Economic Situation has a Magnified Affect on Charities
Adam Aptowitzer, January 17, 2009
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| The entire world is following with concern the effects of the volatile economic situation around the world. While no one seems to have any idea what is really happening, it seems apparent that everyone is suffering. In particular, charities seem to be suffering from more than one direction. |
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| The first and most obvious way is that charities dedicated to relieving poverty obviously have greater restraints put upon them in times when more people are suffering from poverty. Unfortunately, just as the individual suffers from these economic troubles, so too does the charity. |
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| On the investment side, charities with endowments are still subject to the prudent investment rule. The prudent investment rule, of course, requires directors to invest assets in a conservative and prudent manner. It seems that despite the rule that many professional advisors have advised their clients as to prudent and conservative investments within the stock market. While at the time, this probably seemed appropriate in hindsight, it seems obvious that this was disastrous for charities that held large endowments. It should be remembered that charities still need to meet their disbursement quota requirements by spending 3½% of the initial gifts to their endowments. This may require charities to dip into their principal in order to meet their disbursement quota. Thus, within the investing context there are two problems facing charities. The first is how to invest prudently in a market where it does not seem that anyone is able to make any rational decisions. Secondly, how does a charity manage to make enough income in order to meet its disbursement quota when, otherwise, corporations, previously considered safe, are failing and interest rates are plummeting. |
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| Finally, the other most obvious way that charities are being affected is in respect to donations. While the recent innovations in non-taxability of public securities make eminent sense and were extremely successful during good times when the market was doing well. When the market is doing badly, these innovations are of no help to the charity trying to raise money. On the other hand, donations of shares to a charity which have decreased in value will crystallize the capital loss which can be used against a capital gain at some future time (assuming, of course, the donor eventually has a capital gain). Of course, given that capital gains are only a recent memory capital losses may be crystallized so as to be carried back three years. This might prove to be the only carrot the charity has to encourage those with large capital losses to donate their shares to charity. |