In this special installment of the “Foundations” series, Hewlett Foundation President Paul Brest discusses the impact of the current economic crisis on the Foundation and its grantees.

What impact has the current economic crisis had on the Hewlett Foundation’s endowment?

Like virtually everyone who participates in the markets, from Warren Buffett to the individual owner of a 401(k), the Hewlett Foundation has seen its wealth greatly reduced. Hewlett’s assets are broadly diversified and managed by one of the best teams anywhere, but no one can escape the effects of a downturn this massive. From a high of more than $9 billion in early 2008, our endowment currently stands at approximately $5.9 billion.

How is the Foundation responding to this reduction in assets?

In two ways. First, although Hewlett has always had very low administrative costs compared with those of other large foundations, we still found ways to streamline expenses in our 2009 and 2010 budgets.

Second, our grants budget will be smaller for the foreseeable future. Assuming that the economy stabilizes, it will be $344 million, or slightly more than what it was in 2005. We didn’t think that was small then. The challenge is managing this steep reduction while minimizing the harm to the populations that we and our grantee organizations serve.

How will this smaller grants budget affect Hewlett’s grantees?

To smooth the reduction in our grants budget, the Foundation’s Board has raised giving as a percentage of the Foundation’s endowment. But even so, in 2009, we will face an additional reduction of 20 percent in charitable giving over last year.

What’s important, both for the Foundation and its grantees, is to act strategically so our philanthropic dollars will still have the greatest possible impact. We have always focused our grantmaking on a limited set of objectives and tried to direct the Foundation’s support to the most effective nonprofit organizations. The need to do this has never been greater. We and our grantees need to marshal our resources where they can do the most good.

This doesn’t mean that nonprofit organizations should limit their thinking to the short term. This crisis eventually will recede, but the long-term problems we and our grantees seek to address will remain.

In light of all this, we don’t envision across-the-board cuts of a certain percent for all grantees. Our program directors are going through an intensive process of evaluating the Foundation’s strategies in each grantmaking area and focusing on those in which we think can make the greatest difference. We’re considering areas of work that might be modified, combined, or (unfortunately, in some instances) even eliminated.

Finally, we will continue to assist our grantees through organizational effectiveness grants, and we hope to facilitate collaboration or even consolidation where appropriate.

Does this mean the Foundation won’t be taking on new initiatives?

Generally yes, until the economy begins to right itself. But we’re open to considering special opportunities or urgent needs. The Community Leadership Project is a good example. Together with the David and Lucile Packard and James Irvine foundations, we’re committing $8 million to strengthen grassroots organizations that are led by or serve people and communities of color in California. The Community Leadership Project is responsive both to the long-term needs of the communities these organizations serve and to their particular vulnerability in the current economic crisis.

What do you think about the argument that foundations should spend down more of their assets in difficult economic times?

This is an ongoing debate in good as well as lean times. The central question is this: Should a foundation spend all of its assets today, or spend only the income they generate to preserve the ability to make grants in the future – perhaps in perpetuity?

To my mind, the answer lies in a foundation’s particular mission, goals, and strategies. What were the wishes of those who created the foundation? Are the problems it is seeking to address likely to have a more certain solution at some point in the future? How fast is a given problem growing compared with the resources the foundation is marshaling to solve it? How much consideration should be given to providing future generations with resources to solve the problems they might face? These are questions each individual foundation must address.

We view the matter with some flexibility and are willing to weather a decrease in the size of the Foundation’s endowment over the short term if that will achieve important goals. For example, one reason that we are spending more than usual right now, intentionally drawing down our assets despite the hit we have taken from the markets, is to continue to address the problem of climate change. Our Board of Directors believes that money spent today to reduce greenhouse gas emissions will have much greater benefit now than sometime in a much warmer future.

In light of the severity of the current economic crisis, how will Hewlett and its grantees be affected over the longer term?

The next several years are likely to be difficult for every sector of society, including the institutions that we and other foundations support. Let’s assume that the economy will be on the path to recovery within five years – although we hope sooner. We are asking how today’s grantmaking can prepare us to meet anticipated needs then, with a particular eye to organizations currently threatened by the economic crisis that will be essential to their fields in the long run.