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Five of the nation’s largest and most storied foundations are expanding their combined grantmaking by nearly $1.7 billion. A growing wave of smaller foundations have doubled their giving or more. One group is pushing a legislative effort to force foundations to spend more. And more grantmakers are questioning the assumptions that shape how they decide their giving rates in the first place.

These developments—prompted by the staggering health and economic toll of the COVID-19 pandemic and the recent gains of the movement against anti-black racism and systemic inequities—have cranked up an already heated philanthropic debate over how much of their wealth foundations should be spending.

For decades, most foundations have treated the 5% minimum spending requirement as both a floor and a ceiling. And critics have long urged foundations to give more, both in response to global crises like climate change and economic boom times. But overall, giving rates have remained strikingly flat, hovering just over 5% for the sector as a whole. 

Now, proponents of smashing that norm are hoping that the challenges—and possibilities—of this time will drive widespread change in the sector.

Five Massive Foundations Take Unusual Measures to Spend More

Last week, five major U.S. grantmakers—the Ford, MacArthur, W.K. Kellogg, Andrew W. Mellon and Doris Duke Charitable foundations—announced a plan to significantly expand their giving. At least three will do so through a rare maneuver: issuing bonds.

“An urgent crisis has been presented to us, and as leaders, our challenge was to rise to the occasion,” said Darren Walker, president of the Ford Foundation, in a press call. “This COVID-19 moment requires foundations to step up in unprecedented ways with courage and boldness and creativity.”

Ford will nearly double its giving by granting an additional $1 billion over the next two years, expanding its payout to 10% over that time period. Doris Duke and Kellogg are each pledging to distribute the equivalent of a year’s worth of giving over the next two years—$100 million and $300 million, respectively—raising their payout rates to about 8% over that time.

Mellon is expanding this year’s grantmaking by $200 million, or about two-thirds of its recent annual giving, a one-year boost to a nearly 8% spending rate. In the smallest increase of the group, MacArthur will grant an additional half-year’s giving over the next three years, or about $125 million, likely increasing its payout rate by less than a percentage point. Each of the five had a payout of between 4.9% and 5.9% in 2019, or the most recent year for which data was available.

The group—four of which have multi-billion-dollar endowments that rank among the 15 largest in the nation—stated that they were stirred to action by the need they saw in their communities as a result of COVID-19’s health and economic impacts, as well as the “national reckoning” taking place over systemic racism.

“It feels like 2020 is a combination of 1918, in the sense of the effects of a pandemic, 1933, in the sense of the long bread lines as well as the whiff of authoritarianism in the air, and 1968, in the sense of, of course, protests, some riots, of course, but also the sense of possibility that derives from that period,” said John Palfrey, president of MacArthur, on the call. “And out of that mix, I think we have an extraordinary possibility to create a new future, but only if we’re deliberate about it.”

If the possibility of policy change to advance their institutions’ long-term goals motivated any of the five, they were reluctant to draw a direct connection. Walker wrote in a follow-up email that Ford’s “top priority” is to help grantees weather a “once-in-a-century” crisis. He only hinted at the broader possibilities: “And as we fund these vital recovery efforts, we must reimagine our systems—reimagine our democracy, our economy, our culture, for the better.”

Ed Henry, president and CEO of Doris Duke, did acknowledge some potential for policy shifts. “The pandemic has wreaked havoc on people and the economy while at the same time magnifying inequities in our society. Racial and social injustices call for action above and beyond our normal capacity. We expect that actions will help prod policy change,” he told me.

Several members said bonds, which have historically been used by philanthropy only to finance capital projects, offered a low-cost method of financing this giving that was superior to pulling from their endowments. Locking in interest rates well below anticipated market returns from their endowments will ensure the debts will not threaten the foundations’ long-term prospects. 

In other words, an important distinction here is that—if all goes according to plan—these foundations will have made a shrewd financial maneuver to grant larger amounts, but are still stopping short of cutting deeply into their own wealth in the process. On that note, La June Montgomery Tabron, president of Kellogg, did challenge foundations to think beyond their own survival.

“We don’t have to exist in perpetuity, particularly if we’re not serving the role and the vision of our founder,” she said on the call, noting that Will Keith Kellogg founded the institution she now heads during the depths of the Great Depression. “This is a moment in some ways more dire than the moment that he created this foundation. Any tool that we can understand to meet this challenge and this moment is one that we will consider.”

Smaller Foundations Take Bolder Actions

Last week’s announcement follows in the footsteps of a growing number of smaller foundations increasing payout, in many cases much more dramatically than their larger peers.

Wallace Global Fund will spend 20% of its $100 million endowment this year. The Skoll Foundation is quadrupling payout in 2020 based on a $100 million gift from its founder. The Libra Foundation is doubling its grantmaking from $25 million to $50 million, raising its payout to 10%. Mary Reynolds Babcock Foundation aims to “roughly double” its 2020 payout. Robert Sterling Clark Foundation is adding “one additional year of funding to every grant” this year. General Service Foundation has committed to spending 10% in each of the next four years—the longest-known commitment in this latest wave. We saw similar decisions, although not as many, in the wake of the 2016 election. 

The Solidaire Network, a group of progressive social justice funders, including several of those mentioned above, has seen many member foundations and individual donors increase their giving lately, with some raising distributions to 10% or even 20%, said Rajasvini Bhansali, the group’s executive director.

“The fact that philanthropy is moving money in this moment is critical, and more is needed to make possible black liberation and overall transformation for a generation,” she said.

To date, the smaller foundations who have committed to raising payout have mostly been progressive, coastal, and urban institutions. But proponents are optimistic that this tide of change can reach beyond that base—and say timing may be a factor.

“I think the very recent announcement by those five foundations gives everyone permission to do it,” said Aaron Dorfman, president and CEO of the National Committee for Responsive Philanthropy, who recently co-authored an op-ed urging more payout. “I’m hopeful that there are more on the way. These decisions take time. Foundations move pretty slowly compared to other institutions in our society.”

One other factor common to several of the foundations listed above: an active founder. Whether small or large, one engaged donor can allow a grantmaker to act at a speed that others, particularly those with large numbers of involved family members or entrenched financial teams, cannot.

“There’s a nimbleness around philanthropies represented by living donors,” said Nick Tedesco, president and CEO of the National Center of Family Philanthropy, who used to work for the Bill & Melinda Gates Foundation. “What you find with multiple-generation philanthropies is not that they’re unwilling to pivot or evolve, but it’s often a more involved conversation.”

How Much Do Foundations Typically Spend?

Data suggests there’s long been a divide on payout rates between big and small foundations. For smaller foundations, a high payout is not actually that unusual. Foundations with $10 million to $50 million in the bank pay an average of 11% of those assets each year, according to a Foundation Center study on nearly 1,000 institutions. However, the nation’s largest foundations, those with more than $500 million in assets, averaged a payout of only 5.4%.

In fact, some of the richest foundations in the country have only barely met the minimum requirements over much of the last decade. Analysis by the Institute for Policy Studies found that several foundations with billions of dollars in assets averaged just 4.8% to 5.0% payout between 2010 and 2018, including the Robert W. Woodruff Foundation, the Harry & Jeanette Weinberg Foundation, the Gordon and Betty Moore Foundation, and the Helmsley Charitable Trust.  Some even dropped well below the minimum for long stretches. Payout at The Lilly Endowment, for instance, averaged 4.5% during that period.

Two members of the five major grantmakers that are expanding their giving are among that group: MacArthur and Mellon. Their payout ranged from 4.8% to 5.1% over that time frame, according to IPS’ analysis.

The low overall rates for major grantmakers persist despite some of the most wealthy and visible foundations consistently giving double or more what is required by law. Open Society Foundations, the Bill & Melinda Gates Foundation, the Susan Thompson Buffett Foundation and others consistently paid out between 10% and 18% of their endowments between 2010 and 2014, according to a 2017 analysis. The Walton Family Foundation’s rate fluctuated from 20% to as high as 41% during that period. 

Notably, all of those funds have living donors, or direct heirs, calling the shots. And many institutions that blow past the 5% minimum receive regular infusions of new cash from their wealthy benefactors, who in many cases have grown richer despite their accelerating giving.

A Bid to Force Foundations to Increase Their Giving

One group within philanthropy is not content with merely encouraging foundations to give more—they want to require them to do so. An open letter calling for an “emergency charitable stimulus” has garnered signatures from nearly 500 foundations and individual donors, according to Chuck Collins, who directs the Charity Reform Initiative at IPS, which is one of the organizers.

The proposal would mandate foundations double their minimum annual payout rate from 5% to 10%—and extend that order to donor-advised funds, which currently have no spending requirements. It would also seek to boost giving further by excluding certain payments from counting toward payout: contributions to donor-advised funds; for-profit investments, even if considered social-impact oriented; and overhead and operating expenses above 0.5% of assets. (That’s right, administrative expenses count toward payout.)

Foundations in the United States have a combined $1 trillion in assets; donor advised funds have another $120 billion. The group of advocates—which includes the Wallace Global Fund, Patriotic Millionaires and Solidaire Network—says a calamity of this scale demands that foundations dip into those funds. “We shouldn’t be hoarding,” Collins said.

Raising the payout rate to a mandatory 10% for three years would trigger $200 billion more in giving, according to the group’s calculations, a stimulus that wouldn’t cost any taxpayer money. Donors have already earned tax breaks on those dollars—up to 74 cents on the dollar in some cases—and now is the time to put them to work to help recover and rebuild, they argue.

“If the 2008-2010 economic meltdown is any indication, the biggest foundations are going to bounce back faster than the rest of society,” Collins told me. “You’re going to bounce back faster than the unemployed, faster than the home equity of the working class of America, faster than the savings of 98% of workers in the country.”

The group is now working to identify legislative sponsors with the hope of introducing a piece of legislation that can be inserted into a future stimulus bill. Much more modest legislative efforts on payout have been easily blocked by foundation opposition, but the group hopes to assemble a wider coalition to carry this attempt to victory.

Members of the group have published op-eds across the philanthropic press, including a recent post by Collins in Inside Philanthropy, but also in mainstream publications like The Hill and USA Today. They also partnered with Ipsos on a poll that found 72% of Americans favor an emergency three-year payout at 10%, with even larger margins favoring payouts and transparency for donor-advised funds.

“One of the challenges of any kind of charity reform initiative is the constituency issue,” said Collins, noting nonprofits are “understandably a little bit nervous” about challenging funders. “They’re not going to be the constituency that carries this.”

This latest push is part of a rising tide of pressure for change that goes beyond the pandemic, notes Benjamin Soskis, philanthropy historian and research associate with the Center for Nonprofits and Philanthropy at the Urban Institute.

“The demand for more payout is not just a function of the current crisis; it’s a function of the larger debates of the responsibility of wealth and rising inequality,” he said. “It’s a convergence of the demands of the crisis now, and a sense that the rich are getting richer and their philanthropic response is not commensurate with those increases.”

How 5%—and Perpetuity—Became Standard Practice

It would be easy to take for granted that 5% payout is just the way foundations work, and anything more is a deviation. But it’s not always been the norm, and foundations themselves have fought tooth and nail to keep the bar as low as possible.

The key turning point in the history of foundation payout was the Tax Reform Act of 1969. Most importantly, the bill established the first minimum payout rate. Originally set at 6%, it was lowered in 1981 to 5% amid a big lobbying push by foundations. The act also had two powerful carryover effects on today’s attitudes about payout and perpetuity, argued Soskis in a recent blog post on the history of philanthropic payout for HistPhil, where he is a co-editor.

First, in the debate over the bill, some critics sought to limit foundations’ lifespans. In response, foundations and their allies began to champion perpetuity as key to their independence, a stance that would harden into an end in itself. 

Second, the bill’s regulations forced foundations to hire many more tax accountants and lawyers. “Foundations’ legal and accounting expenses nearly doubled between 1968 and 1970,” notes Soskis. These new staff saw maintaining their endowments as central to their professional responsibilities, establishing a powerful internal constituency for a mathematically driven approach to payout.

“Before that there was a more fluid understanding of how you could be oriented in time,” Soskis told me. “It became a key principle of an independent sector. Gradually from there you get to the idea that perpetuity is a default understanding.”

The most recent serious legislative effort to address foundation payout came in 2003. A bill that year, HR 7, contained a section that would have prevented foundations from counting administrative and operating expenses towards meeting the minimum spending requirement. At the time, the measure would have freed up $3 billion in additional giving, according to analysis by NCRP.

But after sustained pressure from foundations, the provision was substantially weakened. The only expenses ultimately excluded were compensation expenses above $100,000 for executives and trustees, air travel expenses beyond the cost of an equivalent “coach” seat, and administrative expenses that were not “directly attributable” to grantmaking, administration, compliance, and public accountability. Rick Cohen, then NCRP’s executive director, argued at the time that the compromise “might actually be worse than doing nothing at all.”

Should Payout Be Driven by Math or Mission?

Much of the debate over payout has focused on external forces, bypassing the question of how each foundation’s board approaches the question internally. One leader’s journey shows how those norms are now being questioned.

In November 2016, a week after the presidential election, Dimple Abichandani went to her board at the General Service Foundation. Wanting to prepare her grantees against the campaign threats from then-president-elect Donald Trump, the executive director requested a one-time increase in spending. The board approved it.

By spring of 2017, it was clear more was needed. A flurry of executive orders and policy shifts had deeply impacted their grantees and the communities they served. Yet the foundation’s practices had no mechanism to take into account what was transpiring.

“Things we had long invested in were being rolled back,” said Abichandani, the foundation’s executive director. “The spending policy had no way to measure or account for the needs in the field. It didn’t have a way to account for opportunities to advance justice… It became clear to me that we needed a different approach.”

She felt that in relying on a mathematical model not informed by the foundation’s mission to set spending, her board was forgoing a key governance responsibility. And she was troubled that decisions over spending came only at the stage of dividing up the pie—not in the earlier decision of how large it would be.

Abichandani was also struck by research from the Council on Foundations and Commonfund showing that giving by private foundations had barely fluctuated between 2009 and 2018. Even as stocks rallied to historic gains following the Great Recession and federal policies shifted dramatically, spending rates stayed between 5.4% and 5.8%.

“The fact that foundations have been so static in their spending, it speaks to a structural lack of responsiveness, and it’s built into the processes and practices of these institutions,” Abichandani told me. “The lack of responsiveness says to me we’re not making key spending decisions in a way that is mission- and values-driven.”

She started looking for materials, but finding little she found helpful, Abichandani began to formulate her own approach. Trained as a lawyer, she was inspired by the “balancing tests” that judges use to rule on complex issues that require weighing multiple factors. Ultimately, she laid out seven factors—including nontraditional categories like “meeting the moment” and “values/mission”—for her board to consider in what she renamed the “spending process.” She shared her approach—which has led her foundation to increase giving since it was implemented in 2017—in a Stanford Social Innovation Review article in February of this year.

“If you’re a foundation that has a perpetuity goal, and you’re also a foundation committed to advancing racial justice, that’s a conversation that needs to happen. We can’t simply say we won’t meet this moment because we want to exist in perpetuity,” she told me. “Our mission, and our opportunities to advance our mission in this moment, should be at the heart of our decision about how much to spend.”

Signs of Interest—and Potentially Bigger Shifts

Earlier this year, the National Center for Family Philanthropy held a pair of webinars on the topic of payout. One featured three family foundations—Libra, Mary Reynolds Babcock, and Hill-Snowdon foundations—which have all raised their payout rates beyond 5%. The other looked at Abichandani’s spending framework. Each event had about 400 attendees—a four-fold increase over normal attendance.

“That’s absolutely indicative of the interest we see among giving families,” said Tedesco. “There is a lot of interest from families to explore the issue and revisit the issue of payout.”

Tedesco says inquiries range from CEOs asking how to manage conversations with their boards to trustees seeking tips on raising the issue in the boardroom. Families want to know what others are doing, or how to pace the increases to their grantees for sustainability and impact. Many are also interested in trust-based giving practices.

Many others report fervent discussion behind the scenes. Walker said he originally reached out to about 10 foundations, and says that while some rejected the idea, several are still in conversations about increasing their rates. Abichandani says she’s receiving regular calls from other executive directors, while Collins says he’s seen a wide range of groups host discussions and debates.

The interest may extend beyond this year’s events—and even reflect a larger questioning of perpetuity. Some 44% of the philanthropic institutions established in the 2010s were set up as time-limited organizations, a startling increase from 16% the decade prior, according to a recent survey by Rockefeller Philanthropy Advisors of 150 philanthropic organizations, mostly in the United States. The survey found perpetuity remains the default, with more than seven out of 10 respondents representing organizations aiming to last forever, but the tide may be changing.

“In a lot of ways, I think this is a defining question in philanthropy today,” Tedesco said of the debate over payout. “It’s begging donors to ask what they are doing to address this need. It’s also asking donors to justify a more patient approach when the needs are so great.”

Source of original article:John D. and Catherine T. MacArthur Foundation (www.insidephilanthropy.com).
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