Low unemployment, strong stock market performances, and increases in corporate profits made 2018 a stellar year for grant-making foundations and charitable trusts. The sector is primarily fueled by private contributions from individuals and corporations, investment returns, and capital asset gains, so when economic conditions are favorable, grant-makers do well, too. And when grant-makers do well, it benefits the not-for-profit organizations that rely on donations, grants, and endowments to support their programming efforts.
Growth has been steady for donations, grants, and endowments over the past five years, with revenues in the sector growing by an average of 3 percent between 2013 and 2018, according to data compiled by industry analyst IBISWorld. Signs are looking good that the sector will continue to grow. The following provides a brief outlook on growth and other trends that may affect donations, grants, and endowments in 2019 and the years to come.
Economic conditions are of two-fold importance for donations, grants, and endowments because they affect both the assets held by the grant-makers and the assets held by potential donors to those organizations. The S&P 500 index, per capita disposable income, and corporate profits all increased in 2018, in part because of tax reform’s corporate and individual tax cuts.
The yield on the 10-year Treasury note also increased as a result of the gradual increases the Federal Reserve has been making to interest rates. Many foundations rely heavily on fixed-income securities like the Treasury note, which benefit from higher interest rates.
The combination of positive trends will likely result in the sector experiencing a 4.6 percent increase in revenue by the end of the year, according to IBISWorld data.
Contributions and Investment Returns Projected to Rise
Private contributions and investment returns are two of the largest sources of revenue for donations, grants, and endowments. Corporations have been increasing their contributions by a rate of 5.2 percent per year over the past five years, and individuals have been increasing their contributions as well, growing 5.2 percent in 2017 according to Giving USA statistics.
Signs indicate that although corporate profits are expected to decrease after 2018, contribution levels from corporations is projected to remain steady over the next five years. The S&P 500 index is predicted to continue its growth pattern, which may lead to an increase in investment income that could potentially offset the slowdown in corporate profits. Additionally, the per capita disposable income levels are projected to increase, which could lead to increased giving from individuals.
Demand Only Increasing
Continued growth in revenue for endowments, donations, and grants is good news for not-for-profit organizations, particularly two of the largest consumers of the sector: Educational groups and health care related programs. Both education and health care continue to see increases in costs for their services, which creates a steadily increasing demand for grants, donations, and contributions. Industry indicators suggest that foundation giving will moderately increase over the next five years (a projected 2.5 percent annualized increase according to IBISWorld), with many groups sustaining the current programs they support.
Factors to Monitor
Because the health of grant-maker assets is intrinsically tied into the economy, fluctuations in the stock market could have a significant impact on the performance of donations, grants, and endowments. Foundations and charitable trusts may also be vulnerable to political events, and changes in business culture, such as declines in corporate giving strategies.
What also remains to be seen are the effects of the tax reform law, commonly referred to as the Tax Cuts and Jobs Act (TCJA). Corporations received a significant tax break in 2018 from the reduction in the corporate tax rate, but in the second year with the new rates and thresholds, profits may normalize. Additionally, changes to individual tax provisions may make tax incentives for charitable donations less popular. The TCJA increased the allowable individual tax deduction for a charitable contribution to 60 percent of adjusted gross income, but it also doubled the standard deduction and eliminated or limited many other popular individual tax provisions. Individuals who choose to take the standard deduction instead of “itemizing” their taxes cannot take the charitable contribution deduction.
Additionally, changes to the estate tax may affect high net-worth individuals’ charitable giving strategies. The TCJA temporarily doubled the threshold for the estate tax, making fewer estates subject to the 40 percent tax rate. Popular planning strategies, such as gifting assets with high appreciation potential out of the estates or establishing charitable lead trusts may be utilized less often until the expanded threshold sunsets at the end of 2025.
Planning for the Future
There are a lot of variables that could affect performance of grant-making agencies. Organizations that rely on grants, contributions, and endowments will want to carefully follow market indicators, as changes there could have an impact on the contributions they receive from charitable trusts and foundations. For more information on grants, donations, and endowments, please contact us.
Published on December 19, 2018