News

Building on a foundation of giving
Some foundations oversee a growing amount of the country's money for charity, writes David Reevely.

David Reevely
The Ottawa Citizen
March 2, 2004

The people who run Canada's charity foundations breathed sighs of relief as 2003 ended. The financial markets had improved dramatically in the fall, so a major source of money for the country's charities was safe again.

The previous year had been terrible for many foundations, which oversee an increasing proportion of Canada's charity money. They work by investing donors' money and then, at the end of the year, giving the proceeds to support charities that spend money directly on programs. If the investments go bad, there's no money to hand out.

"Oh, it was awful," says Peter Doherty, an Ottawa investment adviser who counsels several charity endowments in the city. "In Canada, many funds lost 10 to 15 per cent of their value."

Still, it could have been worse: At a recent gathering of foundation officials in Vancouver, some from the United States had been dealing with 40- to 50-per-cent declines, Mr. Doherty said. "My jaw just dropped."

"It can be totally devastating to have a bad year," says Barb McInnes, the chief executive of the $70-million Community Foundation of Ottawa, which Mr. Doherty's firm advises. "If you have losses like that, not only are you in a position where you can't make the grants people are counting on, but you're cutting staff and operations so you don't have the resources to try to bring in more donations to make it up."

Foundations are no longer the preserve of big-money causes, such as curing diabetes or supporting universities. Over the last decade or so, with governments cutting grants and baby-boomers confronting their own mortality, small charities and middle-class families have been setting up their own endowment funds.

That's reduced many organizations' dependence on government money; now, they depend on the performance of the financial markets.

Canada had 8,353 registered charitable foundations last year. Even that number is misleadingly low, because many of the smallest endowments have banded together in groups; Ottawa's 15-year-old Community Foundation, for example, is one organization but oversees about 500 separate endowments.

If you have $5,000 to invest, you can get one yourself, Ms. McInnes says.

The donors sign over the assets they want to use, the Community Foundation invests them, and then it distributes the proceeds every year to causes the donors want to support, less a 1.5-per-cent administration fee for all but the largest endowments.

That fee buys investment advice from Mr. Doherty; disbursement advice from professional charity advisers; and a board that includes former mayor Jacquelin Holzman, former Citizen publisher Russ Mills and a dozen other Ottawa business executives, professors and lawyers.

It's the advice on donations that's most valuable to the majority of people, Ms. McInnes says.

"As hard as it is to know where to invest money, giving away money sensibly is really, really hard," she says. "You can do a lot of harm by giving away money badly, to organizations that don't know how to use it properly, that don't have the capacity."

Many people who start foundations want to apply their money strategically, she says, to give the $1,000 that will keep a shelter operating or a research project operating, but it's impossible to identify those opportunities without being familiar with the charity landscape in the city.

"That's the expertise we bring," Ms. McInnes says.

Though the foundation itself is pretty low-profile, it administers several well-known funds in Ottawa, such as the memorial fund for murdered teachers Bob and Bonnie Dagenais, Tom Green's Nuts Cancer Fund, and the anti-homelessness fund set up by former city councillor Alex Munter. It also manages the assets of the Citizen's literacy foundation.

Most of the foundation's funds, however, are named after people who haven't been in the news. People who aren't -- or weren't -- wealthy, but want to leave a lasting mark.

"What we're seeing is the generation that scrimped and saved and did without, that never took a vacation and always made sure to put a little money away, thinking about leaving something behind after they're gone," Ms. McInnes says. Rather than making bequests to, say, the Ottawa Hospital, they prefer to have grants made from funds in their own names.

Furthermore, she says, the Community Foundation will probably be around as long as Ottawa is.

"For many people it's not a major consideration, but what if, for example, they cure cancer?" she says. "I don't think the foundations that support searches for cures would just disappear, but looking far into the future, you don't know what might happen."

She points to the demolition of the Grace Hospital in 2001 and the conversion of the Riverside Hospital to an ambulatory-care centre.

"I don't think anyone who donated to those foundations would be terribly unhappy with what happened to their money," she's quick to say, given that the Salvation Army (which ran the Grace) still exists and the Riverside is now part of the Ottawa Hospital, "but sometimes institutions you think are permanent turn out not to be."

Funds run by the Community Foundation, she said, will be used for purposes as close to the donor's original intent as possible, even a century from now.

The concept seems to be working. In its 15th year last year, the Community Foundation gave out $5.5 million in grants. Ms. McInnes was one of the first two volunteers; now she's making roughly $100,000 to oversee the foundation's 11 paid staff and deal with donors, recipients, and the investment counsellors, according to the foundation's tax filings from last year.

The Vancouver Foundation, which had a 45-year head start on Ottawa's group, is the biggest community foundation in Canada, with $516 million in reported assets last year.

It also had the benefit of expanding during some really good years that the Ottawa foundation missed. Those were the years when the federal Finance Department came up with the rule that said charity foundations, to keep their legal status, had to give out at least 4.5 per cent of their assets every year.

According to Finance spokes-man Chris Heggtveit, the rule dates to 1984.

"The disbursement requirement ensures that foundations do not simply accumulate gifts of capital assets, but rather use the income generated by such assets to provide a flow of funding for charitable programs and services," he says. It also prevents the very wealthy from moving money into phoney foundations for the tax advantages and then never spending the money.

"If the foundation spends more in a year than is required by the disbursement quota, the excess may be applied against a disbursement shortfall in the immediately preceding year, or carried forward for use in any of the five subsequent years," he says.

The 4.5-per-cent rule was set more or less arbitrarily, Mr. Heggtveit says, to reflect what was considered a fair return on a foundation's investments.

Lately, many foundations would have been thrilled to make 4.5 per cent in a year.

Ms. McInnes, 60, has had a few bad years at the helm of the Ottawa foundation. It has had two years of very poor returns: its assets lost 1.6 per cent of their value in 1994; and in 2002, while almost everything else was crashing, its assets squeaked out a 1.56-per-cent gain. Last year, with returns of 10.85 per cent, was much more typical.

"We're very, very pleased with the advice we've gotten," she says.

The most risk-taking foundations in Canada generally split their portfolios about in half, Mr. Doherty says, with 50 per cent in guaranteed-yield investments, such as bonds, and 50 per cent in comparatively volatile stocks and other "equities." Even their stock choices tend to be conservative and diversified. In the U.S., aggressive foundations might have 70 per cent of their money in equities, Mr. Doherty says, and they buy riskier ones than Canadian foundations would consider.

"I guess they have more of a go-go spirit," he says. "I don't know why, but they do."

In general, as with most large financial organizations, foundations diversify their holdings as they get bigger. Ms. McInnes says that however good Mr. Doherty's advice has been, the community foundation will probably split its portfolio among two managers when its value reaches about $100 million.

The Ottawa Hospital Foundation, which mainly pays for research and new equipment at the hospital, divides its roughly $50 million in assets among three different money managers, says its chief executive, Susan Doyle.

"They have to go through a very rigorous selection process," she says. "We choose very, very carefully." (Ms. Doyle wouldn't say to whom the foundation board has trusted its money, however.)

Ms. McInnes, in her Albert Street office, has a chart showing her foundation's returns from every year since it was formed in 1987, which she uses to discuss the 4.5-per-cent rule.

"I think that rule made sense around here," she says, circling with her finger years in the late 1980s with percentages of about 11, 12, and 18.

"That's a problem when we're down here," she says, circling more recent years lower on the page, with percentages of about five, eight and 1.5.

The community foundation, says Ms. McInnes, grants 4.5 per cent per year, no more. Extra returns go back into the investment funds so they'll grow faster.

Touching the principal is forbidden.

"We have a legal obligation, not to mention an extreme moral one, to be stewards of the funds entrusted to us," Ms. McInnes says. In the foundation's two really bad years, she says, the board reached a compromise to spend beyond the investment returns, on the theory that a chunk of the money in the funds came from surplus returns from previous years -- so technically, they weren't granting out the actual money the original donors had invested.

That compromise, she concedes, wouldn't hold up if the financial markets had several bad years in row, and it wouldn't work for a foundation whose investment strategy was more aggressive, more American-style, and therefore prone to big losses.

What's ironic about the situation is that it's actually governments that have pushed foundations to make riskier investments, says the former treasurer and current vice-president of the Jewish Community Foundation, Gregory Sanders.

"A couple of years ago they came in with this 'prudent-man rule,' which says essentially that trustees have to make their investments the way a prudent man would," he says.

In Ontario, before 1998, money administered by trustees could only be invested in a limited number of very conservative ways. That year, the provincial government abolished the list and changed the regulations so that charity foundations, among other groups, could put their money anywhere a "prudent investor" would.

The rule has interpretations going back to at least 1830. But in 1998, the financial markets weren't behaving normally. Enron was flying high. Nortel was on its way to $120 a share. Even basically sound, non-high-tech equities were rocketing up in price.

In many cases, foundation directors felt that the old conservative investments were actually imprudently cautious, and now the law required them to put their money into higher-yield (but also higher-risk) investments.

They bought more equities, then the bottom fell out of the equities market. The decline began in late 2000, but the markets didn't hit bottom till 2002.

That year, the Ottawa Jewish Community Foundation had a real problem. Its structure is similar to Ms. McInnes's foundation, but it's aimed at Ottawa Jews who want to support Jewish causes. Unlike the non-sectarian Community Foundation, which made a tiny gain, the Jewish Foundation lost more than $400,000 on assets of about $25 million in 2002.

"We looked at the organizations we were granting to and, essentially, they really needed the money," says Mr. Sanders, a chartered accountant and tax lawyer at Soloway Wright. "They were counting on it. So we made the decision to meet our commitments and we disbursed I think it was about $1.2 million."

(Mr. Heggtveit, of the Finance Department, points out that in special circumstances, such as a brutal year on the markets, foundations can apply for a waiver from the Canada Customs and Revenue Agency to exempt themselves from the 4.5-per-cent requirement for one tax year.)

After the bad year in 2002, the Jewish Community Foundation took a hard look at its investment strategy, deciding to move to a much more conservative approach and to split assets between two managers. That's been a typical response for foundations that got burned over the past few years.

"The primary goal of any foundation is to show good stewardship," Mr. Doherty says. "If you don't have that to show donors, there's no reason for them to give you their money. ... You give up a little reward, you give up a little return, for the sake of reliability."

Donors generally understand that a bad year on the markets isn't any particular charity's fault, but they're still happier to see good returns than poor ones, he says.

Charities are likely to come to depend on foundations even more, he says.

"Government funding is dropping. They want a more secure source of funding," Mr. Doherty says.

In most years, a cautious investment strategy will produce that security. As the past few years have shown, sometimes even the best financial advice isn't quite enough. Sometimes optimism has to take the place of hard returns on investment.

"You have to be an optimist in this business," Ms. McInnes says. "That's the only way I can be here, is by believing that the future is going to be better than the past."

The Charity Industry

Today: Why foundation directors are sighing with relief. And the birth of Algonquin College's new charitable fund.

Tomorrow: How 'sound-alike' charities threaten the real McCoys. And Ottawa's top-gun fundraisers.

To find a searchable list of Ottawa's registered charities, visit www.ccra-