July 24, 2008 | Read Time: 3 minutes
With the stock market sinking rapidly, will Congress lose its zeal for scrutinizing the largest endowments?
Some members of Congress, including Sen. Charles E. Grassley, the senior Republican on the Senate Finance Committee, have raised the idea of requiring nonprofit groups with an endowment or significant reserves to distribute a minimum percentage of assets each year.
But some endowment managers say the push for greater spending was a bull-market phenomenon, and that the scrutiny of endowments will fade now that the economy is weakening.
“They’re ringing the bell at the top of the market,” says D. Ellen Shuman, chief investment officer at the Carnegie Corporation of New York, which has a $3.1-billion endowment. “This is very likely to go away if we have more modest returns going forward, which I think is highly likely.”
As a private foundation, Carnegie is already required to spend at least 5 percent of its assets each year on charitable causes, and its spending policy calls for a 5.5 percent payout. But as the law allows, the foundation calculates its spending rate using a three-year average of assets. Thanks to strong returns in recent years, which bolstered assets, Carnegie distributed only 3.8 percent of its endowment’s value during the 2007 fiscal year.
Changing the Rules
Senator Grassley, who has been critical of private foundations for not making the best use of their endowments, said in a statement that it may be time for all nonprofit organizations with significant resources to face a mandatory spending rate similar to what private foundations are required to pay out.
“Even though some of these organizations might not earn 5 percent on investments in the stock market for any given year doesn’t mean they wouldn’t have other resources available to pay out an amount equal to at least 5 percent of their assets,” Senator Grassley said. “After all, there’s no record of increased payouts for charitable activity when the stock market is going strong.”
The Senate Finance Committee is expected to hold hearings on overhauling tax-code provisions that govern charities in the fall.
Dean A. Zerbe, a former aide to Mr. Grassley, says that amid the economic downturn, Congress will be taking a close look at what charities are doing to help needy people. “The idea is require these charities to not be hoarders of money, but sharers,” he says.
“Over the whole cycle, the big endowments are doing very well,” Mr. Zerbe adds. “And they still get charitable giving on top of that. A mandatory payout for endowments is very much something that folks continue to look at.”
The Internal Revenue Service is also taking a close look at whether nonprofit organizations are making good use of their assets. Steven T. Miller, commissioner of the IRS’s tax-exempt and government-entities division, said in April that the agency will begin using a so-called commensurate test to determine whether colleges and other nonprofit organizations are performing charitable activities in line with their financial resources.
Prudent Approach
Many charity officials believe existing endowment spending rates are reasonable given long-term expectations for returns and inflation.
The Nature Conservancy has spent an average of 5.5 percent of its $1.16-billion endowment each year for the past five years, according to Craig T. Neyman, the conservancy’s chief investment officer. He sees that as a responsible amount to spend, given that a diversified portfolio might earn 9 percent over the long term, and inflation might average 3 percent to 4 percent.
“We’re trying to maximum the amount of conservation we can get done with the resources that we have available,” Mr. Neyman says. “You can be sure that there’s a lot of pressure in our organization to spend more, and there are the more fiscally prudent folks who say hold off. There’s this natural balance.”
