That faint grumbling sound you hear about foundations comes from all over, but recently, more and more of it is emanating from Washington, D.C.  Sonal Shah, head of the White House’s Office of Social Innovation and Civic participation, in January took foundations to task for being risk-averse. Senator Charles E. Schumer, (D-NY) last year stated that “The need for philanthropy is greater than ever in this weakened economy, and we should be encouraging foundations to increase their charitable giving.”

Granted, this is a far cry from the rolling thunder of dissatisfaction led by Congressman Wright Patman, Democrat from Texas, during the 1960s, which led to provisions affecting foundations in the watershed Tax Reform Act of 1969.  And, in this age of anti-big government fury, it is easy to dismiss such Administration and Congressional calls as mere posturing by the discredited denizens of Weimar-on-the-Potomac.

Such a dismissal of this winter of Washington’s discontent with foundations would be a mistake, for one very big reason.  Over the past year, the wave of populism epitomized by the Tea Party movement has grown to tsunami proportions, and the criticisms of foundations in Washington may well be the equivalent of the ominous stillness before the wave washes in. And, sorry to say, most foundations are, figuratively, lolling on the beach. 

The Tea Party movement, of course, is a motley collection of malcontents, a certain number of whom are unsavory to the highest degree:  racists, nativists, homophobes, and xenophobes.  These elements lead many decent people to dismiss the Tea Partiers, en masse, as haters and wack jobs.  This is neither accurate, nor wise, for many in the movement are populists who are neither Klansmen nor crazy, but who are mad as hell about the federal government in particular and—this is crucial for foundations—institutions in general. 

When the Tea Partiers helped Scott Brown to victory in the Massachusetts Senate race, thus taking a seat that the Democrats had held long before the current President was born, it provided a rude awakening to politicians of both parties.  Both Democrats who had dismissed them as the lunatic fringe, and Republicans who had thought they could co-opt them, now realized that this movement was demanding that establishment politicians dance to their populist tune.  

Consequently, we have already seen leaders, from President Obama on down, begin to stake out populist positions, from taxing the banks to gutting the budgets of certain federal government departments. These attempts to placate of the torches-and-pitchforks sensibility will only increase as we approach the November elections.

Once the politicians run out of governmental targets to flog, you can bet that they will turn to other institutions.  Large nonprofits, especially those that pay their chief executives well, are already in the crosshairs.  Maybe foundations will escape the wrath of the populist movement.  Perhaps the sheer lack of familiarity that even the best-informed Americans have with foundations, discussed in my last post, will allow foundations to escape unscathed. 

Evidence suggests, however, that foundations will not be so lucky.  In Michigan, for example, the ambitious Attorney General, Mike Cox, took aim at the Ford Foundation a couple of years ago, threatening legal action on the grounds that the Foundation, which was established in Michigan in 1936, was making an insufficient number of grants in its ancestral home. Ford grants to Detroit rose from $350,000 in 2002 to $5,730,000 in 2008, and Mr. Cox, mollified, stepped back from the legal brink. 

Should politicians decide to sacrifice foundations upon the altar of populism, they will find a target-rich environment. Consider the following facts.  Most foundations pay out about 5 percent of their net asset value, an amount that many consider to be parsimonious even in good times.  Most foundations have cut back on payouts due to the market meltdown, which makes good financial sense, but seems, to people who are hurting or angry, to be the unkindest cut of all. 

Foundations turn down far more organizations than they fund, which means that every day, they make more potential enemies than potential friends.  Most foundations do little or nothing to train their employees, which virtually guarantees that applicants, and even grantees, will occasionally be treated unprofessionally.  Most foundations do little or nothing to improve their processes and “customer satisfaction,” which leaves the people with whom they interact often frustrated and angry. 

Naturally, if politicians come after foundations in order to appease the Tea Partiers, foundations will defend themselves as vigorously as they can.  To put it bluntly, however, foundations should not expect to have many friends standing with them on the ramparts.  The field is widely perceived as ungenerous, unapproachable, unreasonable, unprofessional, and unaccountable.

Moreover, it suffers from the Willie Sutton problem:  foundations are where the money is.  If Congress, in its infinite wisdom, decided that revenue enhancement (and populist appeasement) could be achieved by doubling or tripling the excise tax paid by private foundations, does anyone truly think that there will be a groundswell of support for foundations as they resist such proposals?

A growing number of foundations have been taking their business more seriously, by sending their program officers to be trained by The Grantmaking School, and by commissioning Applicant and Grantee Perception Reports from the Center for Effective Philanthropy. 

Encouraging as this movement is, it is as yet a mini-movement, its participants amounting to less than 1 percent of the U.S. foundation population. So let’s hope that the populist anger and political posturing pass the foundation world by this time. 

A decade or two from now, the foundation world will be better-positioned to respond.  For now, however, they would be well-advised to pray that it is not 1969 all over again.

Note:  My friend William A. Schambra with whom I almost never agree, published a viewpoint article in the February 21 Chronicle of Philanthropy that, to my surprise, advances many of the same arguments.  

Joel Orosz, PhD, is the Distinguished Professor of Philanthropic Studies at The Dorothy A. Johnson Center for Philanthropy and Nonprofit Leadership at Grand Valley State University.

 *****

Disclaimers and Disclosures: The views expressed in the CEP blog by guest bloggers are entirely their own and do not necessarily reflect the opinions of the Center for Effective Philanthropy.  

This posting’s headline, of course, was inspired by the title of Joel Fleishman’s celebrated book, The Foundation:  A Great American Secret.  Fleishman got it half right, at least according to a recent report by Harris Interactive for the Philanthropy Awareness Initiative (PAI), which suggests that foundations are—even among the best-informed Americans—a mystery beyond fathoming.  This is a finding that should worry all of those who believe in the power, or at least the potential, of foundations to improve the lives of people.

The findings of the PAI survey are, if not shocking, at least depressing.  Only two out of ten people surveyed could identify an example of how a foundation has affected their community, and fewer than four in ten could even name a foundation on the first try. 

What goes beyond depressing to the realm of scary is that the respondents are not the fluffy-craniumed participants on Jay Leno’s “Jaywalking” segments, but rather what PAI calls “engaged citizens.”  Engaged citizens are the 12 percent of the adult population who hold leadership positions, either staff or volunteer, with organizations working on community or social issues. 

If foundations are a secret to more than 60 percent of these people, imagine what an abiding mystery they must be to the “disengaged” 88 percent of our adult population!

It gets worse.  While most of these engaged citizens can’t name a foundation or think of a way a foundation has affected their community, they do have high expectations of foundation performance.  More than three out of four say their communities would suffer without the work of foundations, and nearly eight in ten want foundations to focus grants on finding new and better ways of solving problems.  And nine out of ten believe that it is important for foundations to accept responsibility to serve the public.

So, to summarize, even the best-informed of our citizenry know very little about foundations or their work, but nonetheless have high expectations of what foundations should be doing to help their communities. 

If one thinks that foundations are capable of doing much, but one also thinks that they are doing very little, there is a definite disconnect.  The PAI survey does not suggest that such a disconnect has yet inspired the highly engaged respondents to grab their torches and pitchforks, but it does raise the question of whether an unaddressed gap between what is expected and what is delivered might turn “highly engaged” citizens into “highly enraged” citizens.

There are two possible explanations for the cognitive dissonance highly engaged citizens experience when considering foundations.  Either foundation performance 1) has been lousy, or 2) has been effective, but not well communicated, either of which would explain the perceptions of trifling impact.  Fortunately for foundations, the respondents seem to believe the latter:  nearly 90 percent think foundations should be more open with the public about their activities, mistakes, and lessons learned.

If ever there was a wake-up call to foundations to do a better job of sharing their wins, losses, and learnings with their natural allies in the social sector, the PAI survey has rung it up. There is no guarantee, especially in these straitened economic times, that engaged citizens will continue to blame the gap between their perceptions of high foundation potential and low foundation performance upon ineffective communications. 

In fact, it seems likely that, sooner or later, the conclusions will shift from “they’re doing a lot, but don’t tell us about it” to “they don’t tell us much because they aren’t doing much.” 

True, communicating good news is not easy, but in this age of viral marketing, there is no excuse for the good work of foundations to be an abiding mystery among even the best-informed citizens. 

If that omission is not corrected, and soon, foundations may pay a big price the next time they need public support, whether to buttress their funded programs or to defend themselves from misguided regulatory efforts. 

The time to make friends is not after the bar fight has begun.  For foundations, friend-making time is now.    

 Joel Orosz, PhD, is the Distinguished Professor of Philanthropic Studies at The Dorothy A. Johnson Center for Philanthropy and Nonprofit Leadership at Grand Valley State University

*****

Disclaimers and Disclosures: The views expressed in the CEP blog by guest bloggers are entirely their own and do not necessarily reflect the opinions of the Center for Effective Philanthropy.

One of the best books about foundations I know is one that gets too little attention. It’s Effective Foundation Management: 14 Challenges of Philanthropic Leadership – And How to Outfox Them by Joel Orosz. It should be required reading for every new foundation CEO and board member, because it lays bare the pitfalls that await them.

Its author, Joel Orosz, is one of the clearest-thinking people I know, and he writes with great wisdom, wit, humor, and insight – drawing on his experience as both a foundation insider (at the WK Kellogg Foundation) and someone studying foundations. Among his most important contributions to effective philanthropy is that he identified a need for better education and training for program officers, founding The Grantmaking School at the Johnson Center for Philanthropy at Grand Valley State University.

Over the past eight years, Joel has been a huge encourager of our work at CEP and provided wise counsel in his role as a member of our Advisory Board. He cares passionately about foundation effectiveness and has done much to advance it.

I, for one, missed his presence on the philanthropic scene greatly – no one is more fun to banter with at a conference – during his recent medical leave of absence. It’s more than great that he is suited up and back in action again.

And we are thrilled that he is bringing his game to our stadium as CEP’s third guest blogger. I know you’ll enjoy reading what he has to say.

****

Phil Buchanan is President of CEP

Announcing the final funding guidelines for the Social Innovation Fund last week, the chairman of the Corporation for National and Community Service Board said, “It’s just crystal clear we can’t continue to be funding social programs the way we’re funding them without more evidence of success.”

As I discussed in my last post, I see the Social Innovation Fund – and its focus on evidence – as a welcome push in the right direction. While there have been funders and nonprofits that have worked hard to assess effectiveness over the past many decades, we remain well short of where we need to be.

Admittedly, assessment in philanthropy is complex. It happens at multiple levels:  1) determining which grantees to fund; and 2) assessing a foundation’s own overall effectiveness. These two levels are interrelated, of course, but each has its own set of challenges.

Cutting to the heart of the first level’s challenges are the requirements in the SIF Notice of Funds Availability’s “Applicant’s Track Record of Using Rigorous Evidence to Select, Invest in, Support, and Monitor the Grantees” section. Funders must describe the process they use to “incorporate evidence into the selection, investment, support, monitoring, replication, and expansion of your grantees” and provide “in detail specific examples of how your organization has used rigorous evidence to drive program improvement and increase the base of evidence of what works.”

Neither of these requirements would be easy for most foundations to fulfill.

Today, too few funders use “rigorous” evidence to select the nonprofits they fund or to drive the development of their own goals and strategies. But, while I applaud the push that SIF NOFA requirements provide, any move in the direction they suggest must be made thoughtfully.

These guidelines should not be taken as an invitation to put the onus on grantees to suddenly produce evidence of their effectiveness independently. As I said in my post last week, many nonprofits are understaffed and underresourced, lacking the people, skills, and/or funds to conduct evaluations or collect data. Funders should proactively offer support – monetary and nonmonetary – to help grantees develop the needed systems and data to more rigorously test their effectiveness. 

Today, too few funders provide the needed support for nonprofits to build better evidence bases about their work.  At CEP, we have analyzed data from over 30,000 surveys of grantees of nearly 250 funders, and the facts speak for themselves:

•  Just 11 percent of grantees report that their funder helped them with the development of performance measures
• Only 11 percent say their funders provided them with research or best practices
• Of the 58 percent of grantees who reported having participated in a reporting or evaluation process, less than half (44 percent) report that after submitting a report or evaluation, their funder or an evaluator discussed it with them

These facts have consequences.  We know from our data, for example, that when discussions of a report or evaluation do not happen, grantees find the reporting/evaluation process to be much less helpful in strengthening their work. 

Funders have an opportunity – and an obligation – to step up and share responsibility for the development of more rigorous nonprofit performance data.  Because if nonprofits are in a better position to answer questions about what works, funders will be able to better decide where to direct their resources, and subsequently have  more answers to questions about their own effectiveness.

If the Social Innovation Fund can act as an impetus for this kind of evolution, that is a very good thing indeed.

****

Ellie Buteau, PhD, is Vice President-Research at CEP

The White House’s Social Innovation Fund, which will support intermediary grantmaking institutions that “identify and invest in promising organizations to help them build their evidence-base and support their growth,” has been a topic of much discussion and debate. Among the concerns has been the Fund’s focus on evidence of nonprofit program effectiveness and, in particular, its focus on evidence of effectiveness being based primarily on experimental design approaches.

In an op-ed in the Chronicle of Philanthropy, Katya Fels Smyth, founder and principal of the Full Frame Initiative, argues that “No one benefits” from the Fund’s proposed approach. “Not the best ideas for helping the nation’s most vulnerable, not the taxpayers, not philanthropy, and, most important, not the communities that most need help achieving a decent quality of life.”

Her critique is rooted in an inaccurate conception of what it means to take an experimental design approach. She asserts that experimental design must “require a very narrow definition of who is being studied, and people who face multiple intertwined challenges—who are the most in need—are excluded. So, for example, if a new approach to helping homeless mothers is under scrutiny, experimental-design evaluation would exclude battered women, those with chronic health problems, or those involved in the criminal-justice system unless everyone had the same problems.”

But that is simply not the case.

An experimental design approach need not be totally removed from the complexities of the real world or prevent innovative approaches from receiving serious consideration. Many factors can be taken into account through the design and statistical analysis processes.

For example, in one of its randomized trials, Nurse-Family Partnerships, which is now a grantee of The Edna McConnell Clark Foundation, had an objective “To investigate whether the presence of domestic violence limits the effects of nurse home visitation interventions in reducing substantiated reports of child abuse and neglect.” Participants did not fit a “very narrow definition” but instead differed in a number of important ways, including the number of domestic violence incidents in the family, race of the mothers in the study, mother’s marital status, and the employment status of fathers. These differences were taken into account when the data for this study were analyzed.

My experience with foundations and nonprofits tells me that we certainly are at no risk today of over-emphasizing rigor in how assessment is approached. Nor is it the case that a greater emphasis on rigor – and on really understanding what works and what doesn’t – need crowd out other valuable approaches to getting feedback.

The promotion of experimental designs often has a polarizing effect: this has been true in the field of education with the What Works Clearinghouse, psychology’s approach to the study of social issues, and in the nonprofit community and field of evaluation as well. Proponents sometimes act as if it is the cure for all evaluative ailments; opponents sometimes act as if it is the root of all evil.

But being in support of the use of experimental designs is not necessarily in tension with supporting nonexperimental designs, case studies, and the use of qualitative data (the importance of which Bob Hughes, from the Robert Wood Johnson Foundation, wrote about in a recent CEP blog post). Any design should be selected because it is the best way to answer a particular question, and the question to be answered should be directly related to the stage of the organization or program being tested. Not all questions in the field are best answered through an experimental design approach. But some are. I see experimental design as an important tool for the field to use to understand the effectiveness of its work.

Experimental designs allow us to rule out alternative hypotheses in a way that no other designs do. When testing the effectiveness of a social program being offered to those most in need, doesn’t it behoove us to get as close to an understanding of causation as possible?

We should seek to be as confident as possible that a program has positive benefits and isn’t yielding no – or even negative – effects. Philanthropy should be looking for the models that have potential to really make a difference on our toughest social problems. The field has a moral obligation to demonstrate, to the best of its ability, that a program works before funneling significant resources to expand it.

Admittedly, these are weighty statements. Many nonprofits are understaffed and underresourced, lacking the people, skills, or funds to conduct evaluations or collect data. A small nonprofit might have an excellent innovative idea that deserves to be tried on a larger scale and tested more rigorously. This is where funders come in. They have a crucial responsibility in this.

I will take a closer look at that responsibility in my next post.

****

Ellie Buteau, PhD, is Vice President – Research at CEP

“There was an extremely lengthy and convoluted pre-proposal process. The program officer then seemed to need a lot of hand-holding in making the case to the trustees. Once the grant was verbally confirmed, an additional online application process seemed to duplicate the copious information requests already made. Later, after the grant was confirmed and awarded, they decided to change what it was for exactly, leading to further paperwork and back and forth. Condescending…and painful.”

“[The Foundation was] unreasonable in the demands it made for data that we could not collect or just was not available…the Foundation is asking us to collect data up to a year after the project funding has finished. We have no money to pay anyone to do this work.”

This weekend I was surprised to receive a Travelocity airline confirmation forwarded to me from my parents. They don’t fly very often, and booking travel online is a pretty new experience for them. My dad begs my mom to do the searching because he finds the multitude of sites and options frustrating.

My mom is really only concerned with price. So, when I, a frequent traveler, opened their confirmation I just sighed and began to work up some serious anger at Travelocity. Travelocity hadn’t given them any easily visible warning that the “inexpensive” flight they had purchased would require them to execute a 25 minute connection. Nor or was it clear that their second “direct” flight stops for an hour and a half in Minneapolis. Too bad – it’s a sunk cost now. They’ll just muddle through.

Like the grantees who made the comments at the beginning of this post, my parents are suffering from a lack of clear, upfront information about what to expect from a complex system. This is a frequent lament of grantees: At first a funder’s requirements and processes seem simple and straightforward but there turn out to be hidden twists, predictable by the funder but not visible to the grantee. That lack of clarity can frequently lead to an erosion of trust between two organizations that should, optimally, be partners in achieving mutual goals.

Grantees tell us that foundations are often “overwhelmed” and “unresponsive.” But both sides are complicit, as Nancy Lublin points out, mockingly, in her recent Fast Company “letter.” These issues aren’t new, and they’ve been highlighted by others, like Project Streamline. But they continue. And funders have more power, so the fix should start with them.

There are certainly opportunities for some funders to just do away with pointless complications that don’t provide them with any real value (a point I’ll touch on in a future post – but let’s just agree now that font requirements are probably over the top). However, there are also opportunities for most funders to do a better job of setting grantees’ expectations about their processes and requirements.

Imagine if Travelocity had appended a note to “your credit card is about to be charged” that said something to the effect of, “Hey, we’re about to sell you a flight with connections that normal mortals in their seventh decade shouldn’t attempt, during winter, in New England.” My mom would have still purchased a flight, but she would have asked a few more questions and probably ended up with a different one. The site would have earned her undying trust.

Or for funders: “Our typical process involves a letter of inquiry, a conversation or two with a program officer, and a final application. Sometimes it involves a few revisions as we work with you to create a strong proposal. Because we really value data for our decision making, we may ask you to collect quite a bit of it – please ask us about that as part of our conversation. Oh, and by the way, the typical application process takes our grantees about 40 hours to complete.”

Why not? Isn’t the potential opening to build trust and better mutual understanding worth it?

****

Kevin Bolduc is Vice President - Assessment Tools at CEP

“We always felt we had a ‘Hannibal-the-cannibal’ relationship: Stay where you are and mind yourself and you’re okay. Take one step forward and your arm will be bitten off.”

“The Foundation has had a negative impact on our organization in spite of funding. Runaround by foundation staff and [the Foundation’s] nontransparent priorities and processes have wasted staff time and effort…. It is disheartening to think that the viability of an important program is subject to an unqualified person’s review, analysis, and presentation of our project to the full decision group.”

In my last “Dose of Honesty,” I highlighted the positive end of the spectrum of commentary we receive from grantees. Here, I figured I’d talk a bit about the other end, using these comments from surveys of two different funders.  Just like positive remarks, the terrible need equally careful consideration.

It’s a rare foundation that solicits candid, grantee feedback through CEP’s Grantee Perception Report, that doesn’t end up with a zinger in there. Invariably, comments like these cause serious freak-outs when staff members read them in the full list of redacted comments we provide.

Yet, as these one-off comments absorb attention and focus, they can distract from the important insights hidden in less snappy language in the rest of the qualitative feedback.  So, staff should be upset – but mostly if those comments are part of a broader theme and not, as the zingers often are, just an indication of one very broken funding relationship.

One comment is scant evidence of failure – or, for that matter – of success. The glowing comment that gets tacked up on a bulletin board can wipe away dozens of comments that reveal utter mediocrity, or worse, a serious problem. As intoxicating as they may seem, like the zingers, one or two compliments – in a survey or at a dinner party – are just anecdotes.

Don’t get me wrong – qualitative anecdotes have their place. Terrible comments like those at the beginning of this post make for important warnings to foundations about what to try to avoid. They provide a visceral punch in the gut. But our focus at CEP is to raise up themes worthy of significant attention – and so we try to focus on trends in negative comments that highlight areas in which grantees say funders most need to improve.

****

Kevin Bolduc is Vice President - Assessment Tools at CEP

“Honestly, [this foundation] is the ideal funder. I find the whole grantee/grantor relationship distasteful in most cases, but with [this foundation] I really feel like we are equal partners working towards the same goals.”

In a guest post on this blog, Bob Hughes of RWJF highlighted one of the frequent apprehensions about assessment in philanthropy and, too often, about CEP’s work: that assessment is only focused on the numbers. Quantify this. Count that.

While I proudly admit to spending quite a bit of time thinking about the insights that we can pull from our quantitative assessment data, my colleagues and I spend a ton of time analyzing the comments we carefully solicit as part of our surveys. In fact, on many days, our teams spend a lot more time analyzing qualitative data about a foundation than they do buried in numbers.

It’s a rare assessment tool that doesn’t have at least one key finding drawn largely from the qualitative feedback. Doing substantive, frequently comparative analysis of qualitative data, though often difficult and time-consuming, is fundamental to our work. And, we believe, ultimately critical to surfacing new insight and to supporting themes from quantitative analysis.

This post begins a series that will highlight some of the candid, open-ended feedback we receive about funders. I hope the comments I choose to reflect upon will resonate, sometimes make you laugh – or gasp – be food for thought, or just plain illustrate the profound difference that many funders are making through their work.

Take, for instance, the comment at the beginning of this post. You might think that grantees throw around words like “ideal” and “best” pretty frequently in reference to organizations that have given them substantial sums of money. If you thought that, though, you’d be dead wrong.

In our experience it’s fairly unusual. However, for this funder, which I’ll identify when they make their Grantee Perception Report public, that comment was only the tip of the iceberg. About a quarter of its grantees provided open-ended feedback that used a superlative. Here are a few more.

•  “Best ever out of all the funders we work with.”
•  “Best foundation staff on earth.”
•  “The most thoughtful and helpful foundation in my field.  It adds value but respects its grantees.”

The litany continued with words like “favorite,” “most outstanding,” “stellar,” “fabulous,” “awesome,” “A++,” “impeccable,” that drove the point home to the board and staff – I think just as much as the exceptionally positive quantitative ratings grantee provided – that grantees believed this foundation was unusually effective.

In his next post, Bolduc will examine grantee quotes that give negative feedback in “The Tyranny of the Anecdote.”

****

Kevin Bolduc is Vice President - Assessment Tools at CEP

Georgia Levenson Keohane will be a CEP guest blogger from January 25 – February 5, 2010.

From the 2010 vantage point, we can see that the era of ‘new’ philanthropy – big, strategic, tactical giving – was also one of historic inequality.  In the U.S. the last quarter century proved a gilded age for some – the rich did get much richer – but was a period of stagnation for the middle class and lost ground for those with the lowest incomes. 

During this time, we mostly opted to reduce taxes (by historical standards) and deregulate any number of industries in deference to market forces.  For some, this approach produced spectacular wealth, and many embraced philanthropy with the same zeal they brought to enterprise. 

Yet the economic cataclysm of our time – which has taken its greatest toll on the most vulnerable – compels us to re-examine the fundamental tenets of the social contract: just what kind of society do we want to live in?  What is the role of government?  Of markets?  And can philanthropy fill in the gaps?

The notion of American exceptionalism – that we do things differently here – applies to charitable giving.  Throughout our history, private philanthropy has been a feature of civic life: long before the sweeping and institutional philanthropy of Rockefeller and Carnegie, Americans gave both time and alms to relieve the suffering of the poor. 

Today, these traditions continue.  According to the General Social Survey, 71 percent of Americans belong to at least one voluntary organization, a rough gauge of civic engagement.  The most recent cross-national data from the world values survey comparing membership in charitable organizations (an imperfect measure of volunteerism) shows that Americans are more than three times as likely as their European counterparts to participate in a charitable group. 

When it comes to giving, the difference is even more profound.  According to one cross-national estimate from 2000, charitable giving in the United States was approximately $190 billion, or $691 per capita, compared to $141 in the United Kingdom and $57 for Europe as a whole.  (See Alberto Alesina and Edward Glaeser, Fighting Poverty in the U.S. and Europe). 

In 2006, data from the Charities Aid Foundation show that philanthropy in the United States represented 1.7 percent of GDP followed by the U.K. at .73 percent.  Germany was .22 percent and France .14 percent.

This isn’t reason to crow about superior American generosity (though, by any measure, we are highly altruistic): rather, it reveals a fundamentally different approach to social welfare.  Generally speaking, European countries provide greater public social welfare than the United States, which relies more heavily on its private delivery. 

In Europe and the U.K., this typically means higher redistributive taxes for more government programs and services (e.g., universal healthcare), and as a result, fewer dollars available for philanthropy; in the U.S. it means lower taxes, smaller government, more privatization of social services (e.g. employer and private insurer based healthcare, nonprofit activity) and higher levels of charitable giving. 

It is worth noting that in recent years, as financial deregulation in the U.K. has led to greater prominence of hedge funds and financial services generally, British philanthropy – in amounts and style (see Absolute Return for Kids or Children’s Investment Fund Foundation) – more closely resembles that of its American cousin.  Now that the U.K. is attempting to rein in (read, tax) elements of the financial services sector its government deems ‘socially useless,’ we may see a concomitant drop in charitable giving.

The question of which system works better – which is more efficient in ensuring social welfare – is empirically complex, ideologically fraught, and beyond the scope of this post.  If the U.S. bested Europe on income inequality (it does not), or on the various measures of the UNDP Human Development indices (it ranks 13^th), it would be an easier one to answer. 

Rather than attempting to here, we can instead pose some equally challenging questions:

• In the aftermath of the financial crisis, what exactly is the proper size and scope of government? 
• How do we harness – and regulate – markets? 
• Should we expect private philanthropy to plug the social welfare holes when states and markets fail? 

It is fair to say that even at 1.7 percent of GDP, private philanthropy cannot – and should not – provide our entire social safety net.  With official unemployment over 10percent – and the budgets of state governments busted – it has been billions of dollars in federal stimulus, not private charity alone, keeping millions out of poverty in this recession. 

While thousands of social service agencies have valiantly scrambled to meet rising human needs, federal intervention – emergency unemployment insurance, tax credits, an increase in food stamps, and cash payments for retirees, veterans, and people with disabilities – has been necessary to keep people afloat. 

Even in the best of times, less than one-third of American philanthropic dollars goes to help the poor.  This level of funding is not enough to help those harmed by the downturn, neither is it sufficient to meet ongoing social and economic needs once the economy has stabilized.  Private charitable giving cannot stand in for our collective responsibility for social welfare, nor for market solutions to social needs – which begin, we hope soon, with jobs.

We have made important gains in our understanding of what makes for effective philanthropy – both the role foundations can play alongside their nonprofit, public and private sector partners, and ways in which they can improve and measure impact in the social sector. 

We know, for example, that philanthropic dollars are particularly vital when it comes to risk – to incenting investment in things like vaccines when the markets fail to do so, or piloting anti-poverty programs that may be too politically controversial to attract public funds.  We also know that foundations must hold grantees accountable for performance, while evaluating their own successes and failures. 

Yet even the smartest philanthropy is no substitute for well functioning states and markets.  If we have learned anything from the economic crisis, it is that our system of social welfare may require some recalibration.

*****

Disclaimers and Disclosures: The views expressed in the CEP blog by guest bloggers are entirely their own and do not necessarily reflect the opinions of the Center for Effective Philanthropy.

Georgia Levenson Keohane will be a CEP guest blogger from January 25 – February 5, 2010.

The challenge for foundations in this economic crisis has been to do more with less.  On average, the nation’s endowed philanthropies lost 28 percent of their value in 2008, just as the needs of nonprofits and the people they serve began to spiral. 

And yet, despite the conventional criticism– that foundations are conservative and slow to change – many have responded quickly and creatively to support the work of their grantees. 

An increase in the use of program related investments (PRIs), for example, marks an important step in how foundations finance the work of the social sector. 

Although it’s still only a relatively small number of foundations that use PRIs – investments made to support charitable work with the expectation of return – the increased prominence of this philanthropic approach is an unintended but important legacy of the downturn – and one which might lead to greater innovation in the social capital markets.

PRIs are not exactly new.  The Tax Reform Act of 1969 first defined them as investments made by foundations to support a charitable project or activity. Large philanthropies like Ford, MacArthur, Packard, and others pioneered the approach. 

Over the last decade, the number of foundations engaged in mission investing has doubled, and the dollars invested this way has tripled.  Most of the growth in PRIs has occurred at small- and middle-sized philanthropies, like the $227 million Heron Foundation in New York City. 

Founded in 1992, Heron has played an important role in advancing the PRI field.  Unlike more cautious PRI investors, Heron has preserved the value of its endowment by making “core support” grants within the 5 percent payout IRS requirement and deploying 50 percent of its endowment to finance projects that might not otherwise find affordable capital in the commercial markets. 

Heron’s PRIs include things like loans for a child care center in Trenton and affordable housing in Nashville, working capital for a Yonkers bakery that hires “hard to employ” workers, and a limited partnership stake in a Rural Business Investment Company promoting economic development in Appalachia. 

Heron contends that this integrated approach of grants and PRIs enhances its philanthropic impact, belying the notion that effective philanthropy requires a Chinese wall between endowment and charitable investing.

Heron’s PRI returns are hardly anomalous.  A 2007 report from FSG Social Impact Advisors shows that, over a forty-year period, 96 percent of loans made to nonprofits by foundations have been repaid.  These findings should reassure foundation officers concerned about the risks of PRIs; even in a strong market, low beta investments in the social sector can offer smaller but consistent yields.  Recently, as our definition of “market return” has altered, PRIs may present a particularly attractive ROI.

It is not only perceived risk, however, that has discouraged foundation executives from making PRIs.  Many, often rightly, believe they lack the financial expertise to evaluate program related investments.  In response, a number of organizations have emerged to help foundations overcome this obstacle. 

The PRI Makers Network, for example, is an association of 90 PRI grantmakers that provide tools, professional development, and other resources to foundations engaged in program related investing. 

More for Mission is a campaign organized by the Annie E. Casey and Heron Foundations and the Meyer Memorial Trust to advance mission investing and to encourage foundations to spend an additional 2 percent of assets – or an industry total of $10 billion – on PRIs. 

Consultancies also offer expertise in mission investing.  And collaborations between foundations like Living Cities have created social investment vehicles such as the Catalyst Fund – $20 million in debt capital – for community based organizations around the country that work on urban development. 

For foundations new to mission investing, the Catalyst Fund promises a chance to “invest alongside PRI pioneers” and “build a diversified portfolio without hiring additional, specialized staff.”

In 2009, when most philanthropies were scaling back their charitable commitments, a handful of others targeted more than $185 million in PRIs to respond directly to the effects of the economic crisis.  According to data from the Foundation Center, most of the first emergency PRIs went to housing and shelter. 

The MacArthur Foundation, for example, which has long focused its PRI efforts on affordable housing, dedicated $60 million in PRIs to prevent large scale foreclosures in its hometown of Chicago, as well as PRIs to fund similar efforts in North Carolina and Minnesota. 

The Ford Foundation made more than $100 million in foreclosure-related PRIs to national housing organizations.  Significant PRI dollars also went to emergency assistance, such as the Kresge Foundation’s $2.5 million award to Feeding America, the nation’s largest hunger relief agency, to finance the purchase of 25 refrigerated trucks for food banks and mobile pantries. 

Kresge also established an interest-free PRI Community Relief Fund offering bridge loans to “high performing” human service organizations to better meet the increased demand for their assistance. 

In September, the PRI landscape morphed once again when the Gates Foundation announced it was allocating $400 million for loans, investments, and other “non-granting financial instruments” to advance its anti-poverty work.  Like many Gates initiatives, this foray into PRIs was not the first in the field, but its scale and profile sets an important precedent for other philanthropic investors. 

In some ways, the growth in PRIs can be seen as one part of the expanded social capital marketplace.  This would include the approximately $4 billion passed through community development financial institutions (CDFIs) each year, which is set to increase significantly with additional stimulus funding.  Some, like the Rockefeller Foundation, who champion “impact investing” more broadly claim that investments which address social and environmental problems while also turning a profit represent, potentially, a $500 billion industry.

In spite of this momentum, the number of foundations actually making program related investments remains small.  Of the thousands of grant making foundations in the United States, only a few hundred use PRIs.

The downturn has shown the importance – and relative facility – of deploying much needed capital to struggling nonprofit organizations.  PRIs offer an important way for foundations to expand their philanthropic reach.

 *****

Disclaimers and Disclosures: The views expressed in the CEP blog by guest bloggers are entirely their own and do not necessarily reflect the opinions of the Center for Effective Philanthropy.