Philanthropy is another industry, if you could call it one, debating what to do now when doing business as usual just has to be wrong.
Private foundations in the United States were sitting on about $1 trillion in assets when a deadly pandemic and social justice crisis unfolded.
Marquee names in philanthropy such as the Ford and Rockefeller foundations have responded by deciding to more or less double the amount of money they give away, a huge departure from the rule of thumb distribution rate of about 5 or 6% of assets.
Here in the Twin Cities, none of the big foundations have acknowledged a similar big shift — yet. But they are certainly talking about it.
Arguing about the right percentage to give away seems like a narrow, inside-baseball sort of issue, but there is much more at stake here. Put it this way: if 10% is the right number now, why not 20%? And if giving more this year is better, why not all of it?
Of course, that’s another way of asking why keeping all that money sitting perpetually inside high-status foundations was ever a good thing to do.
After all, foundation money is all but exempt from taxes and meant for the public good, but the public doesn’t get any real say on what to do with it, including whether this crisis year is the time to really spend it.
It’s important to note that this isn’t the first time people have argued about the right distribution approach in giving away money. It’s really an every-year discussion. It’s mostly a math and investment returns problem, provided the foundation has already decided it wants to continue rather than spend down all of the money.
Capping distributions at 5% is a simple strategy to make sure the money lasts, if not forever at least a long time. Investment returns over the course of years should more than cover that amount given away plus pay for the foundation’s cost of doing business.
Giving away much more than that, given expected returns in the financial markets, means the assets will one day start to shrink. A high giving rate becomes a version of eating your own seed corn.
Foundations, by the way, basically have to give away 5% to avoid a pretty hefty federal excise tax.
People approaching retirement might recognize this math problem from their own planning about how to make their money last the rest of their lives. Retirees may freely spend their 401(k) savings in the first few years of retirement, then realize they could be nearly out of retirement money and have to get by just on Social Security.
This year though, some of the biggest names in philanthropy — Doris Duke, Ford, Rockefeller and so on — decided that unprecedented needs means there should be unprecedented amounts given away. One approach was to borrow money to boost the amount of money distributed.
Last year, the Ford Foundation gave away about $500 million. In June, it issued $1 billion in bonds, planning to give away the proceeds over the next couple of years. In effect, it’s doubling its grantmaking to more than 10% of its assets without having to sell a slug of its stock or other investments to fund the increase.
It’s hard not to be impressed by just how clever this approach is.
Of course, what these foundations do is entirely up to them. They don’t even have donors keeping them accountable like other nonprofits have, as the capital still sitting in foundations could have been turned over a generation or two ago by people long passed.
No foundation’s board will be asking me about jumping to a 10% distribution rate, but I would respond to the question about much higher payouts with a lot of caution. The math is clear, a 10% annual payout of a portfolio invested in ordinary financial assets means the capital won’t last for generations.
As for the crisis unfolding for so many people in our country, yes the needs are certainly big this year. Yet we can’t be sure they are going to be a lot smaller next year or the year after that. Or in 2030.
And finally, there are limits to what even the wealthiest foundations can accomplish.
For one thing, doubling the amount of money a foundation gives a nonprofit this year may not change the long-term trajectory of that program unless there’s a pretty good chance the grant will be the same size again, year after year.
The foundations, as rich as they seem, also don’t have enough money to identify a problem — not enough affordable housing, for example — and then just solve it.
That’s why you see foundations, as rich as they are, often use their money to “seed” programs, hoping to have government agencies or just private people in the market step in and keep a successful approach going.
That’s another way of pointing out the obvious, that the amount of money even the most generous philanthropists can spend is dwarfed by the financial impact of the people of the country, collectively acting together in a market, and through their government.
Payouts of at least 10% of the $1 trillion in private foundation assets is a pittance alongside the federal government’s spending to deal with the effects of the pandemic. That total is around $3.3 trillion so far, in the form of stimulus checks, business loans and so on. And it might not have been enough.
Last week, even after all that government money, a Wall Street Journal headline blared “Struggling Rental Market Could Usher in Next American Housing Crisis” as mass evictions get underway of the people far behind on their rent.
So instead of saying the times require boosting the distribution rate, foundation staff and boards should think more about their priorities.
Ambitious new projects can wait for next year. Bigger checks this year can go to nonprofits helping Americans keep a safe place to live and with food in the refrigerator.