Fault Lines in Payout Debate

To the Editor:

Your coverage of the Council on Foundations 2000 convention (“A Royal Call to Action for Foundations,” May 18) reveals the fault lines in the payout debate more clearly than ever: investment banking versus grant making.

You report that the Council of Michigan Foundations commissioned Cambridge Associates, an investment-consulting firm, to assess the proper level of payout. Not surprisingly, the investment consultants concluded that foundations should minimize their grant making — i.e., pay the Congressionally-mandated minimum of 5 percent of their assets a year for charitable — in order to maximize investment returns. They based their recommendations on returns of 33 Michigan foundations from 1969 to 1998, and projected returns over the next 25 years — which may be too low or too high, who knows?

By focusing on investments only, Cambridge Associates omitted at least one major factor: the extraordinary amount of new money in philanthropy.

As Prof. Perry Mehrling, chairman of the economics department at Columbia University’s Barnard College, revealed in a payout study commissioned last year by the National Network of Grantmakers, nearly 85 percent of the growth of foundation assets over the past 20 years has come from the creation of new foundations and from gifts to existing foundations. This enormous growth was ignored by Cambridge Associates, as it was in an earlier report commissioned by the Council on Foundations and conducted by DeMarche Associates, another investment-consulting firm.

Accounting for this huge source of money, Mehrling concluded that a typical foundation could pay out as much as 8 percent and still preserve its asset base. The National Network of Grantmakers’ national campaign has the modest goal of inspiring private foundations to increase their minimum payout rate to 6 percent by adding “1% More for Democracy” — that is, to devote 1 percent of assets to helping those who haven’t benefited from the “largest peacetime economic expansion in American history.”

This debate is not taking place in a vacuum. As foundation wealth grows to record levels, so do poverty, homelessness, and the income gap between rich and poor. Many foundations already are stepping up to the plate and taking on these problems. Colorado’s Needmor Fund paid out 11.1 percent of its assets in 1997; the Stern Family Fund, 16.2 percent. George Soros’s Open Society Institute paid out 34.7 percent that year. (Mr. Soros himself recently endorsed the “1% More for Democracy” campaign.)

As Jordan’s Queen Noor said at the Council on Foundations gathering, “the purpose of a foundation is to sustain the most needy, not to sustain or enrich itself. the final analysis, the criteria for success for foundations are different from those in business.”

For us, the first criterion is to be smart and generous grant makers and to help make the world a better place.

Rob McKay
President
McKay Foundation
San Francisco

To the Editor:

The article on the annual meeting of the Council on Foundations provided good information on the grant makers’ visit to Pacoima, Calif. As a community-relations professional for Prudential, I’m pleased that the reporter, Meg Sommerfeld, noted the contributions of my company and others to the work in this area of southern California.

But real credit should go to Los Angeles Urban Funders, a collaborative of 27 grant makers, including Prudential. The collaborative has worked hard for the past five years in three communities in the Los Angeles area, including Pacoima. What Ms. Sommerfeld witnessed on her visit were some of the gains our collaborative has realized in partnering with the community for five years.

Carolyn G. Brooks
Manager for Local Initiatives
Prudential Insurance Company of America
Woodland Hills, Calif.