Janet S. Sweet
CFA, CAIA

Senior Consultant

Inflation Impacts Foundations in Unique Ways

March 2022

 

Inflation is at the top of most minds—and with good reason. The most recent information released by the US Bureau of Labor Statistics cites that the Consumer Price Index rose 0.8% in February and rose an eye-popping 7.9% over the last 12 months.  Most of us struggle to recall the last period in our lives where we saw inflation at these levels.  While inflation affects all of us most noticeably at the personal level, it can affect our Not-for-Profit Foundation clients in unique ways.

 

Inflation will erode a Foundation’s purchasing power.   When Inflation rises at a rapid pace, the immediate annual allowance for spending will struggle to keep up with the rising costs of the beneficiaries’ needs.  During these cycles, some Foundations may be wondering, “Should we be spending more?”  Each Foundation has its own answer to that question, which can only be answered after fully analyzing and understanding the consequences of the situation.  At Goelzer, we assist clients by discussing the how such decisions might affect the Foundation’s long-term goals and objectives.

 

The needs of the Foundation’s community will increase. Higher costs of food, transportation, and housing lead to greater insecurity among individuals at or near the poverty level.  Pair this with the potential that donors are also watching their paychecks shrink and Foundations find themselves in a familiar conundrum—a cycle when the spending need is greatest and potential donors are hesitant.

 

Successful Foundations understand that a comprehensive investment program consists of three components: the investments, the contributions, and the spending.  Each component has an important role to play in achieving the ultimate goals of the organization, and each is sensitive to external influences in unique ways.  Developing a plan that establishes objectives for each of these inputs, and identifying the ideal, likely, and unacceptable outcomes is a proven way to prepare for the challenges ahead.

 

The Foundation’s internal operations will become more challenging. Inflation and supply-chain disruptions are making certain goods and equipment needed for running the operations of a Foundation more expensive.  Salary expenses are also increasing as staff requires higher wages to make ends meet.  Foundations who already operate on a tight budget have few options available for cutting back.   Further, the shortage of workers in the US and the demand for higher pay makes it challenging for Foundations to compete with private companies who can afford to offer more attractive wages and benefits.  Staff turnover is likely to be higher and positions harder to fill, causing disruptions in day-to-day operations.

 

Unlike corporations who can more easily manage the impact of inflation by passing rising costs on to their customers, a Foundation bears the brunt of inflation on both sides of cash flow statement.  The need to maximize all resources both internal and those that are outsourced is essential to continuing the good work of the organization.  Foundations today need stable partners who can assist with their operational needs, alleviating burdens from their internal staff.  Goelzer serves our clients in this way, believing it is our obligation as a firm who feels strongly about helping our communities.

 

While Foundations posted strong performance in 2021 that more than kept up with rising inflation, we are seeing a different story in 2022, making it important to look at these issues now versus waiting until year-end.

 

Community Foundations are unique Not-for-Profit enterprises.  It should be no surprise that inflation can affect them in unique ways too.  Goelzer is committed to providing proactive solutions to our clients and is proud to partner with them to help reach their goals. Together, we will weather the challenges ahead, whether those challenges come in form of inflation or market downturns. Our approach is consistent and proven: focus on the long-term, prepare for the unexpected, and keep all things in the appropriate perspective.

 

 

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