Jam tomorrow?
Cathy Pharoah and Mark Pincher examine recent trends in charity funding and what these signal for the sector’s ability to prepare for the future
KEY POINTS
- Real income values have fallen two years running
- Statutory funding has propped up overall funding levels
- Little protection if social enterprise initiatives don’t work
- New generation of donors needed
In a twin-stranded policy context aimed simultaneously at an immediate government spending reduction and a longer-term rebalancing of sector income away from dependence on statutory funding, charity managers have never been under greater pressure to think short term but focus long term. This article is based on some of the findings in Charity Market Monitor 2011 (CMM 2011) and examines what the implications of the longer-term patterns in income streams are for the challenge of ‘rebalancing’ sector funding away from statutory towards philanthropic and social financing.
Fall in the real value of income for second year running
For the second year running, the aggregate income of the top 500 fundraising charities recorded a drop. Like last year’s list, this year’s top 500 showed an annual real fall of 1.1 per cent in fundraised income in 2009/10, and an average real drop in total income from all sources of 0.5 per cent. The figures show that as the lag effect of recession continued to be felt in various charity income streams, charities have been left in a position of running to try to stand still: before adjusting for inflation, fundraising income grew by just £74m to just over £6bn.
With a scenario of reduced statutory funding for the long and short-term, the last few months have seen almost feverish sector interest in the scope for increasing income from donations and major philanthropy. So it is not a good sign that one of the major factors underlying this overall drop in the real value of income was that 2009/10 was another challenging year for general donations. There was a substantial fall in their overall value in 2009/10, a real drop of two per cent. This decline is directly related both to lower spending power amongst some sections of the donating public, as well as to a fall in trust and foundation grant making.
Many charities reported difficult fundraising environments; for example, the Wildfowl and Wetlands Trust which highlighted in its 2009 report that unrestricted income had fallen from 40 per cent to less than 20 per cent of costs. It also reported that membership, however, held up well: this is a good illustration of the important role of this form of committed giving in generating reliable income support for causes such as heritage, conservation and the arts as they begin to think about alternatives to government grants.
General donations
The top charities for general donations in CMM 2011 are listed in Figure 1. While charities vary to some extent in what they include within this category, this list provides an illustration of the high level of private donations attracted by religious and animal welfare charities, which also tend to fare well out of the various sources of private fundraising income across the board.
In spite of a weaker environment for donating, variations in individual donors’ circumstances meant that many charities continued to benefit from major donations. Examples include the £4m gift from Lord Parmoor’s trustees to the Howard League for Penal Reform, and a one-off major legacy to RADA. Across the major fundraising charities as a whole, fundraising income remained at around half of total income.
But CMM 2011’s analysis of income by cause shows huge variation in the extent of private fundraising (income derived from individuals, trusts, the private sector and legacies) in 2009/10, ranging from 18 per cent of total income amongst the largest disability charities to 91 per cent amongst chest and heart causes (see Figure 2).
Legacies
In contrast with general donations, income from legacies saw a real increase in value of 1.4 per cent, picking up from the fall of over three per cent seen last year as markets show some recovery. This helped many charities cover shortfalls in fundraising from other sources. However, today’s legacies are a bonus from fortunes made in the previous decades of market expansion before the recession, and care needs to be taken in using these trends as a predictor for what might happen in the future. Animal welfare causes did particularly well in legacy income, though legacies to cancer causes did not keep pace with inflation. The growing popularity of charities which help the armed services was reflected in a trend-busting real increase of almost five per cent in fundraising income to this cause, which included a higher legacy income.
Funding structures
Differences in the funding structure of the various causes means that there is unlikely to be a level playing field when the big drive to increase funds from private donors kicks in. A further issue is which causes might suffer most if competition for private donations such as legacies increases. Causes for the blind and animal welfare have by far the heaviest dependency on legacies, for example, at over one-third to almost half of aggregate income. Cancer and health information/research causes derive the highest proportion of fundraising income from events, with Cancer Research UK earning over £82m in 2009/10; more than a quarter of its fundraised income and continuing to top the table for events income. Hospitals continue to receive the greatest proportion of their total revenue from investments.
Other income streams
Overall non-fundraising income performed slightly better than fundraising income, and this was mainly because statutory grants continued to grow, continuing to show a real annual increase of 2.8 per cent. The arts and culture sub-sector, for example, has a particularly large component of statutory grants and will come under enormous pressure as it absorbs an inflation-adjusted fall of 29.6 per cent, or £457m by 2014/15 in the grants available from Arts Council England (ACE). English Heritage has faced a 32 per cent budget cut, and is anticipating that £650m to £675m of statutory funding will get taken out of the heritage sector. Income from charitable activities, which contains a large element of statutory funding, also continued to show growth, though statutory fees and contracts barely beat inflation.
Income from statutory contracts and fees was recorded at £1.4bn, 11 per cent of the total income of the major fundraising charities. However, it showed little growth in 2009/10, just beating inflation at 0.4 per cent. This probably reflected the emerging constraints in current government funding. It will be interesting to see how the contract environment changes as the tension between spending cuts, but greater opportunity for charities to tender for service delivery plays out.
Some of the top charities, particularly in the heritage category, depend heavily on their investment funds, and struggled with an ongoing fall in the value of income from this source which dropped by a real 34 per cent across the top 500 as a whole.
The longer-term picture
Dependence on statutory funding
The important role which statutory funding has been playing over the last few years in maintaining the levels of the major charities’ income throughout the period of recession when fundraising income was particularly volatile is one of the most challenging messages to emerge from the CMM 2011 research. This can be seen in Figure 3, which compares trends in different income streams (adjusted) amongst financial results for a panel of 446 charities between 2005/06 and 2009/10 (see p24).
The main results from this analysis are:
- The growth rate in fundraised income was at its peak in the early part of the period as wealth grew in the last year before the financial crisis at the end of 2007 (as noted above); it then began to fall.
- Income from statutory sources showed a counter-trend: it began to build up as some of the new grants funding programmes such as Capacitybuilders and FutureBuilders came fully on stream.
- Statutory income continued to grow after 2007/08, but this was maintained more by the growth in grants than in contracts, and the rate of growth slowed.
- The average year-on-year growth in fundraised income over the five-year period was just 2.06 per cent, compared with the robust 3.7 per cent for charitable activities.
Overall it was found that the reason for negative growth in total income in 2009/10 was that fundraised income showed a negative growth rate: income from statutory sources remained positive though was slowing down. This raises the spectre that charities will find it very difficult to absorb a reduction in income from these sources while fundraising income is volatile and clearly impacted by consumer spending reductions.
How and where government spending policy will affect the sector’s finances as cuts roll out over the next few years is not clear yet. Local authorities are facing a spending reduction of about 30 per cent over four years. The biggest hit is likely to be felt by organisations whose core work has been funded mainly by grants from statutory sources. But many other areas which depend on government for their support rather than the general public are potentially at risk. Causes such as drug and alcohol problems, mental health, young people not in education, training or employment and domestic violence. Arts and culture, international and youth causes are the main beneficiary causes for statutory grants, while statutory fees and contracts play the largest role in the funding of mental health and childrens’ charities which fundraise.
Weakened finances
The sober fact is that over the five-year period, the real value of fundraised and of total income have barely grown. In 2009/10 the real value of fundraised income was just 0.7 per cent higher than five years previously, and of total income just 1.5 per cent. Rapid growth in charity income in the middle of the decade fuelled aspirations around its potential as a market for social investment, and led to the development of plans to increase access to social finance, but the reality is that charities are going into a new more entrepreneurial era with their finances in a weakened position. Charitable expenditure fell by 0.3 per cent in 2009/10, lower than the drop in income and suggesting that charities are making cuts elsewhere to maintain their charitable activities.
Grant making trusts and foundations
As noted above, levels of charitable trust grant making fell in 2009/10. Underlying the drop in grant making was a fall in the new donations being made into trusts and foundations, the first time this has been reported in CMM. Underlying trends are tricky to interpret, because while on the one hand the Big Lottery Fund brought over £614m to voluntary income, income to CIFF fell dramatically after a huge injection of £495m the previous year. If the effect of these two grant makers is removed from the picture, then new donations into trusts fell by around five per cent. This is likely to be partly a reflection of the mixed fortunes affecting the incomes of major City and other high-net-worth earners over the last couple of years. The fall in voluntary income was compounded by an ongoing fall in income from investments, although investment values have begun to pick up. Any benefit to grant making levels from better investment performance tends to show through in the following year.
Looking forward and scope for rebalancing
The economic turbulence of the last few years has seen a rollercoaster effect on the major charities’ income streams. None has been immune from impact. The previous five-year period began with a robust rise in income and ended with a marked fall. The earlier expansion around the middle of the decade fuelled confidence in the charity sector as a growth area, attracting interest in the development of a new range of socially-oriented investment options. The evidence presented here would suggest that overall the value of the major fundraising charities today is only slightly greater than it was five years ago.
The immediate challenge for many charities is recovery, repair and potential replacement of the statutory funding which has played such an important part in the sector’s financial resilience over the last few years.
Future funding of charitable causes is likely to see many more claims competing for the philanthropic funding pot. But it is not at all clear that this will do the same job as government funders, considering for example, the current major priority placed on private giving in areas such as faith-based causes and animal welfare, and evidence suggesting that increased major giving would mainly favour national arts and education institutions.
A new generation of donors needs to be recruited with a greater diversity of giving to a wider range of causes. Unless this happens, then any rebalancing of income towards philanthropy might lead principally to a rebalancing of the activities of the sector.
Author: Mark Pincher
Mark Pincher is data editor and development manager for Caritas Data.
Author: Cathy Pharoah
Cathy Pharoah is co-director of the ESRC Research Centre for Charitable Giving and Philanthropy (CGAP) at Cass Business School.
www.cass.city.ac.uk/philanthropy
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