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What the stock market giveth, the stock market taketh away. That's the hard lesson for many arts groups these days as some organizations that were encouraged to build up endowments in the past decade now find those funds aren't going to pay out any income in 2009.

“It's horrifying,” says Kevin Garland, executive director of the National Ballet of Canada, explaining she has been warned not to expect any income from the company's $20-million endowment before 2011. In previous years, that fund generated as much as $900,000 in income, which the ballet used to help cover its $24-million operating budget. “We have a $900,000 hole. First, we have been going through and carefully cutting costs where we can, and the second thing is to hopefully raise more money,” she says, conceding, however, that selling more tickets or snagging more donations may be difficult if a recession takes hold.

At Pacific Opera Victoria, executive director David Shefsiek is looking at a shortfall of at least $100,000 on his $3.2-million budget, after the Victoria Foundation, which manages the company's $2.5-million endowment, stopped paying out income in August.

“They are trying calmly to deal with the situation. We have to give them a little breathing space, but yes, it is a cause for concern,” he says, adding that he is trimming costs, holding off on hiring a new fundraising assistant, and also thinks he will be able to raise more money from donors. “The causes people love don't change according to market conditions,” he says.

The National Ballet and Pacific Opera are just two of hundreds of arts groups that were encouraged to build up their endowment funds – or create them for the first time – by government programs that match donors' contributions.

In 1998, the Progressive Conservative government in Ontario, looking to encourage arts groups to rely less on grants and more on private-sector support, gave the Ontario Arts Foundation $25-million to disperse in matching dollar-for-dollar grants, on a first-come, first-serve basis until the budget was depleted. Since then, the foundation has paid out almost $27-million in income on investments to 270 groups, while subsequent provincial governments have handed the foundation another $35-million to pursue the program, of which only $1.75-million remains to be dispersed.

The federal government has matched endowment funds since 2001, usually to the tune of 50 or 60 cents on the dollar, in a program that has funding up to 2010. In British Columbia, the Liberal government followed Ontario's lead in 2005, asking the Vancouver Foundation to grant the matching funds and to administer the endowments. The oldest community foundation in Canada, it also administers funds for social services, health and education groups, and has almost depleted an initial budget of $25-million for the arts groups' endowments.

Participants include 175 groups who established endowments in response to the program as well as others who had existing endowments. Among them: the Langley Arts Council, Bard on the Beach and the Victoria Conservatory of Music. “Both programs have been a boon to us and helped us grow our endowment,” says Erik Dierks, vice-president and chief development officer at the Vancouver Symphony Orchestra.

Ironically, these highly successful efforts to make the arts community turn to the market for annual income are now revealing the risks of that strategy. To get the matching grants, the arts groups hand over all control of the endowment to the foundations, which set the annual rate of payout and usually stipulate that the capital cannot be touched. Federal tax law decrees that any endowment holder draw down at least 3.5 per cent of the funds per year, but since the foundations have regularly paid out more than that, they can now carry forward those extra percentages – and choose to pay out nothing for 2008-09.

This has left some Ontario groups, especially, angered that the promise of stability has proved empty: Often, they received 5 per cent from the Ontario Arts Foundation, even in years when the market was returning twice that rate. Now, they have been told to expect nothing.

“[It's] a holiday, a holiday we don't wish to take,” says foundation director Janet Stubbs, who has warned participating arts groups that there will probably be no income from their endowments in 2009. The foundation manages the endowments of such small and mid-sized Ontario companies as Toronto's Tarragon Theatre and the baroque orchestra, Tafelmusik. Seven large ones, including the National Ballet and the Canadian Opera Company, are also eligible for the matching grants, but administer the money through their own independent foundations.

The Vancouver Foundation has told its groups they will receive the usual 5 per cent for the fourth quarter of 2008, but that no decision has yet been made about 2009. The foundation's board will meet next month to consider what to do – whether that means holding off on any decision about the first quarter to see if the market recovers, or breaking investment policy and dipping into endowment capital.

“We are committed to finding a way to support our fund holders.… The implicit contract is that you will get annual support,” says Catherine Clement, the Vancouver Foundation's vice-president of communications. “The question asked by any foundation is: Do you change policy and borrow from capital because of the implications of not getting anything?”

The arts groups' predicament has some managers asking whether endowments should be regarded more as rainy-day funds than as annual producers. “U.S. orchestras have relied for years on the endowment funds, and the American orchestras have operating deficits,” notes Madeleine Careau, chief executive officer for the Montreal Symphony Orchestra, which has not drawn any income from its endowment since 2006, but still balances its budget. “We have learned to live without big revenues from investments.”

The Montreal Symphony is not the only group that figures it can simply wait out a bad market. Both the Vancouver and Toronto symphony orchestras say they expect regular payouts from their endowments in 2009. Partly this is because these are much older funds, dating to 1963 and 1966, respectively, that have grown over a longer period. As a result, there's more space to draw some income without touching capital. “We would be loath to … [not draw income] unless it was absolutely dire,” says Dierks of the VSO. “We don't foresee that.”

“Nobody likes to see anything go south, but we are not in a panic situation,” agrees Bianca Roberts, senior vice-president of development at the Toronto Symphony Orchestra, where conservative investments have not fallen as much as the market. “We are in a good position to ride out a bad 18 months or two years – but who knows how long this will last?”

Meanwhile, the groups that are facing the loss of endowment income say they are still better off, no matter how battered their investments.

“We were better going that route than not, because of the matching grants,” says Tricia Baldwin, managing director of Tafelmusik. “It was a great incentive to focus on endowment.” In 1998, when the Ontario program started, Tafelmusik had $110,000 in an internal endowment; in September, 2008, it had $1.56-million, most of it parked with the Ontario Arts Foundation. Of course, the fund lost 9 per cent of that value in October, as the baroque musicians were reminded, along with every RRSP holder of the old adage: Don't put money in the market you can't afford to lose.

On Monday: Arts groups are still receiving gifts of stock, while charitable foundations are trying to hold the line on grant programs.