As the bear market enters its third year, nonprofit organizations are feeling the pinch.
After seeing their funding balloon for years, schools, cultural institutions, and charities across the country are scrambling to cut costs as their budgets shrink. They are laying off staff, cutting back operations, and delaying or canceling capital projects such as new-building construction.
The shrinking fortunes of wealthy individuals and corporations are affecting nonprofits such as the Pittsburgh Ballet Theater. Faced with a $500,000 budget deficit, the theater has been forced to take cost-cutting steps such as a 10 percent salary cut for musicians and a six-week unpaid leave for production staff.
Hurting the theater is the loss of investment income, which has padded its budget comfortably in the past. After generating an average return of 11 percent each year since 1996 through last year, the return on its $8 million endowment is flat so far this year.
Returns on nonprofits' endowments and financial reserves have declined sharply over the past two years, along with the stock market. Now many organizations have little or no investment income to supplement their operating budgets and fund capital projects.
Colleges and universities, for example, experienced last year the first one-year dip in their investment returns since 1984. The 661 schools tracked by the National Association of College and University Business officers lost an average of 3.6 percent on their endowment investments in the fiscal year ended last June, compared with a 13 percent gain in the previous year.
Donations from wealthy benefactors are harder to come by as the corporate foundations themselves are hit by the market woes. Giving by these foundations grew at double-digit rates throughout the 1990s and rose even during last year's down market, helped partly by the effect of the Sept. 11 attacks. But this year, giving is expected to be "flat at best," says Steven Lawrence, director of research at the Foundation Center in New York.
Bruce Bickel, managing director of PNC Advisors' Private Foundation Management Services, says some of his smaller clients have lost so much during the market rout that they are asking basic questions, such as whether they have enough for their own children's college education. "Charitable giving is the last decision to be made and the first one to change," he says.
This doesn't mean that most nonprofits are fighting for their lives. Many still enjoy relatively strong financial positions following the unprecedented gains during the boom years, and the damages caused by the market downturn have been, in many cases, relatively light because of their conservative investment styles. And most donors are still making good on past pledges.
"These are the kinds of funds that really have the longest investment horizons," says Joseph O'Reilly, director of consulting in the Northeast region at Capital Resources, an investment consulting firm. "But if they go through another year or so of a down market ... it will start to affect how people are doing."
Organizations that relied heavily on stocks lost more money last year. For example, Boston University, which had about 85 percent of its assets invested in equity, saw 27 percent of its $913 million endowment evaporate last year.
The endowments at Emory University in Atlanta, relying heavily on Coca-Cola Co. shares, fell 14 percent to $4.3 billion, prompting the school to raise tuition and reduce healthcare benefits for employees.