Foundations’ Endowment Explosion

Assets of large funds rise 22%, which means more for grants

The endowments of America’s wealthiest private foundations grew by a total of more than 22 per cent last year, thanks to a record-breaking stock market.

A new Chronicle survey has found that the endowments of 121 big private foundations were worth a total of $126.5-billion in 1997, compared with $103.3-billion in 1996.

The increase in assets is expected to trigger a big rise in grant making in 1998. Of the 126 foundations that provided either figures or estimates for their grants budgets this year, seven out of ten reported plans to increase their giving. Fifteen foundations said they expected their grants budgets to stay about the same.

Nevertheless, few foundations are rushing to give away all of their new money. Many are reviewing their grant-making areas to figure out what to do with their gains.

“It’s not just ‘Oh my gosh, we have so much money, how do we get rid of it?’ ” says Michael O’Keefe, president of the McKnight Foundation, in Minneapolis. “We need to reassess our priorities and how best to spend our money responsibly.”

The soul-searching among foundations has been prompted by more than just burgeoning endowments. Some foundations are pausing to reflect on the occasion of their 75th or 50th anniversaries. Other reviews have been prompted by the arrival of new chief executives and by the creation of several giant foundations that are working in the same areas as some of the nation’s oldest and best-established funds.

Some of the questions the grant makers are asking themselves: Are we dealing with the most-pressing issues? Are we on the right track? Are there new fields that we ought to support?

No matter what the answers are to those long-range questions, a lot more money will be available in 1998 simply because federal law requires that the funds spend a minimum of about 5 per cent of their investment assets each year for charitable purposes.

According to The Chronicle’s survey, private foundations saw their assets grow in 1997 by a median of nearly 15 per cent — which means that half saw higher gains and half saw lower gains. At 113 of the foundations that provided two years’ worth of spending figures to The Chronicle, grant making grew by a median of 11.5 per cent. Over all, the total amount of grants approved by those funds had risen 8.3 per cent — to $5.3-billion — from one year to the next. That is well above the 2.3-per-cent inflation rate for 1997.

Four foundations have an especially large amount of new money to distribute in 1998 because they saw their assets grow by at least $1-billion last year.

The Lilly Endowment, in Indianapolis, led the way, doubling its assets to almost $13-billion and displacing the Ford Foundation as the nation’s wealthiest grant maker (The Chronicle, January 29). Lilly’s portfolio, which is invested mainly in the pharmaceutical company established by the foundation’s creator, has been doing extremely well as sales of drugs such as the anti-depressant Prozac have surged.

While Lilly’s stock-market gains meant that Ford was knocked out of the No. 1 spot for the first time in 30 years, the New York foundation nevertheless had a strong year, with its endowment growing from $8.2-billion to $9.6-billion.

The two other foundations that saw their assets grow by $1-billion or more were the W. K. Kellogg Foundation (to $7.6-billion) and the Robert Wood Johnson Foundation (to $6.7-billion).

Only six foundations saw their assets decline in 1997. The sharpest drops were at the DeWitt and Lila Wallace-Reader’s Digest Funds, both of which are heavily invested in the stock of their founders’ company. DeWitt Wallace fell by almost 16 per cent, to $797.8-million, and Lila Wallace shrunk by nearly 14 per cent, to $633.1-million.

For foundations that grew last year, many took the opportunity to make bigger-than-usual gifts. Among them:

* The F. W. Olin Foundation, in New York, promised to spend at least $200-million to establish the Franklin W. Olin College of Engineering (The Chronicle, July 10). The grant is so large that the foundation has suspended all further grant making and has not yet announced if or when new awards will be made.

* The $415-million Danforth Foundation, in St. Louis, pledged $100-million worth of Ralston Purina Company stock to Washington University, also in St. Louis. The money will be used over the next five years to endow programs in biology, biomedicine, and the social sciences.

* The W. M. Keck Foundation, in Los Angeles — which saw its assets grow from about $1.2-billion in 1996 to $1.4-billion last year — approved nearly three times as much for grants in 1997 as it did in 1996, largely due to one big gift. It pledged $50-million to establish the Keck Graduate Institute of Applied Life Sciences at the Claremont Colleges, in California.

* The Burnett Foundation, in Fort Worth, awarded a total of $41.3-million to two museums. It gave $34.3-million to help establish the Georgia O’Keeffe Museum, which opened in July in Santa Fe, N.M. It also gave $7-million to the Modern Art Museum of Fort Worth to help it move to a new building.

Thomas F. Beech, Burnett’s executive vice-president, says the foundation has seen a return on its investments of about 20 per cent in each of the past two years, allowing it to make those big gifts without eating too much into its corpus, which is currently worth more than $260-million.

“It’s been the feeling that we can afford to do it given that our investment performance has been so solid,” Mr. Beech says.

It is not just the booming stock market that is likely to make it easier for some charities to get grants money. An infusion of new money from the estates of several philanthropists has helped start or expand several very large funds.

In December, the $1.3-billion Doris Duke Charitable Foundation, in New York, made its first round of grants, totaling $18.7-million, for the performing arts, the environment, and medical research (The Chronicle, December 11). The foundation plans to distribute $55-million this year.

The David and Lucile Packard Foundation, in Los Altos, Cal., is about to receive a bequest of $5.4-billion in Hewlett-Packard stock from its founder’s estate. The foundation will then be worth about $9.1-billion, making it the third-largest private foundation in the country. Packard expects to give out $286-million in 1998 and $450-million in 1999 (The Chronicle, January 29).

Packard is just one of several large new foundations in the West.

The J. A. and Kathryn Albertson Foundation, in Boise, Idaho, grew from $40-million to about $700-million last year. Mrs. Albertson transferred all of her shares in the supermarket chain started by her late husband, Joe Albertson, to their foundation. The fund plans to award at least $35-million in 1998 to support ele mentary and secondary education throughout the state.

And the Ford Family Fund, in Roseburg, Ore., which is currently worth about $325-million, will receive later this year a large infusion from the estate of its founder, the late Kenneth W. Ford, who started the Roseburg Forest Products Company. The company has been reported to have $1-billion in assets. Although fund officials could not estimate how large the bequest will be, they said the foundation intends to broaden its scholarship programs and expand its grant making to include rural areas throughout Oregon. Until now, it has focused its support on only three counties in Oregon and northern California.

Philanthropy is being transformed not only by the influx of new wealth from individuals, but by the conversion of non-profit health-care organizations to for-profit entities.

California has benefited most from the philanthropic windfall that results when the assets from the former non-profit institutions are placed into new charitable organizations.

One such fund, the $1.7-billion California HealthCare Foundation, gave away about $38-million in its first round of grants last year, and it says that it plans to give away about $40-million this year.

Two other funds created in recent years, the California Endowment and the California Wellness Foundation, are expected to give a total of about $140-million to health causes in the state in 1998.

Many long-established grant makers are keeping close tabs on the new health-care funds.

Robert Wood Johnson, in Princeton, N.J., which gives to health causes across the country, wants to avoid overlapping with the work done by the new funds, and it hopes to find ways to collaborate with them. That is especially important, Johnson officials say, as the fund considers making grants to causes it has not previously supported.

In addition to watching the other funds, the Johnson foundation is looking at its own programs and structure to figure out how to deal with its increase in size.

The foundation’s assets have ballooned from $2.9-billion in 1990 to $6.7-billion last year, in large part because it is heavily invested in the health-care-products company Johnson & Johnson, which Robert Wood Johnson built into a worldwide business. Adjusted for inflation, the foundation’s assets have grown by 88 per cent this decade. Giving doubled during that time and is expected to exceed $320-million in 1998.

Now Johnson officials are considering changing the foundation’s structure, either by dedicating a portion of its endowment to long-term grantees or by creating a spin-off health foundation. The foundation is also considering making grants to overseas programs, providing general operating support and capital financing, and sponsoring biomedical research — none of which it has ever done.

In the midst of all the change, the toughest challenge for Johnson — as with other funds that have seen their endowments surge — is trying to keep its staff size down. Johnson has 147 employees — just 20 more than it did in 1990.

“If we increase our staff to match our growth, we are liable to become more of a bureaucratic organization than we would like to be,” Steven A. Schroeder, the fund’s president, worries. “One would hate to make philanthropic decisions based on staff requirements.”

Other grant makers are under pressure to increase the size of their grants because some charities have become more aggressive in their requests for money.

“The requests are simply larger and larger,” says Neal O. Thorpe, executive director of the M. J. Murdock Charitable Trust, in Vancouver, Wash. “It’s easy to say why: because everybody’s getting bolder.”

In 1990, Murdock made 125 grants totaling $11.6-million. Last year, it awarded 83 grants for a total of $17.2-million.

Jon Pratt, head of the Minnesota Council of Nonprofits, says that more charities are turning to national grant makers for money as the charities learn about the funds’ growing coffers. For example, he says that the Lilly Endowment’s stunning growth has made many charities hope for “a national Prozac bonus.” Lilly, which plans to give $413-million this year, has said it is considering new programs but is unlikely to make any major changes in its support, which goes primarily to Indiana charities.

Publicity about the money now flowing into foundation coffers has given a higher profile to grant making, say foundation officials.

“The pressure is on to give away more money, and the obligation is stronger to be more accountable and more responsive,” says Mr. O’Keefe, of the McKnight Foundation.

Rebecca Rimel, president of the Pew Charitable Trusts, in Philadelphia, says that the attention paid to some high-profile gifts — including the $1-billion pledge to the United Nations made by Ted Turner — has made philanthropy no longer “a sideshow” in the public’s eyes.

“We’re at the beginning of a lot more interest, probably a lot more scrutiny, and probably a lot more questions asked of us as a field,” Ms. Rimel says. “But that’s okay. It will make us better.”

Even with charities and the public putting foundations under greater scrutiny, much of the impetus for grant-making change is coming from within the funds themselves. Among those that are re-examining their grant-making priorities:

William and Flora Hewlett Foundation: The $1.7-billion foundation is considering adding new grant-making programs as it figures out how to handle its growth; its assets rose 17 per cent last year. Even before that review of programs was completed, it announced a new program to improve U.S.-Latin American relations. The program builds on grants the foundation previously made to strengthen ties between U.S. educational institutions and those in Mexico. It will now be supporting projects that deal with issues such as free trade, immigration, poverty, and social policy.

Kellogg Foundation: The foundation, which plans to spend $295.2-million this year — up from $270.8-million in 1997 — is looking for ways to spend the new money it has available due to its asset growth. In the meantime, it plans to increase its awards to areas in which the foundation’s president, William Richardson, says the fund has fallen short.

For example, Kellogg plans to increase its support to South Africa. The fund will make $25-million in grants to that country for each of the next three years. It had spent $19-million in 1997.

Kresge Foundation: In preparation for its 75th birthday in 1999, the Troy, Mich., foundation is looking for new causes and charities to support. Traditionally, Kresge has limited its work to helping organizations build or renovate facilities. But last year it made its two largest grants ever — $6.5-million each — to the Detroit Symphony and the Barbara Ann Karmanos Cancer Institute in Detroit, for efforts that were not limited to capital projects. The foundation said that $5-million of the symphony grant had to be put in the group’s endowment and that $2.5-million of the grant to Karmanos was to be used to conduct research on cancer.

Now, Kresge is considering new grant programs to help historically black colleges and universities raise more money and to aid community foundations in increasing their assets.

Kresge’s president, John E. Marshall III, says the new programs are “not for a lack of finding ways to spend money.” The fund is still turning down four out of every five applicants for capital grants. But, he explains, with an increased endowment — now $2.1-billion — Kresge wanted to do “some special things” that were beyond its traditional scope.

The arrival of new presidents is another key reason that many foundations undertake reviews. In St. Paul, the Northwest Area Foundation announced last year that it was scuttling its long-standing grant-making areas. The foundation’s president, Karl N. Stauber, who took over in 1996, led a year-long review that prompted the foundation to devote most of its resources to long-term efforts to improve a select group of poor communities.

Vartan Gregorian, the former Brown University president who this year took over as head of New York’s Carnegie Corporation, is overseeing a re-evaluation of his foundation’s programs. The foundation is receiving pro bono help from McKinsey & Company, the management-consulting firm, as it conducts its review.

Some of the new causes that Carnegie is considering include higher education in Russia and sub-Saharan Africa, efforts to overhaul the U.S. campaign-finance system, immigration, the role of technology, and telecommunications policy.

For new and old leaders alike, millennium fever may be at work, too.

“It’s very interesting how many foundations are now asking how they should position themselves in this seemingly new era,” says Avery Russell, publications director and program officer at Carnegie. “The world hasn’t changed just because there is a change in the clockwork, but there’s always the sense of a dramatic change with the beginning of a new century.”