Tuesday, August 9, 2011

Foundations React To U.S. Debt Downgrade

You probably have heard that Standard and Poor's (S&P) downgraded the United State's long-term debt rating to AA+.  This has created enormous chaos in the market, with stocks plunging in the aftermath.  As much as the downgrade has affected the for-profit world, it also has the potential to impact the nonprofit sector.  The NonProfit Times just put a report explaining the possible scenarios:

According to Bradford Smith, president of The Foundation Center in New York City, there are two ways the downgrade can affect nonprofits. First, it could mean raising interest rates, which would put further pressure on state budgets and their ability to raise money. With states already in a tough situation, he said it if it gets tighter, many budget cuts could come at the expense of nonprofits.

Second, if this week’s volatility turns out to be more than just a market correction, foundation endowments could get a big hit, as they did in the 2008 recession. If endowments take a big enough hit, foundation giving could fall in response, just as giving was beginning to climb back to pre-recession levels, Smith said. “But it takes a crystal ball to predict that,” he said. “We’re only seeing the reaction of the markets on Friday and today.”

From an operational standpoint, the downgrade really has no impact on endowments and foundations, or their ultimate beneficiaries, said Rick Nelson, chief investment officer at Commonfund Institute in Wilton, Conn. “It’s been a non-event from that standpoint,” he said.

Another effect of the downgrade, however, might be that other entities are unable to maintain their rating if the U.S. is rated AA+. “You’re seeing that somewhat today, some insurance companies being downgraded. It could have effect on institutions, but really it’s on a case-by-case basis, not in lockstep,” Nelson said.

To learn more about how the downgrade might affect nonprofits, head on over to the NPT website.

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