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A Ford Called Wanda: One Foundation Proves Nonprofit Debt is Not a Four- letter Word

A Ford Called Wanda: One Foundation Proves Nonprofit Debt is Not a Four- letter Word 1

By David J. O’Brien and Matthew D. Craig are the authors of BUILDING SMART NONPROFITS: A Roadmap For Mission Success.

My Building Smart Nonprofits co-author Matt Craig and I were excited to read about the Ford Foundation’s recent announcement of its intent to issue $1 billion in bonds to dramatically boost its annual grantmaking. The foundation made its decision in response to an equally pronounced rise in need for funding among many nonprofits and their beneficiaries affected by the global COVID-19 pandemic. As reported in the New York Times, in order to keep the groundbreaking strategy private, “Ford code-named it Project Wanda… a reference to a striking 2015 portrait of an African-American woman, Wanda Crichlow, that hangs in the foundation’s lobby.”[i]

Wait, groundbreaking? Companies issue bonds (ahem, debt to you and me) all the time, right? Yes, but many nonprofits – except for those in certain industries, like health care and universities – don’t.  In fact for some, nonprofit debt is anathema to good stewardship and governance. A four-letter word in every sense. Which is what makes the Ford Foundation’s recent action so refreshingly bold. It both epitomizes leadership in a time of crisis (Ford’s clarion call to increase giving was heeded by at least four other mega-foundations) and represents smart financial management of the foundation’s assets. The latter boils down to simple math, really.  But more on that in a moment. First let’s take a look at the state of nonprofit debt in general.

In our numerous journeys around the sun, we’ve seen far too many instances of leaders (including boards) at what we call “Main Street Nonprofits” (those with annual revenues of $2-30 million) equating “debt” with “catastrophic existential risk” and thus as something to be avoided at all costs.  But in doing so, they are denying their organizations the use of leverage.  Put more simply, borrowing has the power to potentially enhance an investment’s return.  In the case of nonprofits, we’re talking about greater mission impact! A word of caution would be wise here. Leverage, credit, debt – call it what you will – must be used with prudence. Sparingly – like saffron in a Spanish paella. You get the point.  As anyone who’s ever taken a finance class knows, leverage is a double-edged sword: it can magnify both gains and losses.  But prudence doesn’t have to mean total avoidance or casting debt as something tantamount to original sin.

And yet, eschewing debt has been de rigueur in the nonprofit world for so long, it’s practically part of the sector’s lore. Even huge foundations are not immune to dogma. “For most foundations, the idea of taking on debt is outside of normative thinking,” wrote Ford Foundation president Darren Walker in a May 2020 letter to his board. “Covid-19 has created unprecedented challenges that require foundations to consider ideas — even radical ones that would have never been considered in the past.”[ii]

A smart financial move…

Just a few scant months ago, as the world was awakening to the health and economic consequences of the coronavirus pandemic, it wasn’t uncommon to witness enormous daily volatility in the financial markets. Overall, the trend in stocks from late February to late March was decidedly negative with the S&P 500 index losing roughly a third of its value during this period. So long-term investors – including foundations – could be forgiven for not wanting to sell their assets into this terrifying maw of uncertainty. Ford thought it might have a better idea.

Under Walker’s guidance, the foundation believed it could markedly increase its annual giving while avoiding the risk of liquidating assets amid a market decline of historic proportions. The solution was Project Wanda – a call to leave the $1 billion (roughly 7% of Ford’s $13+ billion endowment) in the foundation’s investment pool and use OPM (you know, Other People’s Money) to finance the surge in spending. Now here’s the simple math part.  According to Ford’s published results, its endowment generated “annualized returns of 7.3% and 6.6%, respectively, for the three- and five-years ending December 31, 2018.”[iii] If those numbers strike you as a bit “meh,” consider this: When Ford took its $1 billion “social bonds” to market last month, they were priced at 2.415% for a 30-year issue and 2.815% for a 50-year variety.[iv]

In other words, Ford is paying less than half the cost to borrow $1 billion than it can reasonably expect to earn over time in a fully invested portfolio.  Walker and his team are betting this tradeoff will allow Ford to repay its bondholders without raiding the Foundation’s endowment. Like we said, smart.

Many of Walker’s peers at other mega-foundations chose not to jump onto Ford’s bandwagon and boost their grantmaking because they didn’t want to sell investments in a rapidly declining market. Certainly, most professional portfolio managers would agree that when you are investing for the long haul (with foundations that time horizon is, well hopefully, forever) folks who try to time markets or sell into downturns do not fare as well as those who say “leave it alone”. Ford’s use of debt while maintaining its portfolio overcomes this issue.

Money well spent

Walker and his team don’t intend to use the proceeds from their historic bond sale on a shiny new building or luxurious office suites.  No, Ford will use these funds in pursuit of its mission “…to reduce poverty and injustice, strengthen democratic values, promote international cooperation, and advance human achievement.”[v] But unlike philanthropy of yesteryear, many foundations, including Ford, now consider their grants to be long-term investments in their grantees, often with multi-year commitments. These investments are made in a variety of forms – including “program related” and “mission related” loans that are repaid by the recipient over a number of years.  Others think of their grants as a form of “start-up” capital, with a goal of getting the grantee to a point where the organization can prove its impact and then attract other forms of funding.  Just as in the for-profit world, foundations facilitating additional funds to ensure that those they have invested in will survive the present storm is not just good philanthropy – it is good stewardship of their assets –  and a prudent use for borrowed funds.

ESG, SRI, and Alphabet Soup

By issuing its social bonds, Ford is tapping into exciting, new sources of capital for nonprofits and joining the vanguard of innovative funding models within the sector. Called Environmental, Social, and Governance Investing (“ESG”), Socially Responsible Investing (“SRI”), Green Investing, Impact Investing, among many other names, a wave of investment options now exist to help individuals and institutions align their money with their values.  Some estimate that over one-third of investing today (up to $8.7 trillion in the U.S. and $23 trillion globally) is part of this tsunami of conscious capitalism.  And demand is growing. Ford’s decision to issue its bonds was simply a reasoned response to several concurrent factors: the need for funding among the foundation’s constituents was rapidly rising; the desire for socially responsible investments was booming; and the interest rate environment (that is, the cost to borrow) was historically low.

Leadership & Risk-taking

Matthew D. Craig

Matthew D. Craig

Critics often proclaim – not without some merit, mind you – nonprofits are behind the curve of their for-profit brethren when it comes to taking on risk. Perhaps as justification, they cite the lack of financial incentives for nonprofit leaders to make bold bets in the hope of reaping the rewards of successful ventures. That’s one reason Ford’s Project Wanda is so unique, and represents the fallacy of this thinking. Yes, nonprofits are different, and some (too many, we’d argue) are busy simply trying to keep the lights on and just don’t have any spare assets to risk. But there are even many large organizations that lack not the ability, but the will, to put their money to work in service of their missions. Ford, by contrast, represents those in the nonprofit sector with significant resources who are comfortable undertaking prudent risks to amplify the amount of social good they’re doing for their stakeholders. Its leadership doesn’t require stock options or performance bonuses to prompt action. Furtherance of the mission is the incentive: probably why they work for nonprofits in the first place.

Foundations in particular are frequently criticized for annually paying out (contributing to grantees) less than they are earning on their investment portfolios.  Here again the critique levied is often justified. Many stick close to the IRS mandated minimum annual distribution of 5 percent even when their assets are growing at a much higher rate. Some critics claim that foundation managers are limiting payouts in order to maintain the status quo (read: their jobs), while other detractors go so far as to posit that many endowments and foundations – particularly among the nation’s wealthiest colleges and universities – have become de facto  “hedge funds with schools attached.”[vi]

David J. O’Brien

David J. O’Brien

Now hold on a minute, you might be saying. Haven’t Ford’s investments been averaging only 6-7 percent a year (a performance figure not uncommon among its peers)? So a 5 percent payout is actually pretty good, right? In a word, no. And the reason why is the financial force of nature known as compound interest – what no less a mind than Albert Einstein reputedly called “the eighth wonder of the world.” Let’s say for example you have a $1 million endowment (lucky you, but a pittance for a major foundation). If this sum were to grow at 5 percent each year for 30 years, you’d end up with a pile of money worth roughly $4.3 million. Not bad. But now, assume your initial $1 million grew at an annual rate of 7 percent for those same 30 years. How much would you have then? More than $7.6 million! Let’s see the Hanging Gardens of Nineveh do that! Extrapolate this on a scale equal to the vast wealth horded by our charitable foundations and you’ve got a compound interest mic drop, friends!

Imagine all the extra good that could be done in the world if foundations brought their payouts just a wee bit closer to their investment performance. Or let us do the imagining for you: It’s estimated that “every one percent increase in the annual payout rate of all foundations translates into approximately $4 billion in new grant funds for the nonprofit sector.”[vii]  In rebuttal, many foundations explain the motive for leaving their assets to grow is to increase the corpus, thereby enabling larger annual grants in perpetuity rather than in any single year.  Fair enough.  But now we’re back to Ford’s issuance of its social bonds. It obviates the Hobson’s choice between keeping funds fully invested and increasing payouts to grantees, allowing the foundation to do both.

But don’t take our word for it; industry leaders across the nonprofit sector have applauded Ford’s strategy. As the Center for Effective Philanthropy president and author of Giving Done Right, Phil Buchanan, commented on the Ford Foundation’s decision to double its grantmaking by issuing debt, “It’s great to see this kind of leadership … It’s an unprecedented time, and this is an appropriately unprecedented response.” Antony Bugg-Levine, CEO of the Nonprofit Finance Fund agrees saying, “the [Ford Foundation’s] move makes sense because spending money now, at a moment of societal crisis, when many nonprofits are in danger of failing, will pay big dividends for many years to come …what a wasted opportunity for foundations to sit on the sidelines at this crucial moment because they face resource constraints that they could solve by issuing long-term debt at historically low rates.”[viii]

So it turns out nonprofit debt isn’t a four-letter word after all. And if you’re looking for an example of bold leadership taking prudent steps to protect its existing investments while balancing risk and reward by engaging new sources of financing that allow for increasing annual payouts AND building the endowment during unprecedented times…well, we have a word for that.  Two actually: Bravo, Wanda!

[i] Leading Foundations Pledge to Give More, Hoping to Upend … (n.d.). Retrieved June 16, 2020, from https://www.nytimes.com/2020/06/10/business/ford-foundation-bonds-coronavirus.html

[ii] Leading Foundations Pledge to Give More, Hoping to Upend … (n.d.). Retrieved June 16, 2020, from https://www.nytimes.com/2020/06/10/business/ford-foundation-bonds-coronavirus.html

[iii] “Https://Www.fordfoundation.org/Media/4610/financial_snapshot_2018.Pdf ,” accessed July 13, 2020,

[iv] Barnett, Chip, and Christine Albano. “Ford Foundation’s $1B Social Bond Prices, Geisinger Authority, Los Angeles Deals Sell.” Bond Buyer. Bond Buyer, June 18, 2020. https://www.bondbuyer.com/news/ford-foundations-1b-social-bond-prices-geisinger-authority-los-angles-deals-sell.

[v] “Mission.” Ford Foundation, 4 Mar. 2020, www.fordfoundation.org/about/about-ford/mission/.

[vi] Taylor, Astra. “Universities Are Becoming Billion-Dollar Hedge Funds With Schools Attached.” The Nation, 23 Jan. 2018, www.thenation.com/article/archive/universities-are-becoming-billion-dollar-hedge-funds-with-schools-attached/.

[vii] Deep, Akash, and Peter Frumkin. “13 The Foundation Payout Puzzle.” Taking philanthropy seriously: Beyond noble intentions to responsible giving (2006): 189.

[viii] Parks, Dan. “Ford and Other Funds Issue $1.2 Billion in Debt So They Can Give More Now.” The Chronicle of Philanthropy. June 11, 2020. Accessed June 20, 2020. https://www.philanthropy.com/article/FordOther-Funds-Issue/248971.

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