“The doctrine of perpetuity insulates foundations from maximizing the value of their assets for society,” argues Arthur “Buzz” Schmidt in an article released today by the Nonprofit Quarterly. The founder of GuideStar USA and founder and CEO of Guidestar International, Schmidt writes in, “Escaping the Perpetuity Mindset Trap” that this moment in history and the economy makes the role of foundations more important than ever, and it should be in the form of substantially increased payout arates and other strategies—even to the point of foundations considering ‘spending down’ their assets.”
Most of the more than 80,000 U.S. private foundations are required by the federal government to pay out a minimum of 5 percent of their assets yearly including grants and administrative expenses with the exception of community foundation and other “public foundations” that have no payout requirement. Yet most private foundations use that 5 percent floor as a ceiling amassing billions in assets like any privately held corporation. Holding on to what is essentially public money in this way ultimately “erodes the real value of society’s philanthropic assets,” according to Schmidt.
Arguing they must retain funds for rainy days, foundations have adamantly opposed increases in payout requirements and believe it’s more necessary to assure their future existence than to give larger sums to solve social problems right now. Schmidt disagrees with this stance as shortsighted and says, “Minimizing the resources that are devoted to solving today’s problems is hardly a prescription for a sustainable future.”
A successful lobbying effort on the part of the nation’s largest private foundations, defeated the Charitable Giving Act of 2003 that would have required foundations pay out a minimum of 5 percent of their assets in grants, in effect raising the mandatory payout rate by a small amount. Schmidt’s argument questions the precepts of most specific private foundations that going above a 5 percent payout would threaten the value of foundations by undoing foundation perpetuity. He argues that foundations should not continue to think of the 5 percent payout rate or the notion of foundation perpetuity as sacred cows.
“Now more than ever in our lifetime,” Schmidt writes, “we face conditions-economic, environmental and human-that require foundations to maximize the value of their resources for society. They must become every bit as creative and resourceful and accountable as the organizations they support. It is only when foundations escape the perpetuity mindtrap that we will see their full potential to contribute to a sustainable future.”
In his article, among other strategies, Schmidt prescribes a social value maximization approach that might require all foundations to pay out all of their assets in grants over a prescribed period of time. This period could potentially conform the purpose and mission of the foundation rather than to the overriding notion of institutional immortality.
In addition to his roles with Guidestar and Guidestar International, Schmidt is also a trustee of the Institute for Philanthropy (London), the Association for the Preservation of Virginia Antiquities, and the FB Heron Foundation, which he chairs. In 1999, he was recognized as Nonprofit Executive of the Year by the Nonprofit Times. Nationally and internationally, Schmidt is recognized as one of the most significant thinkers on maximizing the impact of foundations and nonprofits for societal betterment.
The Nonprofit Quarterly is the premier management journal of the nonprofit sector, providing print and online resources about management, governance and policy to the nation’s nonprofits and philanthropy.