Missing the point on endowments

To the Editor:

We would like to clarify our position on a few of the comments that Vince Stehle (“The Danger of Comparing Different Types of Giving,” June 15) makes in critiquing our tax-policy analysis in “Philanthropy’s New Agenda: Creating Value,” which appeared in the Harvard Business Review (November-December 1999).

In our analysis, we observe that giving money directly to an operating charity provides an immediate social benefit, which more than offsets the tax deduction incurred.

Giving money to a foundation earns the same tax deduction, but since most foundations only pay out 5 percent of their assets each year, the immediate social benefit is far less. Over time, the foundation’s annual contributions will add up, but at any reasonable interest rate, it takes between 40 and 100 years before the present value of those contributions equals a direct gift today. We suggest therefore that foundations have an obligation to create value through their giving that repays our society’s substantial tax-policy investment.

Mr. Stehle argues that we are wrong to draw this comparison because some charities put substantial sums into their own endowments, and so defer the social benefit themselves. In this he misses our point. We do not suggest that endowments are the problem, whether in a foundation or an operating charity.

Our analysis in the article was based on giving operating support to a charity directly, versus through a foundation. To look at endowment giving, one must compare giving an endowment gift directly to a charity versus through a foundation. And Mr. Stehle won’t like that calculation either.

If $100 is given to a charity for its endowment, the charity may spend only $5 (or less) each year to deliver social benefits. But in giving $100 to a foundation, which then uses its 5-percent payout to make an endowment gift, only 5 percent of the grant, or 25 cents a year, is spent to deliver social benefits.

It is like looking through the wrong end of a telescope: $100 gift, $40 tax deduction, 25 cents in annual social benefit. This is not a hypothetical example: roughly one-third of foundation grants, or $7-billion per year, are endowment or capital gifts.

So whether the gift is for operating support or endowment, interposing a foundation reduces the present value of the benefits generated by the donor’s original gift.

There is a more important distinction, however: An operating charity is accountable to its donors and its constituents. Whether it chooses to put its money into an endowment or not, it must justify its use of funds and deliver benefits that people find valuable if it is to survive. Endowed foundations lack this type of accountability, and that is why their use of endowments is different than the ones raised by operating charities.

Mr. Stehle cautions that those who criticize the cost of foundations should be careful, lest tax incentives be removed or other regulations be imposed.

We strongly believe that foundations can and do repay their social cost. We are careful to ground our analysis in facts, and have not suggested that existing tax policies be changed. But it is also true that foundations enjoy an immediate tax benefit while deferring much of their contribution back to society, and this delay carries a cost that our society subsidizes through its tax policy.

We agree that foundations are valuable societal resources to be defended — but we would rather see an article in which foundations demonstrate that their achievements dwarf their costs, instead of one that simply cautions critics, however accurate, not to rock the boat.

Mark Kramer
Michael Porter
Center for Effective Philanthropy
Boston