To hold or pay out: the case for foundation largesse

Andrew Milner

Grantmaking foundations provide the risk capital of the social sector, yet their trustees are relatively conservative about how much money they make available, with most payout rates single-digit percentages of foundations’ total assets. At a time when we are facing problems like migration that call for resources now, and when the SDGs will demand a major mobilization of resources, how defensible are these small payouts?

Payout around the world

Nowhere apart from the US, with its well-known 5 per cent minimum payout rate for foundations, is there a statutory requirement to pay out a fixed proportion of assets. The question arises in only a few countries, since endowed foundations are either rare or non-existent. Brazil has only one endowed foundation, which follows the US 5 per cent example, but uses it as ceiling rather than a floor. It’s not alone in this. A frequent grumble in the sector is that the 5 per cent minimum in the US has become a ceiling as well as a floor. Russia has a handful of endowed foundations that are supposed to spend all of their annual income. They can’t touch their corpus in the first ten years, but can spend it all thereafter if they choose. In Germany, too, foundations are required to spend all their earned revenue in the following business year, but are also required to maintain the real value of their assets, after inflation. The UK has no requirement on spend down though there are regulators who are responsible for ensuring that foundations and other charities spend an ‘appropriate’ percentage of their assets. The possibility of intervention acts as a check on foundation hoarding.

The limited-life foundation

One way of putting more of your social risk capital into circulation is to spend down. Chuck Feeney, founder of Atlantic Philanthropies, which will make its last grant next year, handily sums the chief argument in favour of limited-life foundations in a letter to Bill Gates in 2011:

‘We believe that if we address urgent issues now, like opportunities for children and youth or access to treatment for those with HIV/AIDS, they are much less likely to become larger, more entrenched and more expensive challenges later.’

Few have followed suit, however. David Emerson of the Association of Charitable Foundations in the UK would be surprised, he says, if, out of the ten thousand or so foundations in the UK, ‘even 100 were actively involved in spend out’. There are no overall figures, so a 2009 study done by the Foundation Center on US family foundations [1] will have to serve as a rough index. Only 12 per cent of the foundations polled had a limited lifespan.

Clearly spend-out would not be appropriate in many cases. If a foundation’s mission is, say, to support scientific research, it wouldn’t make much sense to give away all of the assets in the next ten years. A foundation that supports efforts to combat climate change and environmental degradation, on the other hand, might spend down now to prevent future chaos.

Some foundations will be hindered, if not prohibited, from spending down by the terms of their founding document. Deciding to spend down is much easier if you have a living founder like Chuck Feeney or Bill Gates. The Foundation Center report also notes that family foundations with a living founder are three times more likely to expect to spend down than those whose founder is deceased.

The real merit of the spend-down debate, feels David Emerson, is that it has encouraged foundations to reassess their priorities and spending rates: ‘thinking about perpetuity or not helps trustees focus on what their mission and timescales are or should be.’

Why foundations should save their funds

The main argument for hanging on to their assets is that foundations can do more good over the long term than in the shorter term if investments are allowed to grow. This allows foundations to take risks and provide long-term support for long-running problems. It can even allow them to make bigger payouts in times of need, such as during the 2008 recession. As David Emerson wrote in Alliance, ‘a long-term approach to stewardship of endowments gave them the confidence to ride out short-term market fluctuations.’

The long view also offers perspective. David Emerson notes that, ‘at ACF we have members whose origins pre-date the Magna Carta in 1215. So are present circumstances really more grave than….the First World War, the Great Depression (or) the Second World War? Put in that wider context, isn’t it acceptable for foundations to take the longer view beyond however bad current conditions seem to be?’

Foundations also point out their influence is not restricted to grants made. Writing in SSIR, Judith Rodin and Neil Coleman describe how the Rockefeller Foundation ‘used influence—our brand, reputation, knowledge, networks, and convening power—to leverage $5 million of our grant dollars into the smarter use of almost $2 billion in federal funds.’

…and why they should spend it

However, John Hoover of the Andrea and Charles Bronfman Philanthropies, a spend-down foundation, wonders what might be the impact of the invested funds if they were spent now? Writing on the GrantCraft website in July last year, Hoover cites the Gates Foundation’s polio programme as an exemplar of the benefits of payout: ‘in just 25 years, the number of new polio cases has decreased from 350,000 annually to less than 400 in 2013. That equates to more than 7 million people who have avoided contracting polio.’

And there are problems that seem to clamour for investment now. Foundations, says Rick Cohen of Nonprofit Quarterly, use the argument that resources are being invested to address future problems, but ‘in many cases, the problems they’re talking about for the future can’t be put off.’ The most obvious one is climate change, but Chuck Feeney’s letter notes others where attention now might pay dividends

Some foundations payout all of their funds towards programs like the Alzheimer programms by UK charity Hearts and Mind; others reserve more funds to build their endowments.

Some foundations payout all of their funds towards programs like the Alzheimer programms by UK charity Hearts and Mind; others reserve more funds to build their endowments.

Raising the ceiling?

Even if they want to invest for the longer term, could they give more now? Well, they are doing so. David Emerson points out that actual amounts involved in grantmaking are increasing – in the UK, foundations made grants of £2.5 billion in fiscal 2013, compared with £2 billion in 2010-2011 financial year. But the percentage of assets given out is more or less constant. The principal worry is that ‘payout rates higher than 5 per cent are not sustainable’ [2]. If, as a result, it was not possible for most foundations to exist in perpetuity, ‘there would be a strong disincentive for donors to establish PFs (private foundations)’. [3]

Rick Cohen will have none of it. Even with a market downturn, he argues, ‘foundations as institutional investors do much better than most private investors and their returns are quite healthy.’ And this, he adds, takes no account of the new money coming into philanthropy. Foundation Center data confirms that US foundations received $56.2 billion in gifts in 2013, a little more than they paid out in grants.

‘In what millennium will some of these foundations go out of business if they spend 6, or 7 or 10 per cent?’ he wonders. The real reason for them ‘sitting on their assets’, as he puts it, is that they are ‘too focussed on their institutional survival as opposed to idea that they are problem solvers.’ In other words, the stress is in the wrong place – on the continued existence of the foundation, not on whether it does its job.

At a time when government cutbacks make more demands on philanthropy and a big effort is required to achieve the SDGs, maybe the real question is not how much is enough, but what the real cost of investing, rather than saving might be. Given that the general tenor legislation to curb abuses by foundations — their use as simple tax shelters, for example — but not to interfere with their pursuit of perpetuity on their own terms, it seems likely that the question will left in the hands of individual foundations to decide.

Andrew Milner is an associate editor of Alliance magazine.

Photo credit: http://www.heartsminds.org.uk / courtesy of Braeside House, Edinburgh


Footnotes

  1. ^ Perpetuity or Limited Lifespan: How Do Family Foundations Decide? Foundation Center, April 2009.
  2. ^ PANO (Pennsylvania Association of Nonprofit Organizations) Action Center Campaign July 15, 2003. In fact, the average payout rate in the US hovers around the 7 per cent mark. In the UK, according to ACF’s Giving Trends 2015 report, the top 30 foundations gave a whisker over 7 per cent of their assets in grants in 2013 or just under 5 per cent if the giant Wellcome Foundation is factored out (ACF’s Giving Trends 2015).
  3. ^ Private Foundations: Payout and Perpetuity, Oliver Bareau. MPE Paper, University of Columbia, https://www8.gsb.columbia.edu/sites/socialenterprise/files/OliverBareau.pdf, undated)

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