Funding foundations feel the squeeze

One barely mentioned result of investment bank Lehman Brothers' collapse last September was the severing of funds to its charitable foundations. In 2006, The Lehman Brothers Foundation Europe distributed more than £1m to good causes in the UK, mainly to health and education projects for children and young people from disadvantaged backgrounds. Though the foundation will honour its existing commitments, the bankruptcy of its parent company means it has made its last grant, and affected organisations will have to do without the help of 8,000 of the bank's volunteers.

Financial wounds

The financial crisis has inflicted gaping wounds on other parts of the corporate sector noted for their charitable endeavours. Northern Rock was considered an exemplar of good practice for its annual gift of five per cent of pre-tax profits to its charitable foundation. In 2006, this funded grants worth £27m to charities and arts organisations in the North East, including projects that benefited children and young people such as Northern Learning Trust. In 2009, a nationalised Northern Rock, under the settlement agreed by Chancellor Alistair Darling, will give grants worth just £11.3m, a sum that is likely to be repeated in 2010.

Some foundations attached to financial institutions are trying to maintain giving levels. The Lloyds TSB Foundation for England and Wales received £20.1m from the Lloyds TSB Group for 2009, down from £26.6m in 2008. But it will maintain its main community programme of grants at around £19m, £3m of which will go to charities working with children and young people such as the Hop, Skip & Jump play centre in Bristol for children with special educational needs. "For us it's business as usual this year," says head of communications Louise Harley. "As for next year, we'll have to see what happens as a result of the merger with HBOS (which has its own separate foundation); we're still waiting for the dust to settle."

There is little doubt that corporate giving to children's and young people's charities will be constrained by the recession. According to research organisation The Directory of Social Change, 53 per cent of firms support children's and young people's organisations. In December, a survey by PricewaterhouseCoopers found 71 per cent of charities were expecting either no growth or a decline in corporate giving. Some charities told of a 50 per cent cut in income from current donors.

And it's not just corporate giving that is affected. Independent charitable foundations are experiencing a tough time. Their grant-giving, worth £2.3bn in total, is not as directly related to companies' profitability. But with trusts and foundations deriving their income from endowments invested in shares, property, hedge funds and bonds, they too are suffering.

Budgets cut

A poll by the Association of Charitable Foundations (ACF) has revealed that 42 per cent of foundations are planning to cut budgets this year, and just over a quarter are planning to change grant-giving criteria. For just under a third of trusts and foundations, children and young people are the top priority.

But the effect of these trends will be incremental. As David Emerson, chief executive of the association, says, independent foundations tend to base grant giving on income averaged out over 12 quarters. "On that basis we are only a couple of quarters into recession," he says. "The changes are smooth. Anything will be gradual and we'll see it coming."

Emerson believes organisations reliant on funding from charitable foundations will notice the effects of the recession next year.

Whether foundations will be unscathed or whether they will have to cut grant-giving depends on several factors. One is whether the foundation has a permanent endowment or is able to spend all its money. The former cannot let their capital drop below a certain level, so will have to cut back on grant giving. Those with no such constraints have more room for manoeuvre.

The Henry Smith Charity is already reducing its grant spending. The trust, which gives 15 per cent of its grants to organisations working exclusively with children and young people, had assets of more than £770m in 2007 but they lost 23 per cent of their value in 2008. The trustees decided to reduce the 2009 grants budget by 10 per cent, or £3m. Chief executive Richard Hopgood says: "It looks like we are in for a long recession and a difficult recovery. We are not confident of a quick recovery in values.

Lower dividends

"Partly we are spending a lot more capital than we expected because our dividends are lower. In 2007 virtually all our spending was covered by income, in the current year less than half is." Hopgood says the charity has not ruled out a further cut in the grants budget this year.

But foundations are also aware that an economic downturn is just the time when their support is most needed. "Most foundations are mindful that there is a much greater need for services now than there has ever been," says Mubin Haq, director of youth and policy at the City Parochial Foundation.

"So they want to try to maintain funding at the levels they have been at previously for as long as possible."

City Parochial's grant spending for 2009 remains unchanged at £6.3m, which includes support for organisations such as Raw Material, a Lambeth-based music and media education project, which aims to help young people break into creative industries.

Drop predicted

NSPCC is among the organisations that will be affected by the cutbacks. "There is no doubt our income from trusts and foundations will be down," says Dominic Evers, the NSPCC's development manger for trusts.

He predicts that there will be a drop of between 10 and 15 per cent. Some trusts are deferring decisions on the charity's applications because they do not have the income to make grants at the moment.

Given that the same or even larger number of children's and youth organisations will be chasing a shrinking pot of money, there will be winners and losers. Evers suggests those organisations that make an effort with their relationships with funders will reap the benefit when foundations decide which organisations they should prioritise.

The ACF's Emerson believes that trusts will want to ensure the survival of those infrastructure and intermediary bodies that provide support to the children's and youth sector. Other organisations, with more narrow groups of beneficiaries, may be expendable.

"People will, I imagine, want to support the bodies that provide support to others, they may let individual projects go," he says. "That's their guess, that's what they've said to me. If they have to tighten up they will be looking at the organisations that will keep this sector in the best shape.

"You want to have the capacity there for when you come out of the recession."

CHARITY DISCOVERS A FUNDING DESERT

Foundations are more cautious about who to fund than they were a year ago, according to Caroline Penn, chief executive of Teens Unite Fighting Cancer. The Hertfordshire charity, set up in 2007 by fashion designer Karen Millen, applied to six foundations in autumn 2008 for a range of projects for young people with life-limiting illnesses.

Applications to Esmee Fairbairn Foundation and Lloyds TSB Foundation were rejected. Another two had their original November deadline postponed until March, and then again until April. Penn thinks foundations are delaying funding decisions because they are unsure how much money is available. But for smaller charities it's not just the size, but the timing of the awards that matters, she says. "For some of the projects we had planned for later this year, we needed a guaranteed income by the end of March. Otherwise we can't go ahead with them."

Risk-aversion

She says the economic climate has made foundations less willing to back the unknown. "We want to develop, but are often told: 'You're too new; come back in a year'."

The charity plans to take a group of teenagers on holiday for a week this summer. It was hoped that the trip could last for two weeks, but everything has had to be scaled back, says Penn.

Two of the three paid staff members have halved their working hours. "We've had to do it to keep the charity going, because of the lack of money from foundations," says Penn. "If we can't cut our hours further, we'll have to cut our services. If we can't provide a quality service, we'd rather not provide one at all."

Penn would be willing to merge with another charity with the same remit, but she says none exists.