The extraordinary and massive economic shock of COVID-19 sparked yet another first action by our country’s central bank. The Fed has now expanded a facility meant to lend to nonprofits. Among the targeted non-profit organizations are “educational institutions, hospitals and social service organizations”.
This remarkable program deserves applause. At the onset of the pandemic, the Fed realized that the demand for nonprofit services and the requirements to provide those services were increasing rapidly as their revenues declined. Many don’t normally think of nonprofits in economic or market impact terms. We often take them for granted until we personally see a need for them. Some immediate examples are hospitals and food banks. In April 2020, the The Federal Reserve surveyed nonprofits, financial institutions, government agencies and other community organizations across the United States to assess how the organizations and communities they serve are doing as the COVID-19 pandemic unfolds. Note that there were 3,899 responses and that all twelve Federal Reserve District Banks and the Board of Governors were involved.
Here is a link to an interview between Georgia Grantmakers Alliance Director Lydia Clements and Atlanta Federal Reserve Chairman Raphael Bostic in which Bostic describes the Fed’s responses to COVID-19 and offers some of the conclusions. of the survey and requirements to support nonprofit organizations: https://www.youtube.com/watch?v=EWIj8iNV6QU&feature=youtu.be. In Sarasota, Florida, we are in the Atlanta Fed District and can personally attest to the need for nonprofit services as this COVID-19 wildfire rages around us.
And here’s a link to a San Francisco Fed research study that looks at the concerns of communities and nonprofits in the western region of the United States: https://www.frbsf.org/our-district/about/sf-fed-blog/nonprofit-concerns-covid19-coronavirus-pandemic/. Readers will notice that the regional geography of the San Francisco Fed is enormous.
Time will tell how well the Fed’s new program works. This expanded program is truly unique in the history of the Fed. The Fed had to develop the program from scratch and without precedent. There may be issues with the governance requirements in nonprofit organizations, as they accept the scrutiny that accompanies borrowing that accompanies a program emanating from the federal government through the use of taxpayer funds. In our opinion, this additional control is necessary. The state of governance in nonprofits varies widely, ranging from high standards of excellence in accountability to appalling mismanagement and dealing with cronyism. Remember, nonprofits do not have regulatory requirements like the ERISA on employee retirement funds or the Securities & Exchange Commission on investment advisers. Example: How many nonprofits have you seen that report the results of their endowment investments using GIPS procedures?
Please note the details in the new terms sheet available from the link at the bottom of the Fed press release. Note that the 5-year amortization is “backloaded”. Note the income distribution so that the Fed has a process to estimate loan repayment. Part of the design challenge was to separate recurring non-donor income from philanthropy. It is difficult to “ask” for a contribution from a donor to repay a loan.
Please note the interest rate of 300 basis points above LIBOR. There are two observations to be made here. For some nonprofits, market access may be cheaper since some organizations have the option of issuing tax-free bonds. Experience will show if there is an unfavorable credit selection bias in this program. The second observation is very technical. The Fed anchored the interest rate with a floating formula at LIBOR. Why did he not use SOFR? Was it just an oversight? Will the loan documents allow a switch from LIBOR to SOFR as the benchmark rate?
COVID-19 continues to cause huge changes from what we consider to be the norm. We have seen the Fed’s balance sheet grow to an unprecedented size. We have seen the creation and deployment of unprecedented new programs. And we see a responsible central bank meeting the national goal of helping the United States with its lending tools. Just as it did in the past when the nation came under attack, whether during WWII or after 9/11, the Fed quietly and without any political rhetoric of blame, did what it could to keep the US economy and its citizens in better shape than this and they could be otherwise.
We applaud the Fed for this creative approach to helping nonprofits, whose roles in the fight against COVID-19 are now essential to our survival.
David R. Kotok is Chairman of the Board and Chief Investment Officer of Cumberland Advisors. He holds a BS in Economics, an MS in Organizational Dynamics and an MA in Philosophy. He is Director of the Global Interdependence Center, is a member of the National Business Economics Issues Council, the National Association for Business Economics and has served on the Research Advisory Board of BCA Research. His monograph, “Lessons from Thucydides,” detailing information asymmetries and their implications for investors and global affairs, is available free in PDF format. He appreciates hearing from readers. Contact him at [email protected] or 941-926-6279.