SCVO Briefing – version 20^th October 2008

Please ensure you have the latest version of this paper by visiting www.scvo.org.uk/economy

The Global Financial Crisis has potentially severe implications for the sustainability of the Scottish voluntary sector which is already facing serious financial difficulties.

Paradoxically, as we face a potential recession many people will have a new need for the services delivered by voluntary organisations, whether debt advice, accommodation or care services. Without financial security, many voluntary organisations will be unable to expand their services to meet new needs and the quality of their services will be threatened by excessive demand.

1. Issues of concern

Icelandic Bank accounts

It is estimated that around £120 million of UK voluntary sector money is tied up in Icelandic banks. As yet it is uncertain how much of that is from Scottish voluntary organisations. The UK Treasury has released a statement that retail depositors with Icelandic bank accounts will have their accounts protected and money returned in full. This includes those charities who are either a body corporate (which includes a company, industrial and provident society, Royal Charter body, and statutory corporation) with two or more of the following: (1) £6.5 million or less turnover; (2) £3.26 million or less balance sheet total; (3) 50 or fewer employees, or an unincorporated association with assets of £1.4 million or less.

Other (larger) voluntary organisations are considered as wholesale depositors, and therefore are subject to the Government’s efforts to retrieve monies, but without guarantees. The Treasury has agreed to look at charities that fall into this category on a case-by-base basis. Based on estimates from SCVO’s Financial Panel, there are at least 50 Scottish voluntary organisations that could be in this category, including many household name charities.

Note however, for clarification, the fact that there are at least 50 Scottish charities that could fall in to the category of wholesale depositors does not imply that all 50 of these charities are currently in this situation with regard to Iceland banks.

Reserves and cross-subsidy of services

Secondary evidence suggests that voluntary sector assets have been squeezed. Despite growth in annual income in the year leading up to 2007, the associated expenditure has grown faster. Research in 2007 found that the gap between the sector’s total annual income and expenditure had narrowed to its smallest in years, just £24m or 0.7% of income. This tallied with a concern that in many cases voluntary organisations are only being given public money if they take on much more work than they are being paid to do and are therefore dipping into reserves in order to subsidise these activities.

Unfortunately, the asset reserves of charities themselves have also been squeezed as a result of stock market decline. These reserves, because they stand outside day-to-day cashflow, have often been seen as suitable for long-term investment in the stock market. Subsequently, during late 2007 and 2008 a number of Scottish voluntary organisations walked away from contracts and in some cases ceased trading, suggesting that organisations can no longer subsidise these activities even if they are prepared to.

Now, with the value of the FTSE-100 declining by nearly 50% over the last 12 months, with most of the decline since the end of August, many charities will likely see further significant falls in the value of their reserves. This leaves charities with the options of operating with a level of reserves well below the level set out in their reserves policies, and possibly unable to divert cash from other areas to boost reserves.

Donations from the general public

Donated giving comprises 4.3% of the Scottish voluntary sector’s income (2007). As the cost of living rises and people’s disposable income comes under increasing pressure, it is no surprise that the present economic conditions are already having a detrimental effect on charitable giving.

· A recent survey from the Charities Aid Foundation (CAF) and the Association of Chief Executives of Voluntary Organisations (Acevo)[1] showed that 30% of UK charities have already seen individual donations fall.

· Since the survey above was conducted, the world’s debt markets have collapsed and many of the UK’s high street banks have had to be rescued by the British taxpayer.

· SCVO is aware of numerous charitable fundraising events in Scotland which have been cancelled, including annual fixtures such as the Breast Cancer Campaign’s Pink Tartan Ball, Edinburgh Fashion Show Dinner.

· ‘Cause-related marketing’ initiatives run by organisations such as Capability Scotland where a company will donate a percentage of the price of a product sold have also been stalled.

The top four causes for individual giving in Scotland over the period were:

1. Medical research (£129.2m / 17%)
2. Religious (£121.6m / 16%)
3. Children and young people (£91.2 / 12%)
4. Hospitals and hospices (£83.6m / 11%)

In order to try and grasp the extent of what is at stake, the Charities Aid Foundation UK Giving Report 2007 estimates that the total sum of UK giving during 2006-07 was £9.5 billion.

On the other hand, just over £2.941 billion was given via Gift Aid, the main tax-efficient giving mechanism. The take-up of Gift Aid has been poor. It should be an easy win for the sector but ACEVO has estimated that around £700 million is lost to charities through donors not using Gift Aid. Part of the analysis for this suggests that this may be at least in part due to requirement that donors opt-in to the scheme.

SCVO therefore supports the introduction of a Gift Aid attributable percentage by default to the proceeds from can collections, either public (where licensed by local authorities) or charity organised (and accounted for via their accounts), to boost net income from such collections. A 28% rate could apply, reduced by a small percentage to allow for non-taxpayers who give.

SCVO also supports moves to introduce Lifetime Legacies to allow donors to bring forward the time of their donation to charity without imposing penalties on their estates, and special provision for wealthy donors emerging from the UK Government’s Substantial Donors consultation.[2] This is clearly an opportunity for mitigating some of the effects of likely stalls in donated giving.

Corporate sponsorship

Corporate sponsorship in Scotland, as in the rest of the UK, is only a very small part of charitable income. Corporate sponsorship accounted for 3% of the Scottish voluntary sector’s income in 2001, 1% in 2004 and just 0.3% in 2006. This is significantly lower than in England (3.2% in 2006[3]). Note, however, that corporations, particularly large ones, often donate (as opposed to sponsor) by setting up subsidiary foundations such as Lloyds TSB Foundation Scotland, the Barclays Trust or the Halifax Foundation (see Foundations section below).

Nevertheless, in 2007, Scotland’s largest bank the Royal Bank of Scotland contributed more than £57.7m to community programmes throughout the world. In 2007, for example, RBS launched a new partnership with UK based charity Macmillan Cancer Support to improve advice about the financial implications of a cancer diagnosis. Also during 2007, 25,000 calls were taken by Lone Parent Helpline, funded by the RBS group, a service offering advice specifically for single parent families. In addition, 635,982 secondary school children in the UK received lessons in financial education through the RBS MoneySense for Schools programme. Given the bail-out of RBS, it is likely that a major sponsor of sector activities in Scotland will be substantially compromised.

HBOS operates a commendable programme of sponsorship which invests in sport and in the arts, based in the bank’s heartlands of Scotland and Yorkshire. Its stated aim is to increase access to sport and the arts for young people, creating educational and inspirational experiences through the work of individual partnerships. Since 2002, the HBOS programme has more than trebled the number of young people involved in its sponsored activities. The bail-out of HBOS and the likely takeover of HBOS by Lloyds TSB before the end of the year would immediately result in the effective disappearance of one of Scotland’s largest companies. It is unclear what the merged organisations’ future sponsorship strategy would be, but it appears inevitable that funding in the foreseeable future would not match that given by both companies at the moment.

Think Consulting Solutions, who have conducted recent research in this area, suggest that, “as profits fall, companies are increasingly reviewing their external relations strategies. The early signs in the UK are that corporate sponsorship will suffer unless it is clearly linked to a well developed Corporate Social Responsibility policy (particularly with substantial staff participation) and/or will deliver outcomes like increased profit, customer loyalty, brand awareness / publicity, and improved staff motivation.”[4]

Public Sector Funding (and Lottery commitments)

Public Sector funding accounts for 39% or £1.5bn of the Scottish voluntary sector’s annual funding base (2007). The largest component of this is grants and service delivery contracts from local authorities (28% or around £1bn), which have been rising substantially both in size and proportion of the sector’s income over recent years.

An impending recession will add to existing concerns over contracts and funding agreements between the voluntary sector and local authorities. The existing concerns are encapsulated in the Fairer Funding Statement, which was launched in November 2007 with SCVO as a co-signatory. The Statement, which has been publicised by signatories on a number of occasions, seeks parity of wages (for front-line workers) with the public sector, five-year contracts, appropriate use of competitive tendering and retendering, training of service commissioners, better guidance on achieving best value and an agreed national contract framework. Clearly, meeting the ‘asks’ in this Statement will go a very long way towards anchoring the sector in preparation for the economic difficulties ahead.

Second, voluntary organisations are currently seeking greater commitment to involving the sector within the Single Outcome Agreements that Scottish Local Authorities are required to produce under the terms of the Concordat between Scottish and Local Government in Scotland. There are concerns that the role of voluntary sector is not always explicitly mentioned in SOAs which could compromise the sector’s role in engagement and delivery when finances tighten. A Joint Task Group between Scottish Government, Local Government (CoSLA & SOLACE) and SCVO has been set up as the vehicle to facilitate this greater commitment. However, if the economic crisis hampers the ability of the Scottish Government to maintain its level of funding to local authorities, the SOA process (which is already under pressure) could stall. This may result in uncertainty around service delivery contracts and grant funding for the voluntary sector. We have learned from the early stages of the transition to SOAs, that it is not necessarily the funding regime that causes problems for the voluntary sector, but the uncertainty during transition. The economic crisis will clearly imply a time of considerable uncertainty and change.

Third, added to these concerns will be the impact of funds being diverted from the Lottery grant-makers towards the Olympic Games. Lottery income makes up 2% of the sector’s income, but is a highly valued source of independent funding for innovative projects and smaller organisations, often not fundable elsewhere. Paradoxically, research suggests that the financial crisis may result in more money becoming available for good causes because of more people playing the lottery. There is an imminent consultation due (November 2008) on the programmes for the next phase of the BIG lottery funds, and SCVO will be playing a full part to ensure the Scottish element meets Scottish sector needs.

Foundations

Foundations contribute 4% of the Scottish voluntary sector’s income (2007), but this substantial source of generally untied income is now at risk. SCVO is aware of concerns that a number of trusts and foundations may be tempted to freeze their grant-making activities until the economic crisis and resulting downturn has passed. This is because trusts and foundations are highly sensitive to the performance of their investment portfolios and generally prefer stable market conditions. It is therefore the variability and fluctuations of current share markets that will create difficulties for these trusts, as will the reduction of interest rates and subsequent investment income.

The independently run Lloyds TSB Foundations covering England, Wales, Scotland, Northern Ireland and the Channel Islands receive 1% of the Lloyds TSB Group’s pre-tax profits, averaged over three years, in lieu of shareholder dividend to distribute to local charities throughout the UK. The four Foundations form one of the largest grant-making trusts in the UK and have distributed over £330 million since 1987. The cash fund is designed to benefit charities supporting disadvantaged people and community groups across the UK. In 2008, the fund in Scotland was allocated £7.2 million.

SCVO is aware of a number of suggested scenarios[5] for how foundations might act:

· Overall, there may be a general reduction in per annum giving through the period

· Some trusts may continue to honour long-term commitments but de-prioritise ad hoc applications

· Trusts with investments in oil and gas (and particular commodities such as whisky sales) may be less affected by the credit crunch

· Those that distribute pre-tax profits (e.g. Lloyds TSB Foundation) may have nothing left to distribute until profits return. In Lloyd TSB Foundation’s case this could change for the worse or the better depending on the nature of the restructuring if the merger with HBOS goes ahead.

· Finally, there are concerns that some foundations may freeze their activities for three-years or more.

2. What SCVO will do

Provide information to Scottish voluntary organisations

SCVO has a range of channels through which it connects directly to the Scottish voluntary sector and to the sector’s infrastructure. SCVO is currently using these channels to keep voluntary organisations up-to-date on developments during the financial crisis.

This includes the sector’s weekly newspaper, Third Force News, the SCVO member's bulletin and the thrice-weekly e-bulletin, TFe (circ. 5000). It also includes eCVS, its accompanying email bulletin which reaches the sector’s 60 regional umbrella bodies, and the SCVO Intermediary Network which reaches around 50 national organisations that network subject-specific subsectors. These recipients cascade information further through their own subsidiary networks. SCVO also maintains an Information Helpline (email and telephone), available daily to voluntary organisations. SCVO has already received a number of requests from voluntary organisations seeking information on the financial crisis.

Intelligence Gathering

SCVO has issued a call to its 1300 members for information on the amount of money they have in accounts with Icelandic Banks, how much their levels of reserves or investment have fallen as a result of the financial crisis, and whether they have been affected by the financial crisis in other ways - i.e. loss of sponsorship or private sector support.

SCVO will also be formally surveying member organisations on their perception of the challenges they are facing and how this is affecting their organisations in more detail during early November with a view to report back to its AGM on the 26^th November.

SCVO will also continue to monitor the funding environment for the sector and will be arranging a series of public events to develop further understanding and to gauge options for addressing financial sustainability for voluntary organisations during the economic crisis, starting with a Q & A discussion session at its AGM.

Financial Sustainability Programme

SCVO is in the process of developing a programme of bespoke information, training and support to help strengthen the financial sustainability of third sector organisations. Conceived before the current crisis, in response to needs identified through our existing service provision, the programme will extend beyond the immediate challenges presented by the financial crisis but will initially focus on this given the severity of the situation.

The programme will assist organisations to develop robust financial management systems, organisational strategies that encompass cross-agency collaboration and shared services, and funding strategies that focus on diversifying the funding base to harness greater long term sustainability. In addition to formal training and support, emphasis will be placed on peer support and exchange.

In view of the current situation, the programme will now commence with a roundtable seminar on the financial crisis. SCVO is already keeping members and intermediaries (national and local) updated on developments through the channels and networks described in 2.1 above. This roundtable seminar will provide a much needed opportunity to discuss the impact of the current crisis and how we can collectively address the challenges it presents.

3. What SCVO asks Government at all levels to do

SCVO is meeting with the Secretary of State for Scotland, Jim Murphy and is in contact with the Scottish Government and CoSLA to ensure that the Scottish voluntary sector is supported through the financial crisis.

Guarantee bank accounts

SCVO on behalf of the Scottish voluntary sector is currently calling on the UK Treasury and the Scottish Government to provide enhanced assurance that all charity and voluntary sector assets are protected against the effects of the current financial crisis. We believe this special assurance is warranted because of the supportive (and mitigating) role the sector will be best placed to play during the economic downturn, whether in the fields of skills development, employability, debt advice, health services, community education, accommodation or care services.

Use newfound influence on the boards of RBS, HBOS and Lloyds TSB

Following the bail-out of the above three major banks, the UK Government will be positioned to have substantial influence over the sponsorship and foundation frameworks of the three banks rescued, particularly as profits return. SCVO recommends following the pre-existing Lloyds TSB Foundation, where 1% of Lloyd TSB’s pre-tax profits are designated and devolved to four foundations matching the four nations. By setting the model from the beginning Government will be able to ensure that all three banks fulfil their Corporate Social Responsibility duties in supporting the sector in Scotland and the other administrations. Given taxpayer ownership of substantial shares of the banks, the nature of this support should be consulted with the sector as currently is the case with the Lottery funds.

Commit to resolving contractual barriers to sector funding

SCVO will call on Local Government and the Scottish Government to ensure that the sector’s role in public services is fully utilised and calls on the UK Government to play their part in addressing barriers to funding due to difficulties with the clarity of current guidance for contractual and funding conditions. These should be resolved as quickly and practically as possible in preparation for an impending recession. This will require Governments at all levels to commit to redouble their efforts with sector representatives to ensure that our concerns and opportunities, as collated in the Fairer Funding Statement and ongoing discussions through the SCVO/CoSLA/SOLACE/Scottish Government Joint Task Group, are fast-tracked.

Boost the use of Gift Aid

UK Government must work with its partners including the devolved administrations to help counteract the likely reduction in general public donations and to sustain the sector through the economic downturn. SCVO would like to highlight calls from the Charity Tax Group and other UK colleagues for the UK Government to enhance support for Lifetime Legacies and Substantial Donors, and to promote the take-up of Gift Aid, by allowing an attributable percentage of street, can and associated collections to attract Gift Aid by default.

Scottish Voluntary Sector Statistics 2007

www.scvo.org.uk/almanac

Fairer Funding Statement 2007

www.scvo.org.uk/fairerfunding

Policy and Research Team

SCVO.