Episode 92: Inflation and Philanthropy - Understanding the Challenges, Part 1

Welcome to another edition of "Around with Randall", your weekly podcast making your non-profit more effective for your community. And here is your host, the CEO and Founder of Hallett Philanthropy, Randall Hallett.

It's great to have you back here on this podcast of "Around with Randall" and I'm, of course, Randall. Today we start a two-part series on the effect of inflation in philanthropy. So the first part we'll take apart today, which is what are the issues that we're going to be dealing with. The second part of this two-part series will be on what are some solutions. Would love to try to put them together but realize if we keep to the format which is trying to keep it between 15 and 20 minutes we can't do both in one, so we're going to make it a two-part series. Today, what's going on in inflation. How does that affect our nonprofit work in philanthropy overall?

So let's start with the basics and talking a little bit about inflation. So what we know is the latest numbers as we are recording this in July is that year-over-year inflation is about 9.1%. Now I'm 51 years old and i have very faint memories of inflation in the 1970s and when I say faint I mean just basically remembering that things got more expensive because I was so young. I think that that's a real challenge here when we look at what happened with the federal reserve. And it's really, it's chair people, over the years, they really learn from the 1970s and those high levels of inflation to raise and lower interest rates to keep inflation in check. When the pandemic happened that got all out of whack and for the first time in basically 40+ years we have pretty high inflation, consistently. And there are not as many people who experienced it all those many years ago that are still working or still leading. So we've got a new group of people who are trying to figure out how to do this. The problem is, and I've explained this a couple of times based on at least my own amateur reading of economics and the fact I love it, is inflation's the one thing that can really [ __ ] an economy and quickly. Most importantly, the people inside that economy or that economic structure because at some point no matter what you do the cost of basic needs going up can be devastating, and we'll talk about some examples here in just a second. How maybe we can look at it from a donative or philanthropic intent. This is also on top of what has come out here recently from Giving USA about charitable giving.

Overall the report indicated accurately so obviously that charitable giving's up in total, but some of us who have been watching numbers for five, six years, and if you listen to the podcast, listen to me, listen to others. People I have a great deal of respect for have been saying the number of donors is dropping precipitously, meaning that bigger gifts are making more of a difference. Well, this is going to possibly take that change and put it on steroids because people are going to have, as we'll talk about here in a moment, less disposable income, which means less people making donations or philanthropic gifts to non-profits. So there's this storm that's coming and inflation's right in the middle of it.

We also have some uncertain economic indicators and, which is confusing, some economists and I find it interesting. I don't think I'm smart enough to even be confused but we probably are in a recession and a recession is defined as two consecutive quarters where there's loss of GDP. I think that the numbers are going to come out and say we're in it, or we just have gone, or we're going to go into it, in the very very near future. That's not good. But on the other hand, jobs are plentiful. If you're looking normally, historically, we think of a recession and we think of businesses pulling back which means they may lower the employees that are working there, and as a result we have a change in kind of this inflationary and unemployment status. The problem is that we have the inflation but we don't have the job pullback, which is a little confusing and frankly a little concerning because then you don't have past models that can help you or guide, help guide those at the top in terms of economic decisions from the fed, from certainly the labor department, from other huge governmental or pseudo-governmental agencies. So we don't know what's happening.

I think it's important that - let's talk about an example. Let's put it into a perspective maybe we can all understand. Let's say that you have a family making $300,000 a year and if you want to make it $600 because you're in California, that's more of a major gift level, $300,000 in the midwest or in the south would be an enormous salary. Probably allows for what I call disposable or what they call disposable income, and philanthropy depends much of the time, at least the size and scope on this disposable income principle. It's hard to go to someone to get a major gift when they don't have any money, or all the money there you, that they have on a monthly basis is going towards basic needs, housing, gas, food, necessities. So let's take this family. They're making $300,000. What is inflation doing? What we know is at a minimum that over the last year families basic necessities have increased about 500% per month so that would be food and gas, rental. Now if you have a fixed rate mortgage that's not going to change but the things around it have gone up and the national average is just under 500% but let's take that $300,000 income family who may have some disposable income in normal times what else could be going up.

What we know is that people who make a little bit more money or have a growing salary tend to buy bigger houses and as we learned in the great recession uh 2008 to about 2011 or 12, people bought bigger houses and they really could afford or bought houses at all that they couldn't afford and they were able to do so on what's called an adjustable rate mortgage, meaning they get a set rate at a lower price and in three to five years depending on the terms the rate changes. What's happened to interest rates? They've gone up. Now they've moderated a little bit but they've gone up. Let's say you had an adjustable rate mortgage that you took out before the pandemic and all of a sudden it comes due and you were paying let's say 2.5%, 2.75% on your mortgage and as it resets it's now up to 4.5% or 5%. Your housing payment went up. What happens if you had to buy a new car? What we're seeing is is that cars are extending, or banks are extending loans out to five, seven, eight years to keep the payments slow. But if you need a new car interest rates, newer car, higher expense because of the situation with microchips and supply and demand.

That's more, what about credit cards? If you are used to using credit cards as a financing mechanism, meaning you don't pay them off every month, that interest rate's gone up. When you start adding all of this up there are some economists who think that the estimate could be close to a thousand dollars a month for families that have a little bit bigger home on an adjustable rate, maybe purchased a car in the in the recent year or two, and have credit card debt. So now you're talking about a $300,000 family that has as much as $1,000 more in expenses can't ignore them. That's $12,000 less disposable income. Now you start applying that over multiple households, you can begin to see how challenging this becomes. You have less people that can make a major gift or they can make a bigger difference. That's concerning.So that's kind of the bigger picture.

Let's look inside a nonprofit for a second. What does that mean? Well, let's say you have a series of regular donors that they make a $25 gift a month. If you listen to the podcast probably in earlier editions I've talked about some of our, my wife's and I philanthropic endeavors. We tend to give every month. It's the way I budget. It makes it simple for me. Well if I'm given $25 every month which you know would turn out to be a nice gift by year end, that $25 isn't worth as much as it was a year ago. If inflation is at nine percent and you used to get $100 that gift may be only worth $90. But your organization still has the same number of expenses. The purchasing power of that donation has diminished because of inflation. If they keep that donation consistent, and what we know is the mentality of annual donors is they don't understand well you need more money and we'll talk about solutions on that tomorrow. So if you have regular donors that's terrific, maybe they're making a monthly gift, an annual gift. They tend to give the same amount but it isn't worth as much. That means it's less efficient in terms of productivity for fundraising activities.

Let's take the next step. Let's say that you have a pledge that comes in from a very large donor. You were in a capital campaign. They made a gift of $500,000. They're paying it off $100,000 per year. They made the gift two years ago. They're ready to make their second of five payments. They're equalized if it, you know, across the five years $100,000 per year, that gift isn't worth as much to you but yet you're banking on it for some purpose. Maybe it's a putting in a building. Maybe it's creating an endowment? All of a sudden, larger sums of money, particularly coming out of a campaign or something of that nature, are diminished because the pledge payments aren't worth as much.

Now we start talking about the expense side because we raise money to be expelled or expended inside the nonprofit for the mission that we believe in. Well if you're building anything, the costs are out of control. I had some electrical work done in our house. We had been, we remodeled five, seven years ago and our electrician says do you know how lucky you are? He goes I realistically think you could take the number you, that it actually physically cost you from just five years ago and you could almost double it, which would have made what we did not possible. Well if you're building a building or planning to build a building or building out you know any type of facility plans, your costs are going up. Well what does that mean? How do you then go back into campaigns or into pledges and figure out how do we make all of this work? You made promises to donors. We're gonna do X, Y, and Z. Let's take a third component about this idea of old plans in a new world based on inflation. What happens if you have endowments that are supposed to generate X and that X could be for scholarship, or let's say like a chair or for endowed purpose within your organization, well the stock market's down in the last six months dramatically, and inflation is up. So the cost of whatever it was has gone up. But the amount of money you can get out of your investments has gone down. And again you've made promises. All of these are effects of inflation.

Let's get even more detail. Let's take a couple of examples. If you're a food bank you probably get donations, but you also purchase food at a discounted price. With grocery store partners and other things, cost foods through the roof. That cost is being passed on which means that food pantry has higher expenses. If you're in health care you have labor issues, particularly with nurses. It's kind of a national story. Those are expenses that didn't have a place in the budget a year ago. Education, cost of salaries, whether it's professors or whomever that's an expense that you have to accommodate for, social services. If we take mental health and the great need we have there, we're short mental health which therapists and experts and those that are dedicated to helping others from a mental and behavioral health perspective, it's a supply and demand. They're getting more money. How does a social service agency afford all of that? These are examples of why CFOs are beginning to really put some heavy pressure on cash into philanthropy because they're looking at their expenses. Here's the problem. The cost of borrowing has gone up so if we wanted to have the opportunity as an organization to borrow money for, let's say a capital project, it costs more and it's tough to raise our prices. In the nonprofit world, how in the world do you raise prices on a food pantry? Education is too expensive as it is so you can't just raise tuition indiscriminately. And if you're in health care you don't have a real strong negotiating position with the government for medicaid, medicare for services, you know the reimbursement rate or for commercial pay. So social services and education, health care, food banks, we are at a disadvantage in raising prices, quote unquote, for service, so that puts more pressure on philanthropy.

Economist Jamie O'Halloran talked about three ways that inflation affects charity in such deep ways. First it really is that rise in cost. It can devastate an organization quickly. That income that is the same dollar figure the year before isn't worth as much, so even if you don't grow and you maintain exactly what you had it doesn't have the same value that it used to. And number three, it changes the demand structure, inflation does, in our communities, in our society. The vulnerable will start needing other things. Food pantries, housing assistance are going to become much more important in a high inflation because people can't afford their rent, they can't afford adjustable rate mortgage again. If you've got a 30-year locked fixed rate you're better off but we know a majority of Americans don't own homes. So all of a sudden the things that are more basic - we think about Maslow's Hierarchy of Needs - those baseline needs become even more important. Or if you have a health care episode, even if you have insurance you can't pay the bill, and that changes demand, and all of a sudden more food's needed. Well, if more food's needed, supply and demand, the cost goes up but those food pantries need that basic, basic need of more food, becomes a cycle. Inflation can have a devastating effect on communities, on individuals, and on non-profits.

As a result the challenge is understanding that and then having the appropriate conversations with internal strategy in your office and your your partnership with the CFO and the CEO and others on your boards, on your donors. And how you explain it all, the community, and that's what's going to be tomorrow's episode or whenever you listen to this, about what to do about it. What can we do? Executing tactical solutions to better our nonprofits for this challenging inflationary period of time.

Don't forget check out the blogs at the website hallettphilanthropy.com, posting two or three a week. And if you'd like to get ahold of me that's podcast@hallettphilanthropy.com. Would love to chat, talk to you about maybe an upcoming episode. If you have a suggestion. Always looking for feedback. And if you're listening, watching YouTube or Apple or Downcast or wherever you're getting this, iheart radio, Spotify, please share it with a friend and leave a comment, rate it. I'd like to know if I can get better and how to do so to make your life professionally in the nonprofit world even better. During these difficult times, nonprofits are going to be needed more and more, and the work that you do no matter what you do inside the organization is critical as a result. Know that you bring such value to what your mission is and your professional life. I can't imagine a better way of helping and living and being than making a difference in someone else's existence. That's the heartbeat of philanthropy. Love of mankind. Don't forget some people make things happen, some people watch things happen, then there are those who wondered what happened, where people who make things happen looking for others like us who can help fund the mission, the things that are important in our community. making things happen for those people and those things that are just wondering what happened. And that's what you do every day. I'll look forward to seeing you on part two next time right back here on "Around with Randall" and don't forget make it a great day.