Kalamazoo Foundation Endowment for Excellence Faces Inflation and Stimulus Funding

KALAMAZOO — The Kalamazoo Foundation for Excellence plans to more than halve annual spending on “aspirant” projects in 2023 to protect the endowment from economic headwinds and allow federal stimulus funding for the city to potentially fill the gaps.

The Foundation for Excellence, a rare philanthropic entity created in 2017 to stabilize the City’s budget, reduce taxes and invest in various community services, is in the process of finalizing its 2023 budget.

While the foundation’s endowment will swell over the next decade thanks to a $400 million 10-year gift last year, a planned spending cut of $3 million reflects widespread uncertainty in financial markets and high inflation as well as an influx of federal funding below $1.9 trillion. US Rescue Plan Act (ARPA). The proposed spending cuts have also caught the attention of some city officials who question why past investment levels shouldn’t be maintained alongside stimulus funding.

“For the overall endowment investment, it’s no surprise to say that everyone’s investment has taken a major hit in this economy,” said Steven Brown, director of the Foundation for Excellence, noting that “every dollar we spend is worth less” as consumer prices rise further. more than 8% for the year.

This led the foundation’s board to drastically reduce its “seeker” investments, one of three ways the foundation spends its funds in addition to providing direct budget stabilization to the city and tax relief by paying the difference between a previously higher tax rate and the current one set at 12 mills. The foundation’s spending plan is sent to the city in the form of a grant, which is ultimately approved by the city commission.

The ambitious spending proposed for 2023 — $3.87 million — is less than half the amount the foundation has spent over the past three fiscal years, when it invested more than $8 million a year in projects such as small business grants, youth programs, affordable housing and park improvements. The ambitious 2023 budget includes $1.75 million in neighborhood infrastructure spending, including new sidewalks; $825,000 for a youth employment program; $350,000 for a business development fund; and $250,000 for affordable housing.

Spending in 2022, for example, included $1.56 million for affordable housing.

The market value of the foundation’s assets ended the second quarter of this year at $160.4 million – down 13.3% from $185.1 million in the previous quarter – while the return adjusted for inflation fell nearly 16.4%, according to financial data from the draft minutes of an August founding meeting.

“Granted, there’s been a significant loss in that bottom line right now, but the health of the endowment is the health of the US economy,” Brown said. “We have every confidence that he will recover.”

Concerns with the plan

While Brown said the Foundation’s ambitious spending cuts don’t mean an overall drop, because the city’s ARPA funding could make up the difference, some city commissioners have recently raised concerns about the plan. expenses. The city expects to receive more than $40.6 million in ARPA funding to be spent by 2026.

City Commissioner Chris Praedel said ARPA’s intent is to enable transformational projects in communities.

“We at Kalamazoo have a competitive advantage. If we wait and use ARPA instead of (the foundation), a whole childhood would have passed,” Praedel said at a commission meeting Oct. 17. “The action I think ARPA was meant for is lost. I don’t think there’s a better time to redouble our efforts, if you will.

Brown responded to Praedel at the meeting, saying that “doubling up” “would pose a threat to the staffing because the more you take out now, the less you earn. The more we have invested now, the better.

Brown argues that as trustee, the foundation board is responsible for the proper management of the endowment so that it lasts in perpetuity.

“We have this tool, which was invented to be permanent, and it needs to be nurtured and managed very carefully, even in light of people saying there are needs now,” Brown said in an interview. . “We can’t do everything at once.

Market fluctuations

Jeff Williams, director of the Community Data and Research Lab at Grand Valley State University‘s Dorothy A. Johnson Center for Philanthropy, isn’t surprised to see the Foundation for Excellence withdraw its ambitious investments.

“Especially with this kind of special purpose foundation, this foundation signals the city what to expect in the future,” Williams said. “It’s a clear signal to the city to temper or moderate revenue expectations in the years to come. It’s as much about setting expectations and communicating as it is about making a financial decision.

More generally, Williams noted that many foundation endowments use moving averages – sometimes up to five years – for investments to even out market fluctuations and avoid sudden changes in investments from year to year. the other.

“A lot of foundations don’t do anything,” Williams said. “On the other hand, everyone associated with a foundation — we all read the same newspaper, everyone talks about the markets and inflation. Admittedly, the market is not returning much this year. The big question is: does this transient inflation last a few more quarters, or will we see this for two, three, four years? That’s another story and affects everyone’s wallets. It’s a simply unanswered question where we are right now.

Williams added that cities are now in a “tetris stimulus” game phase, figuring out how to best match new investments with funding streams like ARPA. Typical US cities without a large endowment like Kalamazoo balance their traditional tax revenue streams and ARPA funding.

For Kalamazoo to add a third funding element, “it’s a tricky set of choices,” Williams said.

“I’m not surprised to hear foundations or cities change their expectations given what’s happened in the first 10 months of the year,” he said.

Mindful of these same economic conditions, Brown said the Foundation for Excellence will take a cautious approach with its local investments in the near future.

“In the next couple of years, we’re going to have to be in a situation of abundance of caution,” Brown said. “As with anything financially prudent, sometimes it requires a small sacrifice today for tomorrow’s gains.”

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