An update on our COVID-19 response
Which is why I’m so impressed by the spirit our staff has shown in stepping up and into the challenges. It’s energizing to see people take on extra work, help colleagues in trouble, share ideas and tips, and find creative solutions to unexpected problems. But make no mistake, much of this comes from recognizing how fortunate we are to continue working, even remotely, to support all of you and the communities and people you serve. The health and economic fallout from the coronavirus pandemic are already immense, and it’s impossible to predict how great they could become — even with the welcome government relief package. This is particularly true for the nonprofit sector, which despite the importance of its work, always hovers on the edge of financial hardship.
For our part, we want to do as much as we can to support our nonprofit partners, consistent with both immediate and long-term needs. But I cannot sugarcoat the matter, because no one is immune from what’s happening. The impact of the economic shutdown on our endowment’s value has already been significant, and we must be prepared for difficult times and the prospect of a slow or erratic recovery.
That notwithstanding, the most important thing to share is that we will not be cutting our grantmaking budget for the year. Coming into 2020, we had planned to award $485 million in grants, and including multiyear awards from prior years, we expected to pay out $525 million. We intend still to do both, and want to reassure you all that we will fulfill our promises. We have been through crises before, and we will face crises again, but the foundation remains steadfast in its long-term commitments.
How we prepared for an economic crisis
The current crisis is unprecedented in ways that confound efforts to assess how long it will last, what its long-term effects will be, or what comes next. In 2008, we dealt with a failure of the global finance system. That crisis was big, but not unfamiliar. The current crisis, in contrast, poses a triple threat: a global health crisis, a crisis in the Main Street economy, and a crisis in global finance. How well the world’s political, health, and economic leaders can manage three such upheavals at once remains to be seen — as do the effects on our lives and livelihoods.
Two years ago, the foundation adopted and announced a plan for dealing with economic disruptions. Experience in 2008 taught us the need to balance two paramount considerations that come into conflict during a major downturn. On the one hand is the welfare of our current grantees, whose work and institutional health will suffer if we abruptly reduce or terminate funding in the wake of an economic contraction. On the other hand is the long-term condition of our endowment, whose spending power will diminish in real terms if payout in grants exceeds what’s necessary to sustain growth over time — reducing the foundation’s capacity to have impact in the future.
It can be all too easy to dismiss these long-term considerations when faced with an immediate crisis. But as I wrote then, we believe – along with our founders, who established Hewlett to operate in perpetuity for this reason — that solving the problems we seek to address takes time and depends on efforts that pay off slowly. This means that operating both with flexibility to adapt to current needs and with an eye on long-term impact are each and equally core values of the foundation.
Guided by these values, we developed a solution to mitigate the problem of choosing between current and future priorities in a downturn. The plan rests crucially on steps we took after the 2008 recession. As the endowment recovered its value, we did not put all the funds immediately back into programs, but instead arranged our grant budget so a significant portion each year is unallocated. In normal times, we distribute these unallocated funds over the course of the year to special initiatives, new ideas, and unanticipated opportunities, both within and outside the foundation’s core programs. But our unallocated funds also provide a cushion to absorb reduced payout when a downturn happens, enabling us to shrink our grant budget to preserve the endowment’s future spending power without needing to diminish support for ongoing programs and grantees.
Under this plan, we will not change the approved budget in the year of a financial downturn — meaning a year like this one, in which we expect the endowment’s investment return to be negative. But we also will avoid allocating additional funds, which would require selling devalued assets from an already diminished endowment, thus locking in losses permanently, to the certain detriment of future grantees and the communities they will serve. In the next year, we will set our payout to a maximum of 5.1% of the new endowment, instead of using the usual “smoothing” rule followed by most foundations (that sets the rate based on the average of the three previous years); this allows us to spend at a rate consistent with preserving long-term capacity. The associated reduction in our grant budget will then come from the unallocated funds, meaning we need cut the budgets of our programs and approved initiatives only if (and to the extent) the decrease in payout exceeds these unallocated resources.
Following this plan in 2021 should enable us to absorb a 20-25% reduction in the value of our endowment before needing to think about reducing the budgets of existing programs and initiatives. While we temporarily lose the flexibility our unallocated funds provide, we avoid impairing the foundation’s core work and existing commitments. And we’ll rebuild these flexible dollars as the economy and our endowment recover their value.
How we are supporting charitable needs now
The Hewlett Foundation has approximately 1,400 active grantees, nearly all seriously affected by the virus and economic shutdown. The plan described above enables us to manage the immediate hit to our endowment and to maintain ongoing support going forward while still moving more than a half billion dollars to meet your needs this year.
Still ahead lies the difficult task of adapting your work and organizations to a new and rapidly changing environment. While eager to be your ally in assessing these shifts, we believe you are in the best position to make the wisest decisions about what they should be. We have for this reason long provided mainly flexible support — typically 70-80% of our grant dollars are awarded as such. We are working now to loosen restrictions on those grantees who received more narrowly targeted project grants, at least where we can lawfully do so, as well as to modify deadlines and other administrative burdens for all our grantees. We are hardly alone in these efforts; more than 400 funders — and counting — have said they will do the same. (Which could, I hope, lead to a much needed, permanent shift toward providing general support even after the crisis has passed.)
Yet we want to do more than just stay the course, especially in our own communities, whose populations were among the earliest victims of COVID-19. To that end, our board has approved putting $10 million into Bay Area relief efforts. We believe funds on this scale can meaningfully impact our local communities, particularly given a broader regional effort being organized by the Bay Area’s community foundations that will bring together government, industry, and philanthropy to assist households in need, local nonprofits, and other struggling institutions. Giving to these local efforts is also consistent with the foundation’s longstanding commitment to the Bay Area — our home, and the place whose distinctive culture and people made the foundation’s existence possible in the first place.
As the health crisis worsens and unemployment claims skyrocket, the unfortunate, humbling, but also inescapable fact is that we have neither the knowledge nor the resources to do something similar on a broader scale. Need of this magnitude — even within just the nonprofit sector — requires action from government, whose toolkit and capacity to provide support dwarfs ours. It was for just such a day that we have long been investors in the charitable sector’s infrastructure, and we are supportive and grateful for organizations like Independent Sector, whose efforts have ensured that the massive federal relief act passed last week did not overlook the nonprofit sector and its vital role in the broader community. We are committed to supporting such advocacy efforts on behalf of the sector, as well as to helping our nonprofit partners access and put to use funds made available by the CARES Act.
* * *
Following the usual form for these missives, this is where I step back and say something inspiring about how we’ll get through it if we keep our heads, work together, and act with kindness and empathy. And I think that’s right, because we will get through this if we do those things. But the moment calls for an eloquence that, I fear, is beyond me. So, instead, I’ll quote someone else: America’s most astute expositor and critic, Alexis de Tocqueville. After writing about the unruliness of American society, Tocqueville famously observed:
The perpetual change which goes on in the United States, these frequent vicissitudes of fortune, these unforeseen fluctuations in private and public wealth, serve to keep the minds of the people in a perpetual feverish agitation, which admirably invigorates their exertions and keeps them, so to speak, above the ordinary level of humanity. The whole life of an American is passed like a game of chance, a revolutionary crisis, or a battle.
As always, Tocqueville is spot on — except the moment we are in has elements of all three states: of chance, of crisis, and of battle. His point, though, is that we are built to handle this kind of moment — and not just Americans, of course. People everywhere have the capacity to find hope and step up to the challenges of the moment. If, that is, we can find it within ourselves to be our best selves.
I am proud to represent the Hewlett Foundation at this moment, to speak for our board and staff in saying that we remain dedicated to your missions, your work, and the good you create in our world. And that we are eager to work alongside you and do what we can to help in the weeks and months ahead.
Larry Kramer
President
William and Flora Hewlett Foundation