May 27, 2004 | Read Time: 5 minutes
Related articles: View all of the advice and commentary from this special supplement on endowments
By BEN GOSE
While universities and other nonprofit groups with endowments have started to come under increased public scrutiny, philanthropic foundations have long faced criticism over the size of their endowments. The most recent challenge came last year when some members of Congress proposed a change that would have effectively forced many foundations to increase their annual distributions to charity.
Many scholars and leaders of nonprofit groups believe that small payouts that allow an endowment to exist in perpetuity are more easily justified at universities and some charities than at foundations.
“The case for perpetuity is not as compelling as people think, but it’s more compelling for universities than for foundations because universities have an ongoing business,” says Perry G. Mehrling, a professor of economics at Barnard College, in New York. “In the foundation world, the case is completely slam-dunk for spending all of your earnings, or more. Let new blood take over.”
Foundations face much stricter laws governing minimum spending requirements than do universities and charities. Congress sets no minimum percentage that universities and charities must distribute from their endowments, but has required since 1969 that foundations pay out a certain percentage of their assets annually (currently 5 percent).
Critics who believe the payout rates at foundations are too low have periodically urged Congress to raise the minimal annual distribution to 6 percent. A more modest effort, included in the federal Charitable Giving Act of 2003 (which did not pass), would have precluded foundations from counting administrative costs in their payout calculations, and in effect pushed up distributions, on average, by four-tenths of a percentage point, according to the National Committee for Responsive Philanthropy.
The Council on Foundations, which represents 2,000 grant makers, led the opposition to the provision that would have excluded administrative costs. Dorothy S. Ridings, the council’s president, argued that removing administrative expenses from the calculation would assign no value to the advice and training that grant makers provide to charities.
Some charity experts, including Pablo Eisenberg, a senior fellow at the Georgetown University Public Policy Institute and a regular contributor to The Chronicle of Philanthropy’s opinion pages, question the value of that aspect of foundation work.
However, few charity officials argued last year, when the provision was being debated in Congress, that they would prefer bigger grants and less advice.
“Charities have been totally intimidated by the foundation world into staying quiet,” Mr. Eisenberg says.
He and others believe that foundations could get more bang for their buck by spending aggressively today because substantial sums are expected to flow into the nonprofit and foundation world in the coming decades. Researchers at the Social Welfare Research Institute at Boston College estimate that more than $34-trillion could go to charity in the next 50 years. Moreover, if history is any guide, entrepreneurs will continue to make huge fortunes and give much of the money back to charity, as Bill Gates, a founder of Microsoft, did in creating his $26.8-billion foundation. Five years ago, the Bill & Melinda Gates Foundation didn’t even exist.
“No individual foundation needs to worry that somehow if it spends all its money that good purposes will go away,” Mr. Mehrling says.
Michael Klausner, a Stanford University law professor who teaches nonprofit law, opposed the proposal to exclude administrative expenses from the payout calculation, and so was seen by some as a defender of the status quo. But what he really argues is that it might make sense for some foundations to move aggressively to spend all their assets — for example, a foundation interested in land conservation — and for others to exist in perpetuity. Like other critics of foundation spending, he finds it surprising that the majority of foundations seem to view the 5-percent payout rule as a maximum instead of a minimum.
“It is disturbing, and I’m inclined to believe that it does reflect something bad,” Mr. Klausner says. “It may be propelled by comparisons of foundations by endowment size. If people think size matters, they’re not going to increase the payout rate.”
A few foundations, including the John M. Olin and Whitaker Foundations, are deliberately depleting their assets. Atlantic Philanthropies, based in Bermuda, with $3.7-billion in assets, announced in December 2002 that it would close its doors within 15 years.
As a result, last year it distributed 14 percent of its endowment. Atlantic’s founder, Charles Feeney, who made his fortune by founding duty-free shops, embraced the idea of what he called “giving while living” after reading the writings of Andrew Carnegie and Julius Rosenwald, philanthropists of the early 20th century.
The foundation also changed its mission to focus only on aging, disadvantaged children, health in developing countries, and human rights, and eliminated grant making in other areas, including higher education.
“The decision to spend down the endowment brought a great sense of urgency to having the greatest impact,” says John R. Healy, Atlantic’s chief executive officer. “It really has concentrated the mind.”
Some charity leaders believe all foundations would be wise to make more productive use of their assets, as a way to defuse the rallying cry to increase the percentage of assets foundations are required to distribute.
Kim Smith, chief executive officer of NewSchools Venture Fund, which uses foundation grants to support organizations that manage charter schools, believes more foundations should make low-interest or no-interest loans to nonprofit groups that have a reasonable chance of paying back the loans. In 2001, foundation assets totaled roughly $477-billion, but only $233-million was used for such loans.
Ms. Smith doesn’t support legislation that would alter the 5-percent minimum that foundations must distribute, but she does believe making more low-interest or no-interest loans would be a “great defensive move” for foundations.
“It’s embarrassing that we allow 95 percent of philanthropic assets to be making more money on themselves and not making a social impact,” Ms. Smith says. “At their own discretion, trustees should be carving out a piece of their endowment to make a social impact.”
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Section: Endowments
Volume 16, Issue 16, Page B12
