The David and Lucile Packard Foundation was right on target. The Robert Wood Johnson and Kresge foundations also hit the mark smack on the nose, as did the Rockefeller and Charles Stewart Mott funds.
To keep money flowing from endowments to charitable causes, federal law requires foundations to distribute at least 5 percent of their assets each year. In 2014, the most recent year for which data is available, each of those grant makers scored an exact hit, a Chronicle analysis of Internal Revenue Service data compiled by the Foundation Center found.
Some critics say foundations should be required to spend much more, especially since they enjoy a huge taxpayer subsidy. Even more galling to those critics is that administrative expenses count toward the 5 percent requirement, which can make a foundation a small financial empire that enriches employees, consultants, and financial advisers.
“There are a lot of places we can invest in right now that would have a better return for society than simply putting money in the hands of a hedge-fund manager,” says Brian Galle, a law professor at Georgetown University. Citing figures from the Foundation Center, he estimates that nearly $900 billion in foundation endowments is sitting idle, gaining investment returns but not making the world a better place.
There are signs that policy makers are taking notice. Over the past year, lawmakers have debated measures aimed at getting universities with large endowments to do more with that money. A bill written by Republican Rep. Tom Reed of New York would force the wealthiest colleges to funnel at least 25 percent of their endowment income into student aid.
The bill wouldn’t apply to foundations, which haven’t yet encountered the same level of scrutiny as elite universities. But with Congress preparing for a tax overhaul, and a tight federal budget environment for many foundation priorities like human services and health care, many philanthropy observers say Congress might ask grant makers to turn up the dial on their spending.
“It’s quite prudent for people in the philanthropy field to keep a very careful eye on this,” says Hadar Susskind, senior vice president for government relations at the Council on Foundations.
Job Stability
IRS rules allow for variations in how foundations determine their distribution rates. The Chronicle’s analysis represents one way to calculate those rates, so the figures cited in this report may not exactly match what the foundations reported to the IRS, although they likely are close in most cases.
Foundation managers reject criticism of their distribution rates, saying they have a duty to protect their endowments so they can serve future generations.
“We all think these are the toughest times,” says Amy Robinson, vice president of the Kresge foundation. “But there are always tough times, and you need resources available to have an impact” in the future.
In a bull market, grant makers that distribute the minimum are able to stockpile wealth. That makes them an easy target for proponents of raising the requirement above 5 percent, foundation officials say. But last year foundations’ endowment returns were flat, according to a study by the Council on Foundations and the Commonfund Institute.
Foundation money managers worry that future rough spots in the market will make it difficult to meet even the 5 percent minimum and still maintain the purchasing power of their endowments.
“If you pay out more than 5 percent, you’re going to eat into your corpus in real dollars,” says Donald Williamson, vice president for finance at the W.K. Kellogg Foundation.
Foundation investments saw healthy returns from 1986 to 2009, averaging gains of nearly 10 percent, according to an analysis by Cambridge Associates. But the study — which was paid for by the Council of Michigan Foundations, the Council on Foundations, and Philanthropy Roundtable — found that when adjusted for inflation, returns during that period were closer to 6 percent. Over time, the report suggests, that level of return would make it difficult for a foundation to maintain its grant-making power if it were required to distribute more than 5 percent.
For years, the Cambridge study has been treated as gospel by foundations that want to safeguard their endowments. But Georgetown’s Mr. Galle found a different result when he looked at foundation investment returns.
Using financial data from more than 21,000 foundations over 28 years ending in 2013, Mr. Galle calculated that even when adjusted for inflation, average foundation returns were at least 9 percent. If a foundation wanted to exist in perpetuity it could still distribute well above 5 percent without dipping into its endowment, he argues.
Critics like Mr. Galle say foundations can lose their way after their original donors die. Managers hit the brakes on spending, and the investment staff puts a premium on amassing wealth rather than putting it to use. Like their Wall Street brethren, investment professionals at foundations are used to being judged by the accumulation of assets, Mr. Galle says. A larger endowment equals more status and greater job security, he says.
The Right Strategy
“That’s just nuts,” responds Peggi Einhorn, chief financial officer at the Robert Wood Johnson Foundation.
Keeping an endowment intact has nothing to do with maintaining a stable job, she says. Investment officers at major grant makers could easily ditch the foundation world and get lucrative jobs at any of the nation’s leading brokerages, she argues, but they work in philanthropy because they believe in their organization’s mission.
Peter Frumkin, faculty director of the University of Pennsylvania School of Social Policy and Practice, agrees, saying that a large endowment is often necessary for a foundation to strike a blow when it is most effective.
“Foundations should be focused on what is the right payout strategy for their mission,” he says. “They may legitimately not have the capacity present in the nonprofit community to execute what they want. What if more spending doesn’t bend the curve of the problem? In that case, why not pass it along and make sure other generations get some help along the way?”
But Aaron Dorfman, president of the National Committee for Responsive Philanthropy, says that too often decisions by foundations to pass down their wealth is more of a reflex than a strategy. A multigenerational approach to philanthropy makes sense for some social issues, such as solving racial inequities, Mr. Dorfman says; other work is more pressing. If foundations that focus on climate change, for example, choose to safeguard their assets for future generations, they have already conceded the battle is lost, he says.
“If you make that choice, you have chosen that the goal of lasting in perpetuity is more important than solving climate change,” he says. “It is philanthropic malpractice when foundations choose perpetuity by default.”
Two Outliers
Billionaire investor George Soros’s Foundation to Promote an Open Society is among the few very large grant makers that appear to have paid out substantially more than the law requires — it distributed nearly 15 percent of its assets in 2014. Open Society, however, receives cash infusions from its founder on a regular basis, so it can spend at a faster rate without shrinking its endowment.
Among the majority of foundations that don’t get regular gifts of donor cash, the John S. and James L. Knight Foundation was one of the few that paid out notably more than required — at least 6 percent of its assets during each of the five years The Chronicle studied.
The “grand bargain” grants Knight made to help Detroit emerge from bankruptcy, a large award to the Newseum, and several grants to arts institutions contributed to the foundation’s higher-than-mandated distribution during those years, says Juan Martinez, the fund’s chief financial officer.
Mr. Martinez says healthy investment returns have allowed Knight to disburse grants at a slightly higher rate without degrading its endowment. From 2010 to 2014, its corpus grew 5.6 percent after adjusting for inflation. However, paying out any more than 6 percent might have left the foundation unable to make a big difference in supporting a free and effective press, one of its key program areas, Mr. Martinez says.
The upheaval in the media world caused by the internet has news outlets scrambling to keep up. But Mr. Martinez says that Knight’s journalism grants will go out at the same measured pace as they did before the digital revolution.
“You could make the argument that there is such a crisis in media that you should spend and spend with abandon,” he says. “If that argument had been made 15 years ago, we would not be in the business of making grants today.”
Draining Coffers
Some foundations leaders concede that it wouldn’t be a catastrophe if they had to open up their spigots — even if it means reducing the size of their endowments. James Piereson is the president of the W.E. Simon Foundation, which plans to spend all of its assets by the end of 2023.
In the United States, Mr. Piereson says, steel and oil fortunes were followed by auto and manufacturing empires, which were succeeded by technology wealth. Each iteration created its own wave of philanthropy, and Mr. Piereson is confident future generations will follow suit. Because more money is coming, he believes foundations should spend faster on problems right before their eyes.
A big problem, Mr. Piereson says, is that many large foundations focus on nebulous challenges. He cites, for instance, the “culture of health” Robert Wood Johnson would like to create and the broad equality effort that became the Ford Foundation’s rallying cry two years ago.
Discrete problems, like a single disease, can be solved if foundations pour money into finding a cure. However, when a foundation establishes a broad goal that will take generations to address, it creates a built-in a justification to sit on its wealth and make minimal disbursements, Mr. Piereson argues. “The problems they are presenting are defined in such vague, abstract and global ways,” he says. “I’m not sure any of those things can be solved.”
