are difficult to develop for responsive grants. All measures depend on the grantee and the specific project or initiative, and foundations are constantly reassessing the relevance of the benchmarks they’ve given grantees to meet. As community needs change, foundations alter the way they evaluate success, so the metrics are ever changing.

If grant makers hold nonprofits accountable for performance, who holds grant makers’ feet to the fire? Oversight of founda­tions occurs at both the federal and state level. All nonprofit private foundations are required to file annual reporting forms with the IRS, providing information about mission, programs, and finances. At the state level, the charitable-law section of the Ohio Attorney General’s Office provides oversight to ensure that funds are spent in the public interest. Foundations also have self-policing mechanisms through board oversight or composition. The boards of public charities are often made up of public officials who must answer to their constituencies.

Future prospects

The recession’s real impact on grant making is only beginning to be felt. Grant making sometimes trails the market by two or three years because decisions are based on returns on invest­ments and earnings in prior years. In 2011, foundations gave an estimated $46.9 billion; after taking inflation into account, their contributions decreased slightly from 2010. According to projections based on the Foundation Giving Forecast Survey, grants in 2012 will remain unchanged at best, and will likely increase only modestly in 2013.

The lessons learned in lean times are vital. Looking toward the future, collaborations—among grantees and among grant makers—hold much promise for informing public policy by answering the question, what works? And increasingly, grant makers are showing confidence in the potential payoffs from strategic grants.

At the Cleveland Fed, our plan is to continue the conversation by working with and informing local, regional, and national foundations on community and economic development issues. As more grant makers collaborate with one another and other agencies on projects of mutual interest, they may learn ways to effectively and efficiently align private and public resources, particularly when it comes to strategic grant making. This type of alignment may seem elusive to practitioners, but a heightened awareness of common interests and funding decisions is at least a first step toward promising synergies.

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Meet the Author

Mary Helen Petrus

| Assistant Vice President

Mary Helen Petrus

Mary Helen Petrus is an assistant vice president in the Community Development Department at the Federal Reserve Bank of Cleveland. She is responsible for managing the Department’s outreach efforts and research initiatives. In this role, Ms. Petrus works with economists and analysts on a broad range of issues that affect access to credit and capital in low- and moderate-income communities with an emphasis on policy implications.

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