My July 2020 column focused on a number of philanthropic gift planning strategies in light of the Coronavirus Aid, Relief and Economic Security (CARES) Act, the ongoing impact of the Tax Cuts and Jobs Act of 2017 (TCJA), lessons learned from prior pandemics, changing demographics and other factors.1 When I wrote that article, there hadn’t yet been enough time to gauge the impact of COVID-19 on voluntary financial support of the non-profit sector.
This month, some seven months after U.S. charities began to feel the effects of the pandemic, I examine patterns that have begun to emerge. While the impact initially appeared to be random and unpredictable, the ramifications of the pandemic on charitable funding have now become more clear.
I was asked to focus in this column not so much on the technical aspects of planning gifts in light of COVID-19, but instead on information that could be useful to readers in their capacities as advisors to charities and philanthropic clients, board members, donors and volunteer fundraisers.
The observations set out here are based on input from a number of charitable organizations across the country engaged in various service sectors, as well as professionals who advise non-profit clients and individuals who are philanthropically inclined.
After considering all of this input, five primary factors have emerged that I believe help define the impact of COVID-19 on the funding of the philanthropic sector. Let’s consider these factors and their role in determining the impact of the pandemic on non-profit funding.
Nature of Mission
Perhaps unsurprisingly, the most important factor overall in understanding the impact of COVID-19 on philanthropy appears to be the nature of the mission of an organization or institution. Regardless of other pertinent factors discussed below, there’s an underlying “mission-based” factor that heavily influences the impact of the others.
First, the degree to which an organization’s mission is directly or indirectly related to addressing the human and economic consequences of COVID-19 thus far appears largely to determine the pandemic’s effect on its voluntary funding.
Those charities whose missions aren’t closely related to the effects of COVID-19 are in many cases experiencing greater economic challenges. In addition, some organizations are facing what may amount to existential challenges because of the impact of the virus on their ability to realize their traditional funding strategies.
Another group of charities has been more affected across the board by job losses or other economic factors due to the pandemic, regardless of the nature of their missions. For example, a food bank located in a beach resort community typically thronged by summer vacationers that’s seen COVID-19 shutdowns severely erode its entire economic base will be more likely to have difficulty maintaining funding even as the need for its services grows.
Those charities that engage in non-COVID-19 related activities that they can characterize as “essential” societal services have, in some cases, been more successful in reducing the negative impact of COVID-19.
Others whose missions may not be deemed essential in times of pandemic, such as admission fee-based cultural institutions that have seen their program revenues fall precipitously, have nevertheless been successful in appeals for funds to ensure their survival with messages such as “imagine a world without X.”
It’s important to note that some nonprofits whose missions were already being questioned due to other economic, demographic or sociological factors are experiencing an acceleration of what was already looking to be their ultimate fate. For example, a number of educational institutions were already under stress due to trends toward online learning, the backlash against high tuition and lower birth rates, all of which will be steadily reducing traditional demand. The addition of the impact of COVID-19 to the mix may in combination present insurmountable challenges for a number of these institutions.
A study published in July 2020 evaluated 430 colleges and universities that are ranked by U.S News & World Report and assigned them to categories labeled “Thrive,” “Survive,” “Struggle” and “Perish.” (The initial “Perish” category was subsequently renamed to “Challenged.”) A surprising number of high profile institutions were predicted to face closure, merger or other dramatic changes as a result of COVID-19.2
Geographic Location
In my July 2020 column, I noted that early indications of the impact of COVID-19, as in the case of the 9/11 attacks, economic recessions and other events that challenged the finances of the non-profit sector in the past, have varied a great deal depending on geographic factors.
The first cases of COVID-19 in the United States occurred in late January 2020. Since that time, it’s become increasingly clear that the impact of the virus in terms of numbers of cases and mortality has, to date, been experienced unevenly across the country.
Many of the charts that have been widely distributed in the media focus on total numbers of cases and deaths on a state-by-state basis. For the purpose of our analysis, both cases and deaths may be better viewed in per capita terms. (See “Per Capita Deaths From COVID-19,” this page.)
For example, as of September 2020, the incidence of death from COVID-19 in New Jersey (the state with the highest number of deaths per capita) was one out of 553 residents. Compare this to one of 9,878 residents of Oregon and one of 28,895 in Hawaii. The national average at that time was one out of 1,833.
There were just 14 states (the majority of which are in the northeastern U.S.) that experienced above-average mortality rates. Their total population amounts to 29% of the total U.S. population, but these states accounted for 102,000 of the 183,000 total deaths, a disproportionate 56% of the total.3
One might speculate that those 14 states may have experienced higher mortality due to their older populations. In reality, the percentage of residents over 65 in those states averaged 16.2% compared to a national average of 16%,4 so other factors such as population density must be in play, and those influences will no doubt be ferreted out in future research.
Over time, the remainder of the United States may or may not ultimately experience the horrific impact of COVID-19 thus far suffered by a minority of the population. We have, however, to date witnessed a highly disparate impact of the pandemic when examined from a geographic perspective, and this phenomenon has been reflected in economic activity, including the nature and extent of charitable giving.
This uneven distribution of the effects of COVID-19 means that nonprofits that raise funds locally or regionally in areas where the impact of COVID-19 has been less severe haven’t faced the same extent of reduction in funding that’s been experienced by many local and regionally based nonprofits in harder hit areas of the country.
On the other hand, organizations that raise funds nationally have experienced mixed results that in the aggregate reflect where their larger clusters of support exist, with those with less exposure to the hardest hit areas experiencing less negative impact from the pandemic.
Funding Methodologies
Another factor that’s had a major impact on the extent of damage done to non-profit funding by COVID-19 is the way in which the nonprofits are funded.
Nonprofits enjoy revenue in different percentages from a number of sources, including individual contributions, corporate support, foundation grants, government funding, bond financing and other forms of borrowing, mission-related fee revenue and income from endowments, intellectual property and unrelated businesses they may own. As in the case of physical location and scope of operation of a charity, the pandemic has had an uneven effect on these sources of non-profit funding.
Individual giving in the form of lifetime and realized estate gifts amounted to nearly 80% of voluntary private support of U.S. charities in 2019.5
Even in the best of times, the amount of individual giving per charity varies greatly based on a number of factors. The impact of adding COVID-19 to other factors determining the level of giving by individuals appears to have depended to a large extent on the age and wealth of a given constituency.
As in the case of giving during the Great Recession,6 the impact of COVID-19 appears to be predictable to some extent based on the age distribution of a nonprofit’s support base.
For example, donors in the 55+ age range are either already retired or have for the most part not been swept up in the waves of COVID-19 related job losses. These donors are therefore less likely to have experienced reductions in available funds from which to make gifts. Couple that with the fact that older Americans are more likely to continue to be at home reading and listening to communications from charities, and it’s not surprising that organizations with older donor bases have typically seen less impact from COVID-19 than those that have relied more heavily on group events and other fundraising methodologies that appeal to relatively younger donors and prospective donors.
A surprising COVID-19 shutdown related phenomenon has been increased response rates in some cases from donor acquisition efforts in the mail and broadcast media and more responses to “donate now” buttons embedded in online content that sheltering individuals value and decide to support.
Funding from gifts from the estates of deceased donors hasn’t been significantly impacted by the pandemic. Organizations with large concentrations of donors in the 80-and-older age range that typically depend on a substantial part of their annual revenue in the form of bequests have, not surprisingly, seen less downward pressure on their overall philanthropic support.
For an organization that I’ve advised over the years that ranks among the top 25 U.S. charities in terms of funds raised, income from estate distributions and direct mail gifts from donors over 65 were the only revenue sources that met goals for their fiscal year that ended June 2020.
Contrast this with organizations that depend largely on relatively younger donors who may have suffered greater job losses and have consequently experienced a greater reduction in individual gift income.
This age-related impact may be partially or fully offset by gifts from younger individuals who are still employed but are working from home. These donors are in many cases enjoying substantial increases in discretionary income as expenses for commuting, child care and clothing have dropped dramatically.
Add to that the income not being spent in restaurants and on leisure travel. The restaurant industry grossed an estimated $863 billion in 2019,7 and leisure travel a reported $512 billion,8 for a total of $1.38 trillion. In comparison, individuals donated some 23% of that amount, or $310 billion, to U.S. charities last year.9 Just 5% of $1.38 trillion spent on travel and restaurants redirected to charitable purposes would, for example, more than make up for a 20% decline in individual giving. Consider that four dollars per working day no longer spent on designer coffee amounts to over $1,000 a year that could be directed to a local food bank.
The relative wealth of a donor constituency is also proving to play a major role in the impact of COVID-19 on levels of giving. When an organization enjoys a broad base of support from upper middle and higher income individuals, we’re seeing less impact on fundraising even in areas in which there’s been greater economic dislocation that’s led to a larger number of layoffs and business closures.
The wealthiest individuals are reportedly continuing their giving but are in some cases shifting support to local organizations that have been more heavily impacted by the pandemic. This shift seems to be particularly true of arts organizations, which have in some cases seen funding dwindle to a survival-threatening extent, and other organizations such as food banks that are directly serving those most impacted.10
Anecdotal information indicates that some wealthy supporters of nonprofits are continuing to make large non-COVID-19 related gifts but foregoing increases. In some cases, they’ve decided to increase their overall giving but direct increases to COVID-19 related missions.
The wealthy also appear to be shifting their philanthropic dollars away from brick and mortar and other infrastructure projects toward funding more current operational spending. Some high-net-worth (HNW) donors who had made previous commitments restricted to particular projects have subsequently removed those restrictions and allowed those funds to be redirected where most needed.11
Foundations accounted for some 17% of giving in 2019.12 Their giving appears to have been less affected by COVID-19, as the combination of federally mandated 5% annual payout requirements and investment markets that have maintained asset values on which those payouts are based have lent relative stability to this funding source. Some foundations have reportedly shifted their funding priorities to charities that have disproportionately suffered as a result of the pandemic. As in the case of HNW individuals, a large number of foundations have also pledged to remove restrictions on previously committed grants and allowed the funds to be devoted to payroll and other uses to help grantees weather the COVID-19 storm.13
Corporate support amounted to 5% of charitable gifts in 2019.14 This source largely has been unaffected when the nature of a business has insulated it from significant impact. Certain businesses, such as airlines, restaurants and other components of the hospitality industry have, on the other hand, been disproportionately damaged by COVID-19. As in the case of special events, to be discussed below, some charities depend more on corporate philanthropy than others. An example of negative impact is a national charity that benefits from a major corporate partnership with a restaurant, airline, hotel chain or other business that’s seen its revenues decimated by COVID-19. The corporation may honor current commitments but may or may not renew them at the same level.
Government grants and contracts represent a significant source of funding for a number of nonprofits nationwide. These funds are coming under closer scrutiny as the impact of COVID-19 erodes the tax base, but grants for what are deemed essential societal needs have yet to see broad cuts and may be augmented by additional federal relief packages.
Borrowing in times of historically low interest rates presents a viable alternative for some charities seeking to bridge the cash flow impact of COVID-19 by leveraging strong balance sheets. Others have begun to raise cash by selling or otherwise liquidating non mission-critical real estate and other assets.
Endowment assets overall have experienced record growth in recent years and have generated additional income that hasn’t yet been significantly reduced by COVID-19. In some cases, charities have also tapped capital gains experienced in recent years as a source of operating funds to help weather the COVID-19 storm.
Program fee-dependent nonprofits are among those under the greatest stress due to social dislocations caused by COVID-19, as this source of funding has been severely strained or has completely evaporated. These charities include educational and cultural institutions and others that derive a large percentage of their revenue from tuition, admission fees, ticket sales, gift shops and other program-related income. The loss of sports revenue has also posed a major problem for some of the nation’s largest universities.
Special events such as galas, walkathons, marathons, concerts, golf tournaments and other methods of fundraising that require large groups of people to congregate in close quarters have also been heavily impacted or rendered completely ineffective by social distancing requirements and sheltering in place orders as a result of COVID-19. Organizations that have heavily relied on a large percentage of their annual philanthropic revenue coming from such events have experienced deep reductions in their revenue that haven’t been replaced by other sources, resulting in extensive layoffs of staff.
Those nonprofits that have built a more balanced funding portfolio and been able to rely more heavily on direct mail, telephone, online channels and other less personal methods of fundraising have been less severely impacted by COVID-19 than those that have traditionally relied on events and other personal solicitation. Exceptions are those nonprofits that are benefiting from dividends coming from prior stewardship efforts in the form of larger gifts via phone, mail, email and other impersonal means.
Estate gifts have proven to be a resilient source of income for those organizations that have engaged in focused and sustained efforts to encourage gifts through estates over time. As individuals have continued to pass away during the pandemic, gifts from wills and other estate distribution vehicles have been relatively unaffected apart from pandemic-related delays in estate settlement and distribution. As investment markets have recovered and real estate has held its value or increased in many areas of the country, we haven’t yet seen a widespread reduction in the value of bequests being received by charities.
Alternative Methods of Giving
The most successful organizations have also recognized that there may be a silver lining in the COVID-19 cloud by taking advantage of economic and political factors that can be used to spur completion of larger gifts in this environment.
Record stock market values in spite of COVID-19 have resulted in wealthier donors making more large gifts in the form of appreciated securities. Some have also begun to express interest in donating what they consider to be excess real estate holdings in the form of outright gifts or deferred gifts that result in immediate tax benefits and a source of additional income.
With fewer itemizers among the ranks of older donors of means, more are choosing to give investment assets held in the form of individual retirement accounts through qualified charitable distributions in the maximum amount of $100,000 per year. Some with substantial assets and relatively low amounts of reportable adjusted gross income (AGI) are also taking advantage of the opportunity under the CARES Act to deduct gifts of cash of up to 100% of their AGI in 2020.
At the same time, historically low interest rates have increased the attractiveness of a number of tried and true planning techniques such as grantor retained annuity trusts, charitable lead trusts, sales to family members and other planning tools that benefit from low interest rates used to compute the value of transferred assets.
From a charitable dimension, planners are reminding their wealthy clients that the unprecedented high gift and estate tax exemptions introduced in the TCJA are slated to sunset at the end of 2025, and IRS guidance has indicated there will be no clawback of benefits for assets that are given to others prior to the scheduled sunset.15
Given the current economic and political environment, it now seems more reasonable to believe that the sunset may actually occur at some point as a method of raising revenue to help offset the enormous cost of funding the COVID-19 relief spending. This creates a new sense of urgency to act sooner than later on plans to transfer assets to heirs immediately or on a deferred basis.
Consider the case of a wealthy individual who hasn’t yet used his $11.58 million unified estate and gift tax credit. Through the use of a charitable lead annuity trust (CLAT), it’s now possible for him to place $20 million in a trust that will distribute its remainder to heirs in 10 years. The CLAT will make fixed payments of 5% ($1 million) each year to one or more charitable interests.
Assuming the applicable federal midterm rate of 4/10 of 1% as of August 2020, this results in a charitable gift tax deduction of $9.8 million and a taxable gift of $10.2 million to the heirs, which is less than the donor’s remaining unified credit. After the charitable beneficiary(ies) has received payments totaling $10 million, the heirs will receive the remainder of the trust when it terminates, including any growth of the corpus, with no additional gift tax due on the increase. Through this planning approach, the donor has effectively leveraged the $10.2 million exemption amount he used up to $20 million while also donating $10 million.
A lower interest rate environment also makes charitable remainder annuity trusts and charitable gift annuities funded with cash or appreciated, low yielding investment assets more attractive for older charitably inclined clients whose risk tolerance is appropriate for these sources of relatively high fixed income and immediate tax advantages.
These are just a few examples of how careful planning can make it possible to achieve both personal and philanthropic goals while providing cash flow that can be used by charitable recipients to help offset funding losses experienced during and in the wake of COVID-19.
Leadership Factor
It’s impossible to overstate the importance of strong philanthropic leadership during the COVID-19 crisis. Organizations led by highly motivated executive teams and volunteers who are willing to think outside the box have tended to fare better than others.
Instead of folding and retreating into survival mode, these staff and volunteer board leaders have carefully considered the unique calculus presented by the various factors outlined here and skillfully played the hand they’ve been dealt and, in so doing, diminished the impact of COVID-19 by quickly addressing their weaknesses and playing to their strengths.
For example, one opera company was faced with no revenue from its canceled performances and no practical way to stream performances. Its leadership decided to rent flatbed trucks and outfit them with generators and sound equipment and provide live performances for outdoor summer gatherings of socially distancing individuals celebrating a birthday, anniversary or other group occasion.
The opera company has generated substantial replacement revenue from these performances but perhaps more importantly, brought a welcomed break from the stress of the COVID-19 environment to those in attendance. This creative solution will also help build its brand and pay great dividends when the pandemic passes, while also helping provide funds to keep its talent engaged and at least partially compensated.
Finally, despite all of the ways that COVID-19 has changed the philanthropic funding landscape, the fundamental fact remains that the United States has long led the world in voluntary funding. History reveals that depressions, pandemics, terrorist attacks, natural catastrophes and wars have periodically presented what were in many cases extreme challenges to U.S. nonprofits, but in the end they’ve always exhibited creativity and ingenuity and evolved in ways that have resulted in even greater long-term positive impact on society.
Endnotes
1. Robert F. Sharpe, Jr., “Giving More Effectively While Awaiting Economic Recovery,” Trusts & Estates (July 2020).
2. www.businessinsider.com/scott-galloway-colleges-must-cut-costs-to-survive-covid-2020-7.
3. www.worldometers.info/coronavirus/.
4. www.prb.org/which-us-states-are-the-oldest/.
5. Giving USA 2020: The Annual Report on Philanthropy for the Year 2019, a publication of Giving USA Foundation, 2020, researched and written by the Indiana University Lilly Family School of Philanthropy, www.givingusa.org.
6. Robert F. Sharpe, Jr., “Charitable Planning During and After COVID-19,” Trusts & Estates (April 2020).
7. www.cnbc.com/2019/08/19/americans-putting-more-of-their-budget-toward-eating-out.html.
8. www.ustravel.org/system/files/media_root/document/Research_Fact-Sheet_Domestic-Travel.pdf.
9. Giving USA 2020, https://givingusa.org/giving-usa-2020-charitable-giving-showed-solid-growth-climbing-to-449-64-billion-in-2019-one-of-the-highest-years-for-giving-on-record/.
10. www.nytimes.com/2020/06/26/your-money/philanthropy-pandemic-coronavirus.html.
12. Supra note 7.
13. www.cof.org/news/call-action-philanthropys-commitment-during-covid-19.
14. Supra note 7.