Challenging the Five Percent Solution

As this piece is being written, the Dow has dropped from a high of more than 14,000 in July of 2007 to the current low of roughly 12,600 in anticipation of a recession. The nation’s subprime mortgage industry collapse, epitomized by the bargain basement acquisition of the nation’s largest subprime lender, Countrywide, by Bank of America, hasn’t helped.

With plunging stock assets, one might expect philanthropic foundations to hunker down, conserve on their grantmaking, and do their best to maintain the value of their endowments. But a few foundations will pursue other strategies, not simply “countercyclical spending” with the notion that a lousy economy is exactly when foundations should dip into their reserves. A number of foundations, by virtue of interpretation of their mission, analysis of societal needs, or adherence to their founders’ directives, will choose not only to spend more, but to spend much more, even to the point of spending themselves out of existence.

In late 2007, Northern California Grantmakers, the New York Regional Association of Grantmakers, and the French American Charitable Trust released Beyond Five Percent: The New Foundation Payout Menu, a review of different models by which a handful of foundations surpass the 5 percent minimum required spending (not grants) payout of private foundations. There isn’t much in the philanthropic literature that talks about the experience of foundations that spend more than the law requires or actually spend down. Beyond Five Percent is a useful addition to the literature.

The foundations described in the report are diverse if not eclectic. The author (Heidi Waleson) and project sponsors aim to demonstrate that higher payout practices are not—and need not be—the province of foundations of the left or right. Among the dozen or so profiled are the redoubtable conservative mainstay from Milwaukee, the Lynde and Harry Bradley Foundation, the politically progressive Needmor Fund and HKH Foundation, one of the e-bay founders’ philanthropies (the Omidyar Network), and foundations tied to the specific payout or spend down mandates of living donors such as Richard and Rhoda Goldman, Lewis B. and Dorothy Cullman, and Charles Feeney’s Atlantic Philanthropies.

These very brief profiles, reflecting the personal observations of foundation leaders and family members, lead to some hardly startling but logical conclusions. The report reaffirms the perspectives of observers such as Stanford’s Michael Klausner and the University of Texas’s Peter Frumkin that it is most useful to link a foundation’s payout rate not to a mechanical adherence for or against “perpetuity,” but to a concept of what the foundation is trying to achieve with its mission and desired impact. What a thought, “linking payout or lifespan to mission…offer[ing] a foundation unique opportunities to be deeply involved in areas it cares about, to be responsive to changing circumstances, and/or to make large investments that can prove to be strategic tipping points in its fields of endeavor.”

Beyond Five Percent steers a wide berth away from past and potential federal legislation that might alter the composition of private foundation payout (or qualifying distributions, currently permitted to include most administrative expenses in addition to grants and program related investments), the minimum payout levels (unchanged from the 5 percent that payout was reduced to in 1976), and whether mandatory payout requirements should be extended to other large tax exempt endowments (such as community foundations, universities, hospitals, and other well endowed public charities).

That doesn’t mean that the issue is dead. In the U.S. and elsewhere, there may be signs of a revival of the payout and spend-down debate that died, at least in this nation, with the defeat of the Charitable Giving Act of 2003 due to a furious foundation lobbying effort. The recent attention given to Feeney’s transition from anonymous grantmaking to a new ethos of transparency at Atlantic Philanthropies contributes to the dialogue, with writings such as a McKinsey case study of Atlantic Philanthropies and lengthy treatments of his philanthropic thinking on National Public Radio,[i ] in the Irish Times,[ii ]and in a 2007 biography. [ⁱⁱⁱ ]Warren Buffett’s massive 2006 gift to the Bill and Melinda Gates Foundation and the Gates’s announcement to keep their foundation alive no longer than they are add to the upsurge of attention to alternatives to foundation perpetuity.

Nothing will stand in the way of Feeney’s spend-down plans or Buffett’s annual commitment to the Gates Foundation, but what about the other endowed foundations? In past recessions, foundation payout has dipped in the face of nonprofits and others strongly calling for stepped up grantmaking. The very useful Beyond Five Percent examines the dynamics of foundations that have chosen not to turn the 5 percent payout floor into an inviolate ceiling, particularly their internal thought processes and program plans. But these are all high-payout scenarios brought about by the commitment and vision of rare foundation leaders who for the most part connect payout to mission and strategy. For the remainder of endowed institutions, the payout behavior is much more sluggish. Leaving foundation spending to the decisions of individual foundation executives, many of whom might not get the inspiration they should from Beyond Five Percent, may remind the public and Congress that self-regulated foundation payout doesn’t work.