The highest inflation rate that Americans have experienced in four decades is hitting many nonprofits especially hard. As their operational expenses climb rapidly, these lean-running organizations may see donations flatten, or even decline, as supporters grow more concerned about their own financial situation.

Our wealth management team at Mercer Advisors may not be able to counter the impact of rising costs. But we can share strategies that help the leaders of charitable foundations and endowments evolve their fundraising plans to better withstand economic ups and downs over the long term.

Costs rise while spending power shrinks

For a large swath of nonprofit executives and donors alike, the current economic environment is uncharted territory in their adult lifetime.

Non-seasonally adjusted inflation totaled 8.6 percent over the past 12 months ending in May 2022 — the fastest year-over-year pace since 1982 — according to the Bureau of Labor Statistics.¹ As a result, the money that charitable organizations do manage to attract has substantially less purchasing power today compared with just seven or eight months ago.

When accounting for inflation, a $100,000 contribution made in May 2021 effectively carries about $91,400 of purchasing power today. Compounding this squeeze, the size of individual and institutional gifts historically decreases when inflation is running high.

“Donors unknowingly reduce the value of their gift because they don’t see inflation as dropping the value of money,” writes Gregory R. Witkowski, a senior lecturer in the nonprofit management program at Columbia University. “The danger of the money illusion is not that donors want to give less; it is that they are inadvertently giving less because they don’t recognize the decreasing purchasing power of their donations.” ²

How do these trends affect an organization’s approach to fundraising? Two of the most tried-and-true donation streams for nonprofits — annual giving campaigns and gala events — are among the most vulnerable to the effects of an extended inflationary cycle.

Higher costs involved in staging a charity dinner, auction, river cruise, or get-together for supporters — on top of potentially lower attendance and donations — can drastically reduce the event’s net proceeds. Similarly, a nonprofit that receives the bulk of its donations from one major annual campaign might not be able to rely on the same level of giving while inflation is so top-of-mind.

Expanding your approach to donors

A temporary inflation spike is no reason to forsake your nonprofit’s annual campaign or in-person fundraising events that have proved successful over the years. Instead, take this current situation as an opportunity to expand the ways that current and prospective donors can support your organization well into the future.

Planned giving vehicles can provide a variety of benefits for donors, ranging from higher tax deductions on charitable gifts to greater flexibility in how and when those contributions are allocated. Options include:

• Donor-advised funds. Cultivating this type of vehicle with your donors will allow them to contribute cash, publicly traded and appreciated stocks, and even some non-publicly traded assets to your organization. The donor receives an upfront tax deduction that can be reinvested for future tax-free growth and disbursed to your organization as well as to other charities over time.
• Charitable lead trusts. This type of irrevocable trust is designed to provide financial support to one or more charities for a set period of time. After the term ends, any remaining assets can be distributed to the donor’s family members or other beneficiaries.
• Charitable remainder trusts. A charitable remainder trust provides a stream of income to designated family members for a specified term, after which the remaining assets are transferred to one or more charitable organizations. This vehicle allows someone to make contributions to the trust and be eligible for a partial tax deduction based on the amount of assets that will pass to charitable beneficiaries.

These and other advanced strategies for charitable giving can yield considerable advantages for your nonprofit. However, the time and knowledge required to engage with donors about these options can become overwhelming, especially for smaller foundations or endowments. That’s when the value of working with an experienced, comprehensive wealth management partner like Mercer Advisors comes fully to light.

For example, we have in-house estate lawyers and a family wealth services division that can work directly with your nonprofit and its wealthiest donors to set up advanced giving vehicles such as a charitable remainder trust. Also, Mercer Advisors’ Foundation and Endowment (F&E) Management Services group can serve as a resource to help educate your supporters about charitable giving opportunities through webinars, in-person events, social media, and other channels.

Our F&E team is made up of investment advisors who have spent decades partnering with foundations and endowments and serving on nonprofit boards in their own communities. Beyond engaging with donors, our seasoned specialists can work directly with your board members and executives on developing best practices in governance and fulfilling their fiduciary responsibilities. We can also partner with you to create a long-term financial planning strategy that encompasses your organization’s cash flow, grantmaking cycle, mission, and other core factors.

Regain control of your charitable income

While inflation is beyond the control of any organization, you can take greater charge of how your nonprofit builds its charitable income stream to help counteract rising prices and intermittent lags in donor support during volatile economic times. Reach out to the team at Mercer Advisors for help with getting started.