Foundation Spending on Overhead Examined

Nearly a quarter of the nation’s 10,000 largest foundations did not include administrative expenses when they calculated whether they had met the federal requirement to distribute at least 5 percent of their assets a year, a new study has found.

The report — by the Urban Institute, the Foundation Center, and GuideStar — examined spending in 2001-3 and pinpointed only those administrative expenses directly related to charitable and program activities. Most of those expenses can be counted toward the federal government’s distribution requirement for private foundations.

The study, which examined private, community, and corporate foundations, did not take into account, for instance, expenses related to investment activities.

However, it analyzed the compensation paid to more than 50,000 top executives and board members at the foundations, as part of an attempt to assess what “drives” foundations’ overall spending patterns.

The authors say the study was needed to help policy makers and foundations better understand the financial and giving cycles of grant makers.

The study finds, for instance, that wealthier foundations put a bigger percentage of administrative costs into their payout calculation than did their smaller peers, as they usually hired more staff members, carried out more-complicated activities, and paid their chief executives more. But the authors added the caveat that the largest foundations “also enjoy some economies of scale, so they can achieve lower cost ratios for certain activities.”

Cumulatively, the 10,000 grant makers included in the study accounted for 78 percent of all foundation giving and for 77 percent of foundation assets in 2001, the study’s baseline year.

The three-year study finds that only 2,938 — or 29 percent — of foundations employed any staff members. Among foundations that did have paid employees, that was the biggest influence on their expenses, says the report.

Says Elizabeth Boris, the study’s co-author and director of the Urban Institute’s Center on Nonprofits and Philanthropy: “It was surprising to a lot of folks, the extent to which there are large foundations that are being run by volunteers.”

Other key findings of the report include:

• Of the 10,000 foundations, 5,216 reported no compensation, benefits, or payroll-tax expenses over the three years. And while the report acknowledges that the leaders of large foundations often “command generous compensation packages,” it says that “the norm is to compensate at substantially lower levels.”
• Most foundations spent roughly the same percentage on administration year after year, with little fluctuation in how the foundations allocated charitable administrative expenses over the three years.
• While all three types of foundations saw their assets dip and then rebound over the financially volatile three-year period, the study finds that the assets of corporate and community foundations tended to decline proportionately more steeply — but then surge more strongly — than those of private foundations. The authors speculate that one factor influencing community foundations is that living donors see the dire straits of such funds and contribute more dollars, noting that gifts to community funds grew 9.5 percent from 2002 to 2003, the second-highest rate ever recorded.
• Only 2,571 of the funds compensated board members who were not members of the grant maker’s staff. Those institutions that paid trustees tended to be private foundations that also had paid employees. Corporate and community foundations rarely compensated their board members.

Examining Tax Forms

To conduct the study, researchers culled data from the foundations’ IRS Forms 990 and 990-PF from 2001 through 2003, the most-recent years for which data were available when the study began.

The analysis also included other survey information that might affect administrative expenses, such as whether a foundation made loans to charities and other program-related investments or made grants overseas.

The report — “What Drives Foundation Expenses and Compensation? Results of a Three-Year Study” — is available free for download at the Web sites of the Foundation Center, the Urban Institute, and GuideStar.