Lilly Endowment has made few changes despite massive fall in value

 Posting double-digit percentage losses is a rare event for most charitable foundations.

Not so at the multi-billion-dollar Lilly Endowment
Inc.

The Indianapolis-based
foundation lost 26 percent of its value in 2008, falling from $7.7 billion to $5.7 billion. What’s different
about Lilly Endowment is that its most recent loss caps a downward slide that’s lasted eight years.

Lilly has lost nearly two-thirds of its value
since 2000, falling from $15.6 billion to $5.7 billion. It’s still one of the largest foundations in
the country, and provides hundreds of millions in grants each year to Indiana not-for-profits.

But that pool of generosity is shrinking. Lilly Endowment’s annual giving has declined 43 percent
since 2000, from $583.3 million to $330.9 million.

While other foundations have changed grant-making procedures or cut expenses to maximize withered
resources, the endowment has made no such moves.

"We are continuing with the programs announced last year for this year," spokeswoman
Gretchen Wolfram said. "I am not aware of any adjustment to the guidelines. Many of our grantees,
because they’re so local, pretty much understand the situation."

Other endowment officials were not available for comment. Wolfram said endowment President Clay
Robbins does not grant interviews.

For most foundations, the losses of 2008 came after four years of stock market gains. But Lilly
Endowment didn’t benefit from the run-up because the vast majority of its assets are invested in Eli
Lilly and Co. stock, which has suffered since a federal appeals court took away patent protection for
its blockbuster antidepressant Prozac in August 2000.

The company’s stock soared in the late 1990s and reached more than $100 per share in 2000. Lilly
Endowment grew much faster than other endowments during that period, said Josie Atienza, assistant research
director at the Foundation Center in New York.

But after the tech bubble burst in 2001, sending the overall market down sharply, Atienza said,
the endowment "was also declining faster than the other foundations."

The market, as measured by the S&P 500,
gained 19 percent from 2001 to 2006. Lilly shares slumped 36 percent in the same period. The stock has
continued its slide and now trades for around $36.

Not only did Lilly Endowment miss the bull market earlier this decade, it also experienced more
than one double-digit percentage drop. In 2002, its assets fell 22 percent, from $12.8 billion to $10
billion. Assets fell more than 20 percent again in 2004, from $10.8 billion to $8.6 billion. Further
declines since leave the endowment with assets of $5.7 billion, its lowest level in more than a decade.
"We sort of hit a double whammy with the declining value of that asset, as well as a recession," Wolfram
said.

This year, The Chronicle
of Philanthropy ranked Lilly Endowment as the sixth-largest charitable foundation in the nation. A decade
ago, it ranked first, with the New York-based Ford Foundation second. In the latest list, Ford remains second, with
$9.5 billion in assets, trailing the $30 billion Seattle-based Bill and Gates Foundation.


Concentrated in Lilly stock

Lilly Endowment launched in 1937 with gifts of Eli Lilly and Co. shares from Lilly family members,
and through most of its history company stock was virtually its only investment.

The endowment’s board in 2006 announced a plan
to slowly diversify, and the percentage of the endowment in Lilly shares has fallen to 95 percent since.
Wolfram said further diversification is on hold because of the bear market.

Few U.S. foundations are so heavily concentrated in the original donors’ stock, said Bill Jarvis,
head of research at the Commonfund Institute in Wilton, Conn. The institute is the research and training
arm of Commonfund, which manages $26 billion for more than 2,000 not-for-profit clients.

A 2008 institute study found that donors’ stock
accounts for an average of just 14 percent of foundation assets.

Lilly Endowment’s stake in the company, about 10 percent, is so large that diversification must
be handled delicately, Jarvis said.

"You could see that taking five to 10 years, just to avoid the impression of a fire sale,"
he said. "They are going to have to sell into strong markets. It’s going to take quite a bit of
professional coordination."

Giving close to home

Lilly Endowment has been like a rich uncle to Indiana charities because roughly three-quarters of its
giving is concentrated in the state. Last year, that amounted to $250 million, or 76 percent of $331
million paid out.

The
endowment was even more generous back in 2000, paying out $583 million.

Giving has declined 43 percent since then, but observers say the endowment’s
managers have ways of making that less noticeable to the not-for-profit community at large.

For one thing, the endowment doesn’t take cold
calls.

"The things that Lilly funds, they more or less invite," said Bryan Orander, a not-for-profit
management consultant. "They can control it to some extent there."

The endowment is known for giving large amounts
to address big societal problems. For example, in 2003, it gave $39 million to the state’s public universities
and private colleges to address "brain drain."

"They have these overarching, huge efforts going on," Orander said. "But they get
to pick when they come in for the next grant cycle."

Michael Twyman, director of grant programs at the local Nina Mason Pulliam Charitable trust, pointed
out that Lilly Endowment also has made huge grants to enable other organizations to establish their own
endowments. United Way of Central Indiana received $50 million, and Indiana University’s Center on Philanthropy
received $40 million.

Bestowing that kind of money has a way of making an organization’s recurring needs go away for a while, Twyman said.

At the same time, Lilly Endowment supports a
number of major institutions year after year. The Indianapolis Zoo, for example, has received $1.1 million
for general operations every year since 2000. It also has received one-time grants for capital projects.

Orander said the endowment could keep up those
grants because the number of organizations with that type of relationship is small.

Considering the size of the most recent drop,
Orander said, "It’s hard to imagine the zoo, or the Arts Council [of Indianapolis] aren’t kind of
watching to see what’s going to happen."

The tax code requires charitable foundations to spend at least 5 percent of the value of their assets
at year-end. That means Lilly Endowment must pay at least $286 million in 2009.

The Nina Mason Pulliam Trust and others have
changed their grant-making priorities and guidelines so they can focus their dwindled resources on urgent,
recession-driven needs.

Lilly Endowment helped create an emergency-relief fund and has thrown in $3.5 million so far. But it hasn’t announced any
fundamental change.

Nor
has the endowment laid off any of its 40 employees, Wolfram said.

"We’re all encouraged to spend wisely and not too much," she said.

The major expense is salaries—the board
of directors’ as well as employees’. Salaries of officers and directors totaled $3.36
million, and other employees’ wages totaled $3.18 million in 2007, according to the endowment’s tax return
for that year.

The top earners are Chairman Tomas Lofton, whose salary was $595,885 in 2007, and President N. Clay Robbins,
who was paid $590,520.

Wolfram pointed out that Lilly Endowment has far fewer employees than other
leading foundations. According to the Foundation Center, those with widespread missions
tend to have higher expenses. Lilly’s work is mainly in Indiana.

"It’s very, very lean," Wolfram said.

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