How the recent Standard & Poor’s downgrade of the credit rating for long-term U.S. debt will affect foundations and nonprofit organizations is unclear, according to an Aug. 9 report in The NonProfit Times.
In the report, Bradford Smith, president of The Foundation Center, noted two ways the downgrade might affect nonprofit groups. In the event of higher interest rates, states would have a harder time borrowing money, and attendant budget cuts could punish nonprofits.
Further, foundation endowments could suffer big losses as they did in the recent recession if this week’s volatility turns out to be more than just a market correction. A big enough hit to endowments could reduce foundation giving, according to Smith. “But it takes a crystal ball to predict that,” he said.
Rick Nelson, chief investment officer at Commonfund Institute, said that from an operational standpoint, the downgrade itself has no effect either on endowments and foundations or on their ultimate beneficiaries. “It’s been a non-event from that standpoint,” he said.
The possibility of a “double-dip recession” was on the mind of Lisa Hall, president and chief executive of the Calvert Foundation. A protracted downturn would affect nonprofits throughout the country, she said in the report.
Hall sensed that this week’s stock market volatility has resulted in unrealized losses, which could change people’s perception of their wealth, influencing how much they are willing to give. She said nonprofits will be challenged to maintain services that are consistent with the funding they are receiving.
Despite the recent developments, Hall said, “fundamentally, we have the same underlying structure and financial condition that we had last Thursday, before this downgrade occurred.”
John Stremsterfer, executive director of an Illinois community foundation, said that most foundations with endowments have perpetuity on their side to weather the current storm, according to the Aug. 9 report in The NonProfit Times. However, since their spending rates are based on their rates of return, they could find it more challenging to make grants to nonprofits, he told the publication.
“Our experience over the last three years is giving for larger gifts has slowed,” he said.
Endowments have a longer time horizon and more illiquid assets and equity risks in their portfolios, according to Nelson. The indirect effect is that “greater volatility tends to create greater headwinds for foundation and endowment portfolios,” he said.
Nelson said government-issued debt remains a very safe asset and abnormally low interest rates are likely to go back up in general.
Still, with the downgrade and a rally in government bonds, “clearly they’re riskier until these debt issues get solved in meaningful way,” he said.