Escaping the Perpetuity Mindset Trap

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Over the past 15 years, as their valuations have increased dramatically, many of us have wondered why foundations couldn’t be more generous with their payouts. After all, in real terms they had grown far larger. Why should they continue to give only 5 percent of their endowments to charity? Why not increase their annual payout to recognize their windfall? In this spirit, Congress recently considered a proposal to increase U.S. foundation payout rates, but it was defeated after an intensive lobbying effort by the largest foundations.

In response to the payout proposal, foundations argued that they must preserve their assets to serve future human needs rather than spend it sooner in reflexive attention to more current needs. Several motivations drove this refrain. Foundations spoke publicly about their fear of the erosion of their independence and fiscal integrity, declining endowments, and their loss of power in the national policy discourse. In sum, the proposal to increase payouts was viewed as a threat to fundamental foundation prerogatives. This was a shot across the bow of the “doctrine of perpetuity”: the underlying and largely unchallenged maxim that compels most foundations to preserve their fiscal lives and power forever.

This article argues that today more aggressive foundation fiscal policies are not only critically needed but that they make long-term social and economic sense. While this article does offer prescriptive strategies, it is intended primarily to provoke discussion. As a rule, foundations are essential, committed, and generally progressive players in the social-capital marketplace. They have been a wellspring of innovation and intervention. Many of those who govern and manage these institutions are accomplished leaders and proud partners of the charities that are their beneficiaries. I am keenly aware of the importance of the work of foundations and have been a beneficiary of their largess.

But current structures and fiscal practices limit the potential of foundations to do their work most effectively. Thus, this article first explains the role of the doctrine of perpetuity in driving foundation behavior. Second, it explains three disabling limitations that result from foundations’ unchallenged adherence to this doctrine. Third, it proposes an alternative core doctrine—social-value maximization—to drive foundation fiscal behavior and offers sample strategies that foundations can pursue to maximize their value. It concludes by discussing the implications of today’s depressed investment markets and the prospect of severe recession.

The Doctrine of Perpetuity

In practice, the potential of almost every private foundation is constrained by a single, ubiquitous institutional imperative:

To manage and grow a portfolio of assets to ensure a foundation’s ability to pay out annually to charity the inflation-adjusted equivalent of 5 percent of beginning asset value in perpetuity.

As a result, just about any private foundation’s books reveal that these institutions invest the bulk of their assets, and hence their potential to effect change, in the same publicly traded equities, real estate, private equity, and debt instruments that you’d find in standard private-investment portfolios. This is often literally the same portfolio of assets that existed before the personal wealth that “made” the foundation become “charitable.” Further, after deducting credit for qualifying administrative expenses, the remaining 4-plus percent that a foundation will eventually pay out in grants is dwarfed by a retained endowment that is nearly 25 times that amount. And while percentages vary in years when investment markets trend up or down, most large endowed foundations view 5 percent as not only the minimum requirement but also the strategically determined maximum they expect to spend. The amount granted is therefore determined not by need or opportunity but by an arbitrary, statutory threshold.1

A majority of foundations, with a particularly high concentration of large foundations, adhere to this minimum-maximum threshold without a second thought. When you think about the process of creating new foundations, this is not surprising. Professional advisers—tax accountants, trust lawyers, and investment advisers who are trained to perpetuate wealth—are the formative architects of foundations. Because they do what they are trained to do, we cannot fault these advisers individually for this architecture. They may also direct clients to follow the perpetual fiscal practices of other foundations. And once an “experienced” foundation hand takes the helm, which often happens with substantial new foundations, the die is cast. Together, these “best practitioners” construct a nearly impenetrable barrier to fiscal innovation—a perfect storm of perpetuity—that severely limits foundations from adopting more creative and aggressive strategies to make their contribution to society.

The end result is that foundations have become little more than private investment companies that give a signficant portion of their excess cash to charity. We have arrived at this juncture because we are intellectually and culturally constrained by the institutional imperative of perpetuity. It sets a trap that severely diminishes the potential benefit to society of more optimal uses of foundation resources.

The Limitations of the Doctrine of Perpetuity

In establishing an impenetrable wall around foundations, perpetuity imposes three fundamental limitations on foundations’ strategic potential.

1. The doctrine of perpetuity immunizes foundations from public accountability. The doctrine enables foundations to operate as self-contained systems, needing little from the outside to operate. In other facets of our national life, institutions are guided by, if not formally governed by, empowered stakeholders. Governments serve voters and constituent beneficiaries; businesses have shareholders and customers; universities have students and alumni; and hospitals have patients. Customers, shareholders, and other stakeholders are the principal means to keep our institutions grounded and responsive.

But foundations lack these mechanisms of accountability. The doctrine of perpetuity ensures that foundations never have to look outside for approval or resources. Once a foundation’s original founders and close associates fade from the picture, it has nothing analogous to “shareholders.” As a consequence, foundation boards generally elect themselves, with all the good and bad results that implies. And while charities are the de facto “customers” of foundations, the disproportionate power of foundations in the “transaction” prevents charities from demanding accountability and responsiveness.

Without empowered stakeholders, foundations lack the accountability of other institutions that benefit the public. Regulators and the media periodically uncover fiscal malfeasance by a foundation’s board or executives. But such oversight has nothing to do with grantmaking performance or maximization of the value of foundation assets for society. And while foundations conduct excellent work for society, such work is predicated on the sustained goodwill and energy of trustees and foundation managers. That’s a difficult and largely elusive proposition. In no other context is exclusively internal oversight deemed adequate. Why here? Given the absence of any obligation to report on performance, foundations are arguably the least accountable institutions in our society.

2. Perpetuity diminishes a foundation’s internal accountability, its ability to make consistent performance demands of its grantees, and its ability to optimize deployment of its assets. The unbroken connection of a foundation’s endowment to its grantmaking apparatus limits the potential of both these operating components. Grantmaking staff knows it will have 5 percent of an endowment to distribute regardless of the quality or results of the organization’s grantmaking. As a result, foundations and their grantmaking staff have little incentive to calculate and communicate the quality of their grantmaking as well as little propensity to share research and information with other grantmakers to establish better grantmaking practices.

The same people that manage a foundation’s grantmaking also supervise its endowment. In nearly every other investment context, the owner of a pot of funds selects one or more intermediaries (such as money managers, mutual funds, or stock brokers) to invest the pot and then demands subsequent comparative performance reporting by each intermediary. Certainly that is how foundation trustees handle endowment investments, but not their grants—that is, their social investments. Trustees seldom consider external services to handle endowment grantmaking, and few demand grantmaking accountability.

On the flip side, foundations sometimes establish highly professional, expert grantmaking capabilities in specific subject areas. Yet despite this competence, they continue to view the captive endowment payout as the one and only source of funds to pass through their grantmaking systems. Due in large part to their inherent insularity, foundations with demonstrable grantmaking competencies are blind to the opportunity to attract and distribute philanthropic monies from external sources. With this level of insularity, it is no wonder that foundations fail to leverage the best grantmaking expertise, that they duplicate grantmaking efforts, and that they fail to harmonize charity grant application and reporting requirements.

In this respect, perhaps the most remarkable thing about Warren Buffett’s commitment of the proceeds from more than $30 billion in Berkshire-Hathaway shares to the Gates Foundation was that other foundations did not bid for a piece of the Buffett business or catch the significance of the Buffett model and“market” themselves as intermediaries for other new philanthropic capital. If Buffett had put his proposition out to tender, we might hope to have witnessed a flurry of responses by foundations eager to exploit their insights, expertise, and grants’ management capabilities with substantial new funds. Instead, I fear that the insulating qualities of perpetuity would have prevented nearly every foundation from recognizing even the Buffett event as an opportunity to lever its own grantmaking competencies.

This insularity of foundations has implications for the performance of charities as well. Foundations are the principal institutional “investors” in charities, and society should expect these investors to establish performance expectations. In fairness, many foundations require grantees to document the outcome of their work. But because foundations are subject to little accountability themselves, it’s unlikely that grantmakers will apply performance demands consistently over time or link grantee data to any public assessments of their own grantmaking performance.

3. Perpetuity erodes the real value of society’s philanthropic assets. In theory since foundations give roughly 5 percent of their endowments to charities annually, the value of the retained 95 percent has an opportunity to keep pace with or exceed inflation. But as the public waits for each foundation’s relatively small annual distributions to charity, there are real costs. In addition to the public’s loss of tax revenue from the charitable deduction and lost capital gains taxes thereafter, society suffers when it has to wait to solve pressing problems.

Unresolved problems not only create immediate human costs—a malaria sufferer left to die, a child left unfed—but also increase the future cost of remediation to society. The hundreds of examples of this principle include whether to promote early-childhood education rather than build prisons later; whether to work to prevent AIDS transmission rather than treat terminal patients indefinitely; and whether to limit carbon emissions now rather than allow global warming to continue unchecked. In the case of some unresolved problems, notably climate change, there may be no strategy or price tag for future remediation. Certainly, any nominal appreciation in the value of a perpetual endowment should be discounted by the cost society incurs today (that is, the social cost) of human suffering, environmental degradation, and other problems left unresolved.

But in light of our current depressed economic conditions, shouldn’t we perpetually warehouse philanthropic capacity to ensure that we have resources to provide grants to future generations or to deploy resources on a rainy day? No! Even if we ignore the cumulative social cost of waiting to solve long-standing problems, deferral is a valid strategy only if future generations become less philanthropic or the philanthropic capacity of the economy declines. Over any meaningful time period, however, neither condition has presented itself. In practice, individuals have become increasingly philanthropic, and society has always expanded its philanthropic capacity.

There is little justification for foundations to save now to prevent a contraction of assets in the future, and it is a pity that foundations did not address some of the world’s most pressing problems when they felt richer. But there’s no point in bemoaning the past. Despite and because of our difficult economic circumstances, foundations should persist in addressing today’s problems, even at the risk of exceeding perpetuity-sustaining payout levels.

When compelling, unserved current needs stare us in the face, the idea that foundations should save resources to serve a theoretical future need makes little sense. Despite all the good work of foundations, their perpetuity-at-all-costs mindset ensures that endowments are a depleting social asset.

An Alternative Core Doctrine: Social-Value Maximization

What strategies can we pursue to preserve foundations’ flexibility and unfettered philanthropic function but also help these institutions become more accountable and social value–maximizing? One obvious strategy is to require all foundations to stipulate a formal strategy to pay out their assets in grants over a prescribed time period that fits the circumstances. This strategy might encourage an internal accountability and time-pressured acuity, causing foundations to deploy assets to solve problems more quickly and intelligently as well. Alas, this blanket prescription is not politically possible. And it may not always be the best solution. Nonetheless, we must escape the perpetuity mindset trap and compel foundations to follow a revised institutional imperative. Without bias for perpetuity or immediate payout, trustees should consciously follow this alternative doctrine:

To manage a foundation’s financial and human resources and to maximize their value for society.

On its face, accepting this new institutional imperative should not be difficult. Most foundation trustees assume they already follow this principle. Indeed, some may argue that because it preserves maximum philanthropic capacity for future generations, managing a foundation’s endowment for perpetuity and restricting payout to the statutory minimum best maximizes a foundation’s societal value. But given the cost to society of deferring philanthropy, it is not plausible to assume that even in a minority of cases perpetuity maximizes social value. If foundations were to follow this new social value–maximizing imperative faithfully, in addition to generally higher payout levels, we would observe more foundation operating strategies such as the following:

1. The use of mission-related investments (MRIs) in endowment portfolios. MRIs are made in profit-seeking enterprises that work in areas that mesh well with the mission and objectives of a foundation. Theoretically, their double–bottom line return (social and financial) mitigates a portion of the “social cost of capital” discount applied to retained endowment assets.

2. The application of a calculated annual “social cost of capital” to discount the value of assets retained in endowments. Application of a calculated social cost of capital would compel foundations to reconcile the cost of waiting to solve problems through their annual payout policy. Despite its imprecision, this exercise is important. It focuses trustee attention on the implicit erosion in the social value of a foundation’s endowment over time.

3. The separation of the endowment and grantmaking components of foundations to create accountability and improve performance. Yes, in virtually every substantial foundation, different personnel manage the organization’s endowment and grantmaking. Nonetheless, there is no practical separation for the automatic flow of the annual payout from the endowment into the grant’s budget. If the components were truly distinct, it would be an endowment manager’s job to ensure that a foundation’s annual payout is granted as effectively as possible, and as is the case with any external grantmaking alternative, it would be the grantmaking manager’s job to prove his team’s work was effective and deserving of subsequent grantmaking responsibilities.

Without consideration for the quality of grantmaking, when tens of thousands of “pots” of foundation funds are dispensed through captive grantmaking services, inefficiency and low quality are inevitable. To prevent these problems, a foundation’s policy could provide that if the endowment management were dissatisfied with the conduct of grantmaking, it should choose a competing grantmaking service. By segregating endowment and grantmaking and considering alternative grant-delivery mechanisms—either through dedicated grantmaking intermediaries or the grantmaking departments of other foundations—we could make all grantmaking more effective and efficient.

4. The pursuit of capital from other sources (new to philanthropy and other foundation endowments) to process through existing foundation grantmaking services. This paradigm-shifting strategy is the flip side of the previous strategy. Once the two foundation operating components have been separated, a newly liberated grantmaking service within one foundation could compete to provide grantmaking services for the endowment manager of another.

5. The enhancement of the accountability of foundation boards by establishing a broad-based foundation membership to elect them. These “stakeholder” electors can include practitioners, beneficiaries, experts, and independent thinkers who care about the work of foundations and the utility of foundation assets. A culture of performance and accountability must extend beyond a foundation’s staff to its board.

6. The shattering of the benefactor-supplicant condition endemic to grantmaker-grantee relationships to encourage more honesty, feedback, and safe criticism. The foundation serves as “banker” to a grantee “customer.” The nature of this relationship should be acknowledged, and foundations should be reviewed regarding the quality of “customer service” they offer. In this respect, the Center for Effective Philanthropy’s Grantee Perception Report is an important model. But because it is conducted for only voluntarily participating foundations and its results remain sealed, its impact is limited.

7. The alignment of foundation compensation and expense indices with comparable practitioners in relevant fields. Not surprisingly, foundations generally establish their compensation policies using data from other foundations. Because perpetuity insulates foundations from market and other pressures to contain expenses, use of other foundations alone as comparables in salary administration is a prescription for spiraling costs, declining grant budgets, and eroding social value. Including salaries of all practitioners in the foundation’s field, staff at nonprofits, intermediaries, government officials, business actors, and so on would help create needed discipline.

8. The regular recruitment of new program officers from the practitioner ranks rather than from among grantmaking professionals. Staying grounded in a foundation’s field of interest and limiting grantmaking positions to discrete terms allows it to remain nimble, informed, responsive, and efficient.

9. Counting only actual grants or direct-program activities as qualifying against payout requirement. If foundations were unable to count administrative expenditures toward annual payout obligations, they would have greater incentive to control excessive expenses and preserve the social value of their assets.

These examples underscore the limitations of the simple “perpetual” construction. But escaping the perpetuity mindset trap does not mean that a foundation must spend down its assets. Foundations have huge financial and human capabilities. They face vastly different challenges. But at the same time, their ability to use resources most effectively must not be constrained by an institutional imperative of perpetuity at all costs. Perpetuity should be viewed as only a possible strategy rather than as an inviolate precondition.

Implications of the Economic Downturn

But hasn’t the recent market downturn vindicated the caution of foundations in conserving their assets? Doesn’t it argue for further caution? I argue no. Certainly, we face a truly momentous economic moment: a recession or, worse, a situation in which personal wealth has declined, millions of jobs have been lost, and opportunity has diminished. If we seek to engage society most effectively and heroically, this is our opportunity; this is the proverbial rainy day. It will be instructive to see how foundations respond. After all, in real terms, asset values have probably returned to the levels of the mid-1990s.

I predict that foundations’ first reaction will be to preserve capital, restrict grantmaking, and reduce discretionary administrative expenses. Certainly the decline in valuations has been deeper than anyone could anticipate. So it is easy to understand the fear of fiduciaries.

But after foundations gain perspective on the downturn, let’s hope for more from the second round of foundation reactions. Maybe more will conclude that the time to grant is now and that despite declining resources, continuation or expansion of grant- or mission-investment programs is paramount. While foundations had more to give before the economic downturn, it still makes sense to give now while the need is so great.

Ultimately, society’s philanthropic capacity resides in the larger economy. Over time, new philanthropists will emerge. As the economy grows, our capacity to give will grow, as will the interest in creating new foundations. If we apply any socially determined discount rate to philanthropic assets, the cost to society of the indefinite retention of endowment in a growing economy is immense. And if the economy continues to stagnate, there is even less justification for holding onto declining assets. We do need policies that ensure that professional, well-capitalized institutions of philanthropy will endure. But these institutions need not be permanently endowed. As they demonstrate their utility, over time they can compete for funds from new donors. Even with the most aggressive payout and value-maximizing endowment strategies, we will experience little, if any, impact on our future capacity to give. But such strategies will surely help those left unserved and make the job easier for tomorrow’s philanthropists.

Now more than ever, we face economic, environmental, and human conditions that require foundations to maximize the value of their resources for society. They must become as creative, resourceful, and accountable as the organizations they support. It is only when foundations escape the perpetuity mindset trap that they can reach their full potential to contribute to a sustainable future.

Note

  1. For recent research on this topic, see Richard Sansing, “Distribution Policies of Private Foundations,” Nonprofit Economics and Management: The State of Research, by Bruce Seaman and Dennis Young, (eds.), 2008, which shows higher average payouts during the down-to-stagnant 2000–2003 investment period versus payout practices during the late-1990s growth period. The same study found significant variation in payout policies among foundations but also confirmed that the largest 1 percent of foundations holding 60 percent of assets made only 50 percent of grants and adhered to payout rates in the 5-percent–plus range. The latter observation conforms more closely to the conclusions of Akash Deep and Peter Frumkin, “The Foundation Payout Puzzle,” Taking Philanthropy Seriously: Beyond Noble Intentions to Responsible Giving, by William Damon and Susan Verducci (eds.), 2006, who in an examination of 169 large foundations during the 1972–1996 period found strikingly little deviation from the legally required minimum distribution.

Buzz Schmidt is the principal of Building Wherewithal, the founder of GuideStar and GuideStar International, and chair of the F. B. Heron Foundation.

  • Niki Jagpal

    Buzz Schmidt’s article raises precisely the issues that all foundations should consider in strategically assessing the minimum payout rate as a foregone maximum. Especially during an economic downturn, maximizing the social and public benefit of institutional philanthropy offers grantmakers a real opportunity. Each foundation should consider the many issues raised in this article, especially leveraging its assets in ways that advance its mission and enhance the public good. This article is more relevant now than ever as many nonprofits are already reporting fundraising shortfalls. The bold recommendations will have broad social benefits and as the Foundation Center’s 2008 giving forecast for foundations suggests, this will maximize the public good of what still appears on track to the be the year with the highest level of foundation assets recorded to date at some $670 billion for 2008. Kudos to Schmidt and NPQ for this much-needed analysis that raises salient issues for all grantmakers.

  • Michael Edwards

    With Christmas approaching it’s a good time to roast some old philanthropic chestnuts over the fire and re-examine the issue of foundation perpetuity, or maybe that should read roasting some red herrings, since contrary to Buzz Schmidt’s argument there are no mechanical relationships between longevity, impact and what Buzz calls “social value.” Foundations can and have been short-lived and ineffective, useful over long periods of time, and perpetually disappointing (modesty forbids me from naming any names….).

    The real issue is effectiveness, both over time and at particular moments – like now – when special efforts are required, as they will always be required, which is why a planned payout rate makes sense. Some donors will choose to expend their resources during their own lifetimes and others won’t. That’s their choice, but it has nothing to do with social value. Buzz’s ideas are welcome for a different reason, namely, that we can’t know what is effective during any period in time unless we can improve foundation accountability, and by foundation accountability I don’t mean spurious attempts to quantify the relative impact of different investments in such unpredictable landscapes of social change (that is accountancy, not accountability). I mean a much-greater emphasis on learning and open debate about what foundations do, and more importantly what those with whom they work are achieving over the long, long timescales that are required to secure any significant results. Sounds like an argument for long-term continuity to me.

    Michael Edwards is a Distinguished Senior Fellow at Demos in New York, and author of Just another Emperor? The Myths and Realities of Philanthrocapitalism.Check out my website at http://www.futurepositive.org for free downloads and all the latest news about my work

  • Ruth Ann Harnisch

    The late Claude Rosenberg’s work convinced me long ago that society is best served by philanthropic investment made NOW.
    My foundation isn’t operating on a perpetuity model. It wasn’t designed so family members could have income or something to keep themselves busy.
    And which investment of YOUR foundation’s 2008 assets are you happiest with right now – the ones you made in the market, or the ones you made in a grantee’s work?

  • Pablo Eisenberg

    Buzz is right. Here is my answer to foundations: Foundations’ Failure to Give More Is Inexcusable ([url]http://philanthropy.com/pcgi2-bin/printable.cgi?article=http://philanthropy.com/premium/articles/v21/i04/04002701.htm[/url]), published in the Chronicle of Philanthropy.

  • James Jennings

    Whenever I hear the term ‘perpepuity’ in association with wealth, power, and resources, I cannot but help to recall the classic poem by Shelley in 1818, “Ozmandias”…

    OZYMANDIAS

    [i]I met a traveller from an antique land
    Who said: Two vast and trunkless legs of stone
    Stand in the desert. Near them on the sand,
    Half sunk, a shatter’d visage lies, whose frown
    And wrinkled lip and sneer of cold command
    Tell that its sculptor well those passions read
    Which yet survive, stamp’d on these lifeless things,
    The hand that mock’d them and the heart that fed.
    And on the pedestal these words appear:
    “My name is Ozymandias, king of kings:
    Look on my works, ye Mighty, and despair!”
    Nothing beside remains: round the decay
    Of that colossal wreck, boundless and bare,
    The lone and level sands stretch far away
    [/i]
    The essay by Mr. Schmidt should be a reminder to foundations about the importance of not losing sight of the prize of social justice, versus the blind pursuit of the concept of fiscal perpetuity. What is the moral worth of maintaining the economic value of a foundation endowment while there is suffering amongst us? But, Schmidt goes further. He argues that the focus on maintaining a narrowly-defined sense of economic worth at the expense of moral worth, is actually economically and fiscally inefficient! Investing in people and communities now, when foundations can do, represents a way of saving costs in the future. The fiscal dogma of a 5% perpetuity rule is blinding foundations to this reality. Like Ozmandias, we too think that perpetuity is more important than fixing the present, and building, now, a foundation of social and economic justice.

    Alas, the fetish of perpetuity can result in a society where, “[i]Nothing beside remains: round the decay…Of that colossal wreck, boundless and bare,The lone and level sands stretch far away…[/i]” Ultimately, it will not be the 5% perpetuity rule that will move us forward as a healthy society; rather, it will be a focus on social justice and ensuring –however necessary (even rejecting the 5% perpetuity dogma…) — that in some spaces, we will have done everything possile for every human being to enjoy a decent standard of living.

  • Richard Brewster

    Whether or not foundations suffer from the Perpetuity Mindset Trap, Schmidt certainly has fallen into the Philanthrocapitalist Mindset Trap (with thanks to Michael Edwards and Matthew Bishop.). Foundations are social investors who should ‘maximize value’ and take account of the ‘social cost of capital.’ And only a philanthrocapitalist could write this: “Rather, what is most remarkable is that other foundations did not rise to the occasion [i]and bid for a piece of the Buffett business or at least begin to “market” themselves as effective intermediaries for other conduits of philanthropic capital.”[/i] [My italics.]

    Like many social investors, venture philanthropists and others who see the world through this business lens, social problems have clear boundaries and can be solved in a finite period of time: “It is a pity some of the most pressing problems were not addressed when foundations felt richer.” Such an assumption about the problems we face does justify the view that society would be better off if more money was spent now and the problem was “solved.” But many of the areas of human activity and many of the social challenges we face are simply not those kinds of problems, or indeed problems at all. I have a new grandson. I hope that, as he grows up, he will be able to benefit from everything from creative play, great higher education and all the arts; I trust that if he falls on bad times, help will be available, and that if he goes to war or has an accident and becomes disabled, sustained support will be available to him for the rest of his life. I also hope that he’ll be able to participate in civic institutions and the ongoing battle to sustain an engaged democracy. Foundations have been active in all these areas and it is unclear how spending down their endowments now will secure all these benefits for future generations. Even where, theoretically, there is a problem that can be “solved,” such a solution can take decades: talk to anybody with experience of attempts to prevent the spread of AIDS or to sustain the supply of drinking water to villages (two of Schmidt’s examples.) It takes time and often much trial and error to address the cultural, economic and political barriers that make success in these areas so elusive.

    With this perspective, it makes a lot of sense to keep resources in hand, perhaps even in perpetuity.

    Schmidt is aware of this argument but he wants to have his cake and eat it here. On the one hand, “The argument that it is sensible to save resources to serve a theoretical future need is difficult, at best, to countenance when actual and compelling unserved current needs are staring us in the face.” On the other, just in case future needs are not theoretical, he believes in the best of all possible worlds: more philanthropists will appear to replace the ones whose resources have been run down. How do we know this? “…society has always been able to grow its philanthropic capacity.” Pangloss could not have put it better. But let us be optimistic too and assume that Schmidt is right. He nevertheless ignores the extraordinary economic challenges of the next couple of generations. Even without the $8.5 trillion committed to bail outs, the federal government is in serious debt, there are currently unfunded future obligations to Medicaid, Medicare and Social Security and the states are in serious fiscal difficulty. Perhaps these challenges will be met by future economic revival and innovative and bold government action but, if they are not, the problems our children and grandchildren may face will make today’s difficulties look like a picnic in the park. To insist that most foundations run down their assets right now is at best rash, at worst, reckless.

    Foundations suffer the problems of all institutions with lots of money: they have too much “slack.” They can easily become complacent and inefficient and, unless they are held to account, inconsistent and ineffective. The solutions to this include constant debate, and articles like Schmidt’s, and many of the solutions he proposes, particularly those relating to accountability, transparency and the balance of power between foundations and grantees, make total sense. Some of these, like appointing people from nonprofits to grant making staffs, have been taken up by several foundations. Moreover, there will indeed be some social issues or fields where convergence of circumstances, resources, political will and institutional readiness will make it likely that it’s worth the risk of spending all the resources available to solve a particular problem, including a foundation’s endowments. In general, however, spending down the resources of foundations is not a good idea. Let’s spread the wealth around a bit – across the generations.

    Richard Brewster is the Executive Director of the National Center on Nonprofit Enterprise, a national nonprofit that helps nonprofits make wise economic decisions. http://www.nationalcne.org.

  • Wentworth R

    I agree with Mr.Schmidt’s opinion piece. I enthusiastically urge and hope that foundations maximize the value of their resources now, for society’s future. I have never believed in the perpetuity of foundations. Failure to enhance intervention now in attempting to correct social ills compounds the problem later when crisis management is required with lessening financial resources to support it.