by Robert F. Sharpe, Jr.

The past year has been one of extraordinary change. Last September we witnessed events unprecedented in our nation’s history. As of late-July, over the past year the Dow Jones Industrial Average has fallen 22%.  he value of stocks comprising the S&P 500 is off 31%, and the Nasdaq index has declined 40%. Accounting and leadership scandals have rocked U.S. corporations, and investors fear more may be on the way.

In spite of these events, recently released reports indicate that giving in America held steady in 2001, but declined in inflation-adjusted dollars last year for the first time in many years. Some are predicting a similar outcome for 2002. 

What, then, are we to do?  The temptation for some may be to batten down the hatches and try to “ride it out.”  Unfortunately, that is not a viable alternative for most, especially those who are involved in planned, major, and capital gift development.  While capital campaigns now in the planning stages may in some cases be delayed or reconsidered, ongoing fund development efforts, including campaigns that are currently in “midstream,” can and must be continued. 

It cannot, however, be business as usual.  It is time to work harder, and work smarter – in all aspects of funding programs.  There are some things we can control, and some that we can’t.  The key is to know the difference and act quickly and decisively to make the greatest positive impact wherever possible.

Gaining perspective

The last ten years have been among the best ever for charitable giving.  As with the broader economy, at some point a return to more normal conditions should not be surprising, and indeed is something that we should expect.  But we have to look back a number of years to find an environment comparable to today’s.  Certainly the period following the 1987 stock market crash was challenging.  Investment markets lost over 25% of their value in a matter of days in October of that year, and trading was suspended on stock exchanges in the midst of the busy year-end giving season.  Giving overall dropped 4.7% in 1987, over twice the relatively modest 2.3% decline experienced in 2001.  This proved to be only a temporary setback as the markets – and charitable giving - sprang back the next year. 

The recession of the early 1990s ushered in another period of difficulty.  Despite this downturn in the business cycle, there was no significant impact on charitable giving, perhaps because securities continued to increase in value.

To find a period more similar to the one we face today, it may be helpful to look to the mid-1970s.  At that time, America remained embroiled in the long-term conflict in Vietnam, and the Watergate scandal had precipitated a constitutional crisis ending with the termination of a Presidency in the summer of 1974.  The economy was mired in “stagflation,” as the effects of the oil embargo of 1973 crippled the economy, the “energy crisis” unfolded, and Americans shivered through cold winters and waited in long lines to purchase gasoline.  Inflation was beginning to take a serious toll on the life savings of many.  By December 1974, after adjusting for inflation, the Dow had fallen some 60% from its 1965 value.  New York City, unable to issue bonds without federal guarantees, was teetering on bankruptcy as garbage piled up in the streets.  Fund raising was indeed a challenge at that time, but inflation-adjusted giving in America only dropped 5.4% in 1974, a percentage drop that has not been equaled since that time.

While the past two years have certainly been difficult ones for the U. S. economy, the current recession has thus far been relatively mild.  What sets this recession apart, however, is the fact that it is coinciding with a period of correction of financial asset valuations that many economists have predicted and believed was long overdue.  From a  demographic perspective, it is also happening at a time when a generation of donors that has provided the backbone of support for many nonprofits for decades is retiring in large numbers and changing the amount and timing of their gifts, while the baby boomers have yet to “take up the slack.”

Substantial wealth remains

Major market indices have fallen dramatically over the past two years, and large sums have been lost by individual and institutional investors, including the endowments of many not-for-profit organizations and institutions.  However, it is important to consider the fact that those who have invested for the long term have still experienced significant increases in their wealth.  A person who invested in a Dow index fund five years ago may still have gain remaining.  Looking at a ten-year time horizon, $1 million invested in a Dow index fund in 1992 would still be worth approximately $2.4 million, even after the corrections of the past two years.  A $1 million investment in either an S&P 500 or Nasdaq index fund ten years ago would be worth over $2 million today.  Those who invested in the Dow ten years ago still have increases amounting to an average annual return of over 9% during the past decade.  The S&P 500 and Nasdaq are still worth an amount representing average growth of 7.5% over the past decade.  Note that these amounts are in the range that many asset managers typically project for total return on endowment investments over time. 

Capability to give

What this all adds up to is that many Americans still possess significant amounts of wealth, and the most committed donors may be among that group.  Government studies reveal that the wealthiest per capita households in America are headed by persons age 65 and older – a key group from a fund development perspective.  The good news is that this is the age group that may actually have suffered the least during the current economic downturn.  They are already retired in most cases, so they do not have to worry about losing their jobs.  Older individuals do not tend to invest in highly speculative investments, and their portfolios typically contain higher percentages of bonds, cash, or cash equivalents.  Many in this group are also just beginning to take required minimum distributions from retirement plans, further increasing their discretionary (and donatable) income.

Many seniors were driven to debt instruments by lower dividend yields on equity investments in recent years.  Those who shifted assets to bonds in the late nineties to provide more spendable income may have seen the value of those bonds increase significantly as interest rates have declined over the past few years.  An investment in a typical bond fund has increased in value over 10% in the past year alone, while providing income as well.

The last half of the 1990s has been described by Alan Greenspan as a period of “irrational exuberance.”  It was a time of speculation when many believed the old rules of business and finance no longer applied, and the sky was truly the limit.  It was a time when the promise of unlimited returns clouded the judgment of some investors – especially the young and less experienced. 

On the other hand, consider the characteristics of the “millionaire next door” as described in the best-selling book by that name authored by Thomas Stanley and William Danko (see Give & Take, June, 2002).  One might conclude that the best donors of all ages may be among the conservative investors who were less “exuberant” and as a result may have suffered less from recent market corrections.  In fact, because of their investment decisions, they may have experienced a decline in their income, but they may actually have more assets than in the past.

Facing reality

What is called for now is resolute calm as we take a realistic and sober approach to the realities that confront us.  Funding methods that worked well for the entire careers of some fundraisers may no longer be as effective.  Extravagant events could increasingly be considered wasteful and in bad taste.  Campaigns based on selling social recognition to those seeking to make a “statement” with their newfound wealth may no longer be as effective.  High-level corporate executives who provided leadership in the past may now be more focused on struggling to maintain their position.

On the other hand, the past reveals that funding strategies rooted in helping committed persons support causes they believe in will continue to prosper.

Here are some steps we can all take today to help assure the best possible results for the remainder of this year and beyond:

• Strive to devote as much time thanking donors for gifts as you do asking for gifts.  If you want to find the people who still have the resources to make gifts, turn your attention to those who just made them!  Think about it.  They have just proven they have the resources to give in today’s environment.  You may also find that the positive feedback enjoyed in the process of thanking donors will energize you for more difficult tasks.
  

• Take care to serve those who have cared the most for the longest time, and do everything you can to build stronger relationships with them.  In difficult times, your long-term donors will be those most likely to stay the course.
  

• Help donors understand how best to make their gifts today.  Many donors now have large cash reserves after selling investments that were not performing well.  Their natural inclination this fall may be to make gifts using a portion of that cash.  But did they sell the investments that were still doing well, and they thought might continue to grow in value?  No.  They still own those investments.  Instead of cash, those are the assets they should give, to take maximum advantage of remaining appreciation.  They should use their cash to purchase new investments, thereby diversifying their portfolio while they enjoy a new, higher cost basis.  Most donors do not know how to properly balance the sale of some assets with the gift of others.  Don’t expect others to tell them.  This can be a key to obtaining new campaign commitments and fulfilling others in this environment.
  

• Focus on older donors.  As noted above, donors in the sixty-and-older age group are among the wealthiest generation in history.  Remember that for every person who bought into the equity markets during the bubble years of the late nineties, someone else was selling.  Many of the buyers were younger persons seeking to make a quick fortune and retire early.  The sellers were often more disciplined, mature persons, many of whom were already retired.  These persons are likely to still have the sale proceeds from stocks that in many cases have subsequently plummeted in value.
  

•  Listen to your donors’ expressed needs.  Learn to interpret signals donors are giving you.  They may express a desire to give more, but feel hampered by lower investment returns.  Or they could be concerned about providing an inheritance for their children.  What they may really be telling you is that they could make a significant gift if it resulted in increased income or a tax-free inheritance for loved ones.  Trusts, gift annuities, and other gift planning vehicles now more than ever may hold the key to securing major current and deferred gifts.  
  
  Be flexible on the timing of gifts.  Some donors have a tremendous desire to give, but their resources may be temporarily limited due to lower interest rates, a spouse’s job loss, or other factors beyond their control.  Remember that making a provision in their estate plans, regardless of their age, can be possible even if they cannot make a large gift today.  Now is the time to let people know that you appreciate these types of gifts and will recognize them appropriately.  What greater indication of donative intent could there be than the decision to elevate a charitable interest to the status of a close friend or family member by including it in their will or other estate plans.  These persons may be your best major gift prospects when times of prosperity return.
  

• Look to the past for direction.  Those who failed in the past are no longer here, so look to those who have succeeded over time for guidance, and follow their advice.  Seek out someone who worked in fund development prior to 1985 and take them to lunch.

Don’t just do the best you can “under the circumstances.”  Don’t be content to work “around the circumstances.”  Instead, resolve to work “above the circumstances” that present you with difficulties.  Many of those who have come of age in the past twenty years now face the first significant challenges of their careers. Each generation has its proving ground.  Now is the time when proven leaders will once again excel and a new generation of managers will be tested. 

These are not the best of times, nor are they the worst.  The “wealth effect” of recent years may be over, but remember that significant wealth – and donor commitment - remain. We believe that charitable giving will continue – and perhaps even grow - in the current environment. That is because much of the remaining wealth is in the hands of those who did not buy into the ethos of the nineties. It is owned by those who understand the true nature of wealth – and respect it enough to guard and preserve it. The truly philanthropic have always been found among the ranks of such persons, and it remains a rewarding and noble vocation to serve them as they continue to provide much of the funding required to build and maintain our social infrastructure.

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