Despite Gains in Assets, Many Funds Stick to the Legal Minimum for Giving

The value of foundation endowments has soared in recent years, but that has prompted few grant makers to increase the share of their assets that go to charity.

In a Chronicle survey of the nation’s wealthiest funds, 57 out of 88 foundations said that they aimed to spend no more than the amount required by law — which is about 5 per cent of investment assets each year.

Worried that too many foundations were sitting on their wealth, Congress passed a law in 1969 that imposed specific distribution rules for the first time and pegged them to interest rates. In 1981, the law was revised to require the 5-per-cent minimum.

Most foundations, however, regard 5 per cent as a maximum. Foundation officials who favor such a strategy say it is the only way to protect an institution’s corpus and grant-making ability over time — through stock-market fluctuations and varying inflation rates.

Critics say that foundations that stick to a 5-per-cent payout — particularly when investment returns are high and inflation is low — are building their endowments at the expense of charities that need money.

Because so many foundations have seen a run-up in their assets, foundation observers and grant makers themselves are focusing more attention on payout policies. Last year alone, 121 private foundations surveyed by The Chronicle saw their endowments grow by a median of nearly 15 per cent — which means that half had higher gains and half had lower gains.

Foundation leaders are debating the merits of sticking to the 5-per-cent rule, and there have been several indications that Congress may consider whether to stiffen the requirement.

Curtis W. Meadows, former president of the Meadows Foundation, in Dallas, says that now is the time to spend more.

In a speech at the annual meeting of the Council on Foundations last year, he called for “a dividend for humanity,” urging foundations that had seen big increases in their assets to give away more than required by law.

In an interview, Mr. Meadows said that giving away only 5 per cent was a wise policy in less-buoyant economic times but that it seemed stingy at a time when foundation assets are surging.

“We ought to do it because it’s the right thing to do, not because people are banging us over the head and saying, ‘You fat, rich people, give us some of that money,’” said Mr. Meadows. “We have an opportunity to harvest money and put more back into society.”

Key officials on Capitol Hill also see such opportunities.

Alysa M. McDaniel, legislation counsel to Congress’s Joint Committee on Taxation, says that lawmakers might want to revisit the 5-per-cent rule when they consider extending a tax break for foundation donors that expires May 31.

“Interest [in the payout rule] rises and falls,” she says. “When people see the dollar amounts of some of these foundations, they may be more interested.”

No hearings on the 5-per-cent distribution rate have been scheduled, but Ms. McDaniel says that members of Congress continue to express concern about whether foundations are giving enough of their tax-exempt dollars to charity.

“I don’t know what the magic number is,” she says of the minimum distribution requirement. “But they probably could withstand some increase without being pushed out of business.”

An aide to Rep. Pete Stark, Democrat of California, said the Congressman may be interested in tightening the screws on foundations even more. The aide said that Representative Stark may look into whether funds ought to distribute all their assets over a predetermined period. That idea was rejected by lawmakers in 1969 in favor of the minimum-distribution requirement.

The federal law that governs payouts is complex. It requires foundations to spend at least 5 per cent of the average market value of a year’s investment assets by the end of the following year.

Foundations have 24 months to meet the minimum payout, so if they fall short one year, they can make up for it in the next. Similarly, foundations that spend more than the required minimum can use those payments to make up for shortfalls in payout over the next five years.

Along with grants, the administrative costs of making those grants, including employee salaries and other such expenses, can be counted toward a fund’s payout figure. The formula for calculating the payout rate also takes into account such items as excise-tax payments and deductions for cash that funds keep on hand for day-to-day business.

Of 58 grant makers who reported payout figures to The Chronicle, 23 said that their payout rates had exceeded 5 per cent last year. Only nine said they spent the equivalent of at least 6 per cent.

The Burnett Foundation in Fort Worth gave away 11 per cent of its assets in 1996 and 17 per cent in 1997. While it usually tries to give 6 per cent of its assets, officials decided to make an exception because they wanted to help create the Georgia O’Keeffe Museum in Santa Fe, N.M.

Burnett gave $44-million to the new museum over the past two years, spending some money from its roughly $270-million corpus to do so. However, Burnett officials say that because the fund has seen investment returns of about 20 per cent annually its endowment is back up to its 1995 level — and growing.

The Lyndhurst Foundation in Chattanooga, Tenn., has been giving about 8 per cent a year since 1995, when it decided to award $50-million in grants over five years. The grants include support for local schools and for the city’s waterfront area.

Lyndhurst’s assets grew by almost 14 per cent last year, to $162.8-million.

Jack Murrah, Lyndhurst’s president, says that the foundation recognizes the risks of setting an ambitious budget over five years. But, he says, “decisions are driven by the things we feel we need to support” — and not, he adds, by the minimum-payout rule. “When we have an era when returns are good,” he says, “we’ll be more generous.”

Pablo Eisenberg, executive director of the Center for Community Change, in Washington, wishes more foundations felt that way. Instead, he says, too many grant makers act more like investment bankers than like charitable entities.

One way to press funds to share more of their wealth, he says, is for federal authorities to review the 5-per-cent rate periodically or to adjust it regularly, as is done with interest rates.

It is those kinds of suggestions that have some grant makers concerned. Foundation officials say that the 5-per-cent rule is often unfairly criticized.

John A. Edie, senior vice-president at the Council on Foundations, says that the rule is based on both experience and research that show that endowments are likely to be eroded if funds regularly spend more than 5 per cent.

“Over the long haul,” he says, “foundations will be able to give more to charities if they spend at about 5 per cent and allow their endowments to grow.”

In December, the council started a campaign to educate the public, journalists, and lawmakers about foundations and such issues as the distribution requirement.

Without such an effort, fund officials say, the 5-per-cent rule will remain misunderstood.

William S. White, president of the Charles Stewart Mott Foundation, in Flint, Mich., says observers are apt to miscalculate a fund’s distribution requirement. For example, he says, they may see an end-of-year asset figure for a foundation in an annual report and believe that the fund should simply pay out grants worth 5 per cent of that figure.

Says Mr. White: “We are not putting out the true financial picture, and we are leading the public to false conclusions.”