Episode 93: Inflation and Philanthropy - Creative Solutions to Inflation Fundraising Part 2

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

Thank you for joining me, Randall, here on "Around with Randall" and today we're going to do part two of the two-part series about dealing with inflation and philanthropy, and in particular, what tactically you can do to help the situation for your non-profit in these uncertain times. In the first edition we talked about why inflation is affecting people's philanthropic decisions. So I, if you haven't listened to that particular podcast just short of 20 minutes it's worth it because it sets up what we're going to do or recommend to do about it.

So let's start at the top, and this starts with some internal communication and conversations that are critically important. The first thing is that the organization has to realize that they are in the middle of two pressure points. One is that the dollars coming in - charitable dollars or really any dollars are worth less than they were a year ago. What we know here in July of 2022 is that inflation about 9.1% so dollars a $100 given last year and $100 given this year are going to be somewhere in the neighborhood of about nine to ten percent less value. They're going to be worth about $90 this year compared to last on the other side of the equation. The Squeeze occurs because our expenses are going up, particularly, probably HR or Personnel expenses, salaries, hourly wage, whatever. That is not only inflationary pressure because of what's going on across the United States and around the world, but also we're in the middle of this great resignation, this great reshuffling. So when we put all this together we're being squeezed on both sides. We can't just raise prices. If we're a non-profit chances are we don't charge a lot. And if we do, if you're in healthcare, you don't really get to negotiate a whole lot with the federal government or commercial payers. If you're in education it's hard to raise tuition overnight.

There's usually a plan for that, those are just two examples. So internally we have to have a conversation with finance, and the closer our relationship is with Finance the better off we're going to be. So starting with are we putting in inflationary effects into our cost projections, I.E number one, operationally. So when we look out a year or two, and do we actually plan for 10% increases in expenses or if you're dealing with a capital project or a building project or an investment, are we building in contingency costs with those? What we need in philanthropy isn't the being in charge of figuring out what the cost is. What we need to know is that there's an estimation of what the cost is going to be that's accurate. Remember the worst case scenario is when we have a situation where we promise donors we're going to do something and we don't do it. Then we got to go back and say oh we've adjusted, or oh we didn't, you know, give you the whole story, or oh we got to give you your money back because we can't afford it.

The relationship and the communication you have with Finance right now is critical. Let me give you a practical example. I'm working with a client who wants to do a very, very, very large Capital campaign. This is going to be a nine figure deal and when we started this process there were a couple of delays and then inflation took a hold and we had put together case statements and and descriptions of the project and now the organization's like we're not sure we can afford it, which has put the philanthropy office in a terrible position because they are. Largest, most likely donors have been prepped based on these case statements to think of the project in one way, and now the organization is making, and but by the way not a bad decision, or or thought process, but they're changing direction. Changing lanes. And there's a great concern that some of the donors who have been kind of let out on the inside of what might be possible have this vision of what this could be and may not be the same. The organization didn't do anything wrong. No one's to blame but with the foresight now knowing inflation and where it's at in the same scenario, the question is okay if the cost of the project were $200 million are we ready for a $250 or $300 million cost if it takes us five years to build. And you add 10% inflation. Are we in a position to afford that? So that we don't leak out information to our donors that's inaccurate, how close you are with finance and understanding the budget and understanding inflationary estimates and are they in there over a multi-year period. Do they both operationally, and we'll say campaign or a project, and reviewing those in detail even if you haven't been there now, and you have them at four percent should you be looking at eight? These conversations internally are critically important so that philanthropy has the most accurate story and the most, the best we can cost estimates of what the particular needs are so that we can communicate that out to our donor base, to our people who believe in us the most to support our mission.

Start inside. Have hard conversations. Ask questions. Don't be afraid that you don't know the answer. You're not supposed to if you're on the fundraising side. And if you're listening to this podcast, you're on the operational side, you should be aware of how you're looking, cost estimates going forward with inflation. Let's jump from kind of this internal to now how we look at our external constituency, and I'll break these into three components. How do you have this communication, conversation with your annual giving population, your major gift population, and plan gift opportunities, or your planned gift constituencies?

Let's start with annual fund. This is becoming probably more and more important even though we know that annual giving, annual fund operations don't generate the same ROI as a major gift platform, or principal gift platform ,or planned giving platform. It's critical because most annual fund gifts are looser in restriction. In fact, many organizations use their annual giving dollars for unrestricted under, they're unrestricted, which is really important to CFOs. I made a mention of the example of the $100 donor last year and the $100 donor this year and that this year's donation is really worth closer to $90 than it is $100 in comparison. We need to be having that conversation with our annual giving, most loyal donors.

Here's why annual giving donors had a habit of keeping their gifts very consistent even if they're insiders in this industry, and I'll use me as an example and I'll use it a couple times throughout this annual giving discussion. My wife and I make a regular contribution to where I went to law school. That gift hasn't changed in, I don't know, six, eight years, ten years because no one's asked me to and I'm a budget donor most of the time, meaning every month we do regular contributions because I can budget for it instead of one larger check at the end of the year. Different ways of doing it. Neither better or worse. But if nobody ever shows up and says you know that $100 gift that you're giving every month doesn't mean as much as it did eight years ago, then I'm probably not going to change it. Particularly since it's automatically set on my credit card. I don't think about it. I'm glad to support the law school because it was very good to me and allowed me to get to kind of where I am today. One of the major factors, and some of the successes I've been fortunate enough to have. I haven't changed the gift and the gift isn't worth as much. Nobody's asked.

So how do you have this conversation? Well the first piece is you got to have an internal, maybe, office-level discussion, or with your board, or if there's a board committee on this subject to say we need to change how we communicate. Number one, we probably want to break up into a couple groups. We have very regular donors, meaning people that have given for five consecutive years or they give every month or, I mean, they're tried and true, you know who they are. I would recommend that an individual conversation is an order, which is time consuming, which is not very efficient for a $100 gift. But I'll use me as an example. What happens if my law school had shown up earlier this year and said, you know, cost of inflation, tuition everything's going up. Our inflationary pressures, we're asking our most loyal and regular donors would you increase your gift by 10%? Well in my case that's $10 a month as my example was earlier. Yeah I'd do that. Am I more likely to do it with a phone call 10 minute, 15 minute phone call than a letter or an email? Probably, considering that I give minimum of 12 gifts a year, more likely 15 or 16 every year, and I'm a member of their planned giving society. A phone call wouldn't be the worst thing in the world. Nice stewardship. If you did that with enough people, well, $10 a month to $120, in my case, for the year - $10 a month times twelve plus others, it becomes valuable. So your most regular and loyal are probably a conversation. And I'm not saying you need a thousand. Pick a number that's reasonable for your office sizing, for your team number. Two is your lions and side some year but not this year last year but not this year maybe they're not quite as close. Ask them in some type of communication, last year you gave us $100, would you give us $110 this year? And be honest in the letters to why we're facing inflationary costs. This would make a big difference.

You have to be willing to have robust, appropriate, honest dialogue in writing in email and communications. And in person, and in person now includes zoom, in the world we live in, to get what may be possible. The number one reason people don't give is that they're not asked. And the same premise is true. People don't increase their gifts unless they're asked, and know why, and you actually have a legitimate story to tell. You have to ask, and ask, and ask, and remind and talk about it and be open so that donors understand it's not because of inefficiency, it's not because of poor management. Everybody's going through this and we need some assistance. So there's the individual pact, one-on-one, with your most loyal higher level, maybe, leadership manual giving type individuals or couples. And then there is the kind of mass effort increasing people's gifts you don't get unless you ask. That's annual giving. Let's kind of morph into the major gift. Number one is you're going to have to increase communication, much like we saw in the pandemic. The organizations that did the best as the pandemic, we look back maybe even sometimes we forget, but it was pandemonium in March, April, and May of 2020 when we didn't know what we didn't know. And the recommendation was, you need to be communicating exponentially more with your most important, most loyal donors because they want to know what's going on, and they want to know who cares for them as people rather than just a check. The same is true here, but for a different reason. The more you communicate the more you're able to tell the story of what's going on. Number one that your organization is delivering critical service, whatever the mission is to the community, to people who need whatever that is. Number two is that organizationally you're in good shape. You have to be adjustments with inflation. Budgets are tight. But in the end we're going to serve. Number three, we need your support.

We need people like you to be a part of what we're trying to accomplish, and you play a critical role. I think the other thing is... is if you're in the process of soliciting a gift or cultivating a gift or you're beginning a campaign, you've got a large group of people is to ask some hard questions in private moments, it's cultivation. You're a business owner. How's inflation hitting you? You're retired. Gosh inflation is something that is obviously very important. How how are you handling it? You can frame the question in a way that they'll actually tell you probably more than they realize about what their situation is for philanthropy. But you didn't ask about their philanthropy. You actually asked about how they are, or what has been your experience, or if they're a little older you lived through the 1970s a little, you know, you were younger at the time how did we, how did you handle inflation, or what how did the country handle it? You want to elicit a conversation that gets you information to figure out where they're at, particularly if you're in this cultivation or just pre-solicitation stage. You're doing a soft ask. You're trying to figure out how to maximize their gift. Well they're trying to figure out there's a lot of chaos.

You also probably need to widen your pipeline. There's probably a chance of inflation continues, that the size of some of your larger gifts may decrease because we deal in, unless you're a principal gift officer dealing a million dollar gifts, only we we deal with in major gifts. The idea of discretionary income, that's where major gift dollars come from, as we talked about yesterday, we gave an example of a family who maybe has a little bigger house, some nicer cars, has a good job, but all of a sudden their disposable income on a monthly basis while the average in the United States is about $490,000 right now year-over-year could be as much as a thousand, if they've got credit card debt, and they and they have an adjustable rate mortgage, you might need a few more people in your pipeline or in your plan for this year. Because the average gift may go down a little bit and the more of gifts that you have at your, in Your arsenal of the pipeline, the more likely you are to meet your goals and help the organization. The other thing is, is you might have to get into a little bit longer pledge period. If someone's making a $5,000 gift and a year ago they can do $10,000, they may say look I, $10,000 is a little bit of a stretch I can do $5,000, how do you work with the finance office, how do you adjust pledge payments, how do you make it manageable for them? You can't go into these scenarios as an either, or. Either do it my way or we don't take the money. That's not going to work, so that flexibility is critically important, which means you need to have internal communications about what cash flow looks like.

You need to be able to have your supervisors or the organization's blessing to have some moderation on the terms of maybe pledges and major gift opportunities. It's really important to ensure that you have that wider distribution of opportunity, and I didn't even mention I think conversion rates. Conversion rates defined as how you go from how many people, go from qualification to cultivation. How many people go from qualification to solicitation probably is going to go down because they're going to be less people able to give. And that matches, unfortunately, Giving USA's numbers. And what we've seen over the last 10 to 15 years regarding the number of donors the United States in the first place, so major gifts flexibility, communication, the ability to ask good questions to get some feel in what they're going through and how they feel about their monetary situation, in that moment the third major component is planned giving. And this is a real issue. Here's what we're dealing with we have inflation and at the same time in the last, since about November, early November when the market was at its high point of 36,000 we're down 18% so all of a sudden people are looking at their retirement funding, kids college funds. and they're having a little bit different thought process than they did six, seven, eight months ago, in particular if they rode a huge wave during the pandemic and they had resources or assets. So there's this mixed message. So what does that mean for Planned giving?

Well number one, like major gifts how do you deal with the inflation? What's going on in your business? You were retired. Is it... how does this affect you? Number two is knowing that blended gifts should become more important in our conversations, in particular, in partnership with major gifts can people fulfill their pledges or make a bigger gift to the organization. When you include their estate option that's a deferred gift. So if you're building a building you got to make sure you have the financing available, but it's a valuable tool. The other one is is bequests because of a quest either as a a specific meaning, something, piece of land or the house or something individually mentioned or named in the in the plan, or just a percentage of the residuary. Whatever's left. And they cashed out. You get 25 of whatever's there. Are better options because they don't need the money when they're not here anymore. That may be a better option going forward for those who are thinking about some type of payment. So Crut name cruts other things like that annuities the problem that we have is is that yes that would guarantee an income which is better than when the stock market's dropping. the problem is you lock in those rates in those payments so if you get 4.8 percent that's great but if inflation's at nine that person's losing five percent purchasing power every year based on the payments you, your non-profit may be paying them in an annuity or a credit or a Crut. That's a hard issue to deal with.

Now is inflation going to come down? Probably. When is it going to come down? I have no idea. Planned giving is going to be complicated because some of the tools in our Arsenal are handicapped, particularly anything with a payment because we can't predict what inflation looks like in a year or two. And if somebody wants guaranteed income bad enough it becomes a viable option. But they may be losing purchasing power over time. It gets complicated again. communication conversation, probably bequests are going to be where you have the most option. Maybe a percentage of someone's estate. These are some tactical things to think about, whether you start your office, how you deal with the annual giving process, the major gift prospects process, or the planned giving. But ignoring these things you're doing so, to your detriment don't ignore them. Have the conversation. Deal with it. Come up with a strategy.

Don't forget to check out the blogs at hallettphilanthropy.com, and if you'd like to reach out to me podcast@hallettphilanthropy.com. Leave me a review on the podcasts, you know, whether you're watching Youtube or Spotify or wherever. Also share with a friend. Don't forget the work we do is really important and we're in some interesting economic times, which makes nonprofit work even more important. Don't forget my favorite saying, some people make things happen, some people watch things happen. then there are those who wondered what happened. You are someone if you work in this industry who's trying to be someone who makes something happen, finding others in the community, support the work that your organization does, making things happen for people and things that are just wondering what happened. That's a worthy pursuit, every day, making the world a better place. The definition of philanthropy. We'll see you again right back here on "Around with Randall." Don't forget make it a great day.