In the debate over dispersal of philanthropic dollars, donor-advised funds have received the most scrutiny lately, including proposed federal legislation that would require quicker payouts. But those concerned about the warehousing of tax-advantaged charitable funds would be wise to direct their focus elsewhere — at America’s largest private foundations.
In a new report for the American Enterprise Institute, I compare the growth in financial assets of the nation’s 15 largest foundations with their payout rates to nonprofit organizations. The results make it clear that these foundations could and should be giving more.
Even as the rising stock market feeds foundation endowments, with many enjoying double-digit return on investment from 2018 to 2019, payout rates have barely budged. All 15 foundations saw their assets increase by more than 5 percent — substantially more in several cases, including 19 percent for the Lilly Endowment, 13.2 percent for Bloomberg Philanthropies, and 8.1 percent for the William and Flora Hewlett Foundation. Only two of the top 15 saw returns under 6 percent.
(The Hewlett Foundation and Lilly Endowment are financial supporters of the Chronicle of Philanthropy.)
By contrast, average foundation payout rates were strikingly lower — just 5.94 percent for the top 15 or only slightly higher than the legally required minimum 5 percent distribution. Indeed, two of the foundations with the highest earnings had among the lowest payouts rates — the Lilly Endowment, which distributed just 4.5 percent of its assets and the Hewlett Foundation, which distributed 3.9 percent. This is permissible because the law allows catchup payments in succeeding years.
Notable outliers were the Gates Foundation (11 percent) and the Walton Family Foundation (12.2 percent). It’s important to keep in mind, though, that all the distributed dollars include administrative costs such as staff salaries, so even these payouts likely overestimate the charitable impact.
By contrast, the National Philanthropic Trust estimates that the average payout rate of donor-advised funds was a far higher 22.4 percent in 2019. In this context, it’s hard to understand why those concerned about charitable giving would aim their fire at DAFs.
The accumulated assets of major foundations also raise questions about whether they are operating in the spirit of a 1969 tax law that led to the 5 percent minimum for foundation distributions. That rule was a compromise reached after Tennessee Senator Albert Gore Sr., concerned that the wealthy were parking funds to gain tax advantages, argued that foundations should be required to close their doors after 25 years.
Limited Life Spans
As major foundations continue to build their war chests, the issue of whether they should be able to hold onto their assets indefinitely deserves a closer look. A growing number of grant makers are already taking steps to eventually shut down. Bill Gates and Melinda French Gates have stipulated that their foundation should close 25 years after their deaths. Other major foundations, including the Atlantic Philanthropies and the John M. Olin Foundation, closed operations in recent years.
There are several arguments in favor of setting a limited life span for philanthropic organizations. Among them is the risk that foundation staff will move the organization’s focus away from the original intent of its founders, as has happened with a number of large philanthropies, including the Ford Foundation and the John D. and Catherine T. MacArthur Foundation — both of which are far more progressive today than the vision laid out by their conservative founders.
Several steps could be taken to address the disparity between asset growth and payout rates that are enabling these foundations to operate forever. This doesn’t have to involve draconian regulation.
Rather, foundations should consider it a smart approach to ensure their giving rates match their asset growth and not simply adhere to the 5 percent minimum. At the same time, Congress could require new foundations, when filing articles of incorporation, to at least stipulate if they plan to operate in perpetuity and why. Existing foundations should have to take the same step. This would prompt boards of directors to reflect on whether it is appropriate, even ethical, to continue to oversee ever-growing pools of assets.
Ben Franklin’s Lessons
As they consider the future of their organizations, foundation leaders should look to the lesson of Benjamin Franklin, who could be viewed as America’s first philanthropist. When the Founding Father bequeathed $2,755, the equivalent of $426,144 today, to charitable endeavors in Boston and Philadelphia, he stipulated that the funds be distributed slowly to take advantage of what we now call compounding interest. The Franklin Institute in Philadelphia, one of the nation’s great science museums, and the Benjamin Franklin Institute of Technology in Boston, a successful vocational training college, can be tracked to his gift.
But Franklin did not believe in perpetuity and stipulated that after 200 years whatever remained of his gift — compounded many times through investment — should be given to the governments of Massachusetts and Pennsylvania in a lump sum, “not presuming to carry my views farther.”
Today’s foundation leaders, flush with stock-market cash, would do well to ponder Franklin’s words and acknowledge that a 5 percent payout rate is no longer enough. Congress should nudge them in that direction by revisiting a long deferred discussion about the desirability of foundations endlessly building up assets and existing forever.
