Stop Giving Funders Tax Breaks for High Salaries, Fancy Offices

Most discussions about boosting foundation giving — including my own columns — have focused on raising funders’ annual payout rate. Often lost in that conversation, however, is the role funder expenses play in depleting dollars going to charities.

Under current law, foundations are allowed to count all program-related expenses, such as personnel costs, travel, and rent, toward the 5 percent they’re required to give away each year. Every dollar spent on big salaries or fancy offices in pricey locations ultimately takes money away from charitable groups.

A recent survey of 370 private foundations by the Council on Foundations found an average of $4.3 million went to program expenses in 2024. Those expenses represented 17 percent of the payout from family foundations and more than 20 percent for independent foundations. If the higher figure is applied to the almost $110 billion in 2024 foundation grant making, eliminating expenses could produce $22 billion in new funding.

That is a substantial amount and probably more than increasing the payout rate to, say, 6 percent or 7 percent, as I have proposed, would yield. If Congress doesn’t address the expense issue, a higher payout requirement would likely be diluted by a simultaneous rise in expenses.

Changing the policy on expenses would also encourage foundations to be more efficient. There is no penalty now for exorbitant salaries, excessive travel, or luxury offices if such spending can be applied to the required distribution. Take away that ability, and foundation boards and executives would need to be more thoughtful in their spending if they wanted to maintain the real value of their assets.

An examination of spending by 25 major foundations in 2013 and 2023 (see chart below) reveals vast differences in expenses during that 10-year period. At the low end, the Lilly Endowment spent just 1.4 percent of its payout requirement on expenses in 2023, and five other foundations kept their expenses below 10 percent — Richard King Mellon, William Penn, Helmsley, Hewlett, and Moore. Many of these funders have maintained modest expenses over the past decade.

Big Spenders

By contrast, those on the high end include the Rockefeller Foundation, which spent 37 percent of its payout on expenses in 2023, including very high compensation for its president, Rajiv Shah.  The other biggest spenders are Simons, Kauffman, Bloomberg, Kellogg, Robert Wood Johnson, Knight, Ford, and Gates, all of which spent more than 20 percent of their payout on expenses. In most cases, expenses for these institutions were consistently high across the 10-year period.

A few foundations have significant blips that likely resulted from personnel changes, major drops in assets, or other special one-time events. Newer foundations, especially those working in complex areas such as medicine and science, often increase expenses as they add skilled staff. The Simons Foundation, which topped the list with expenses at 42 percent of payout — up from a relatively modest 15 percent in 2013 — had a steady increase in costs as it developed science and math research-focused programs. Bloomberg also has evolved from less than 1 percent of its payout going to expenses in 2013 to almost 30 percent in 2023 as the relatively new funder developed infrastructure and a broad set of program priorities.

However, even long-established foundations in nonscientific fields have seen an increase in the proportion of expenses to grants during the past decade. Totals expenses grew for the 25 foundations from an average of 15.2 percent of payout in 2013 to nearly 18 percent in 2023 — a period of low inflation and surging asset prices.

Likely Opposition

The Council on Foundations and the Philanthropy Roundtable are both opposed to raising the distribution requirement on the grounds that foundations would find it hard to maintain the inflation-adjusted value of their assets. My guess is that they would also oppose any move to eliminate expenses as part of the calculation.

This thinking dates to the 1970s and 1980s, when there was a big push to professionalize philanthropy. That meant moving away from the hoary days of charity doled out by wealthy individuals and families and toward the more disciplined and strategic approach characterized by private foundations. According to this argument, investments in staff and other program-related expenditures were good and even laudable because they would improve the quality of the foundation’s giving. 

Some high-spending funders would argue that their investment in staff and other program costs produce better, more strategic grant making. But is the Lilly Endowment’s giving less effective because it devotes fewer dollars to program expenses than, say, Rockefeller? Living costs in Manhattan, where Rockefeller is based, are, of course, much higher than in Indianapolis, Lilly’s home. The average cost of an apartment in New York is more than $4,100 compared with $1,100 in Indianapolis.  But the difference in expenses between Rockefeller and Lilly isn’t four to one — it’s closer to 25 to one.

For-profit companies often move their headquarters to places with lower taxes and better quality of life to increase their effectiveness as measured by profitability. Foundations lack that incentive since funds that could have gone to grant making can instead pay for fancy offices in Manhattan or Palo Alto — with no tax consequences.

I expect the philanthropic trade associations would argue that excluding expenses from payout distribution not only makes it harder for foundations to maintain their assets but also violates their freedom.  Kathleen Enright, president of the Council on Foundations, recently wrote on these pages that the “freedom to choose what, how, and when to give is one of the sector’s greatest strengths.”

But freedom also entails responsibilities. The creators of these institutions received significant tax deductions because their funds were supposed to support nonprofits. It’s hard to see how spending on large and growing program staffs and fancy offices fulfill the responsibilities entailed by that subsidy.

Does freedom mean that you can spend as much on your staff and offices as you want?  I don’t think so.

Congress should move to disallow expenses as part of the distribution calculation. As I’ve argued, this would require a willingness by Democrats to support limits on the ability of foundations to give money to organizations involved in election-related activities.  But aren’t a few new limitations justified if it means billions more dollars could go to homeless shelters, food pantries, and other worthy charities? The payout rate should be raised, but only after it’s clear that an increase will benefit grantees — and not be diverted to less charitable purposes.

The Ford Foundation, Hewlett Foundation, and Lilly Endowment are financial supporters of the Chronicle of Philanthropy.