To Protect Grantees, Invest Conservatively: A Financial Strategy to Buck the ‘Big Beautiful Bill’

Much of the nonprofit world is up in arms about the “One Big Beautiful Bill,” passed last month by the House and now in the hands of the Senate. Its draconian cuts would gut nonprofit programs and harm the people they serve.

One feature is a big new tax on foundation investment income, an almost five-fold increase in excise tax paid by the largest grant makers. Such a tax would certainly be painful — even if far less so than the bill’s impact on most nonprofits. But could it paradoxically create an incentive for funders to up their game and help those grantees survive?

If foundations continue to do business as usual and use the 5 percent payout floor as a ceiling, any increased tax liability will invariably limit support for grantees when they need it most. But here’s an alternative scenario we hope foundations consider instead: View the potential tax increase as a spark needed to change practices and strategies, including investment strategies, and provide more support to grantees. Seems counterintuitive, right? Hear us out.

Foundations, particularly large philanthropies that plan to exist in perpetuity, are inherently conservative in their business practices, generally moving in lockstep with their peers. But they take a far less conservative approach to their investment portfolios. Big foundation endowments, like those of the largest private universities, are heavily invested in so-called alternative investments, such as private equity, hedge funds, and venture capital — high-risk and theoretically high-reward but illiquid financial vehicles.

Investment returns on foundation endowments in recent decades have generally paid off at a rate greater than the 5 percent needed to meet the annual payout requirement, as have investments in the S&P 500 generally. The hitch is that because most of the alternative holdings are difficult to quickly convert to cash, they aren’t readily available when funders — and their grantees — need them most.

The news last week that Yale University is holding a multi-billion-dollar fire sale on much of its private equity portfolio illustrates our point. As elite universities, like others in the charitable sector, face huge federal funding cuts, they need cash as a hedge against risk.

But for foundations, that’s only part of the story. Volatility in the financial markets, combined with grant maker reliance on endowments for 100 percent of their income, multiplies the risks. Beyond internal challenges, Trump’s tariffs and deficit-exploding fiscal policies will be far more destructive to grantees — and harder to mitigate — than any excise tax increases. Funders urgently need to think differently.

Cash When It’s Needed

Some time-tested approaches can help foundations both bolster grantee support and diversify into investments that are more aligned with their missions and more financially conservative. This will allow funders to fulfill their fiduciary duty to serve their beneficiaries and the public good — and will provide them with the funds they need to reduce their own risk. As financial historian and economist Peter L. Bernstein once put it, “Risk means not having cash when you need it.”

Raising that cash by issuing debt to increase grantee funding is the conservative path. It buys time, letting foundations move investments out of vehicles that are both financially perilous and generally out of whack with their missions, while making sure grantees get the support they need. Most foundations have pristine balance sheets, so issuing debt to improve liquidity shouldn’t pose a significant risk. Plus, it’s been done before. During the COVID-19 pandemic, the Ford Foundation issued $1 billion in long-term bonds to help grantees during the health crisis. Others, including the MacArthur, Mellon, Kellogg, and Doris Duke foundations took similar steps on behalf of grantees.  

Foundations might also use their enhanced liquidity to invest in vehicles that are more compatible with their social missions. That could include making deposits in FDIC-insured community banks and Community Development Financial Institutions, which serve low-income areas whose residents are especially threatened by federal and state budget cuts. They might lend to smaller foundations and invest through financial vehicles developed by and housed in other philanthropies with long track records in social impact investing, such as the Ford Foundation’s Mission Investments program.

By issuing debt backed by their endowments, funders get much of what they need to contend with new tax provisions and market volatility — immediate access to cash. But more important, issuing debt enables them to fulfill their responsibility to grantees and even increase their payout commitments, while avoiding the untimely sale of assets.

Foundations could market their debt much like the old U.S. savings bonds or World War I Liberty Bonds to a range of friendly buyers who align with their philanthropic missions, including foundation trustees.

The benefits of this approach are clear: At little cost to foundations, bondholders would receive a small but not inconsequential financial return on investment and a much larger social return since more funds would be available to grantees. And grant makers wouldn’t have to give up the idea of perpetuity — as much as we’d like to see more of them emulate Julius Rosenwald, Chuck Feeney, and Bill Gates.

Finally, funders could use this newfound cash to meet an immediate need for the entire sector: the creation of a common defense fund for nonprofits and foundations, as has been proposed by some Big 10 university faculties to reduce the effects of federal budget cuts on their institutions.

Courage and Collaboration

Going this route would necessitate more creativity, courage, and purposeful collaboration than is typical of the philanthropy world. But that’s exactly what’s required now. During this time of extreme need, foundations first and foremost have an ethical obligation to the nonprofit organizations that fulfill their missions and to the people and communities they both serve.

The collective wealth of philanthropy cannot abate the cruel punishment the MAGA faithful in Congress hope to inflict on all but the wealthiest and most privileged Americans. Their behavior — targeting those in need and their helpers — reveals a craven rapaciousness more suited to a Lord of the Flies-style steel cage match than to the deliberate actions of compassionate public servants.

But by embracing a more conservative approach to investing and generating more funds for grant making, philanthropies can ease some of the most pernicious effects of the federal government’s unprecedented abdication of responsibility. While government leaders may have abandoned their longstanding partnership with civil society and their moral obligation to those they serve, foundations must not.

It’s OK for funders to be both borrowers and lenders. Anyone with a bank account and a credit card is already both — and no foundation leaders will go to debtors’ prison. Rather, Moody’s market rating for bonds issued by asset-rich, otherwise debt-free foundations would likely be pretty good. And, to paraphrase Ben Franklin, one of America’s first philanthropists, foundations and their grantees just might be more successful if they hang together rather than trying to go it alone.