The most visceral and contentious issue in philanthropy today is whether to increase the mandatory minimum-spending requirement—payout—that private foundations must meet.1 As the National Network of Grantmakers (NNG) put it in 1998, “Payout is the engine that drives philanthropic grantmaking and, in turn, nonprofits supported by private foundations and public charities.” However, the payout debate is largely limited to discussions among foundation directors and staff. Where is the nonprofit voice? Sometimes nonprofits are not invited; sometimes they are not interested; sometimes they are a little fearful to speak up about an issue that might put them at loggerheads with their foundation funders.
Payout ought to be one of the vital issues of the day. An increase of payout in grants of a mere one percent could increase foundation spending by $6-7 billion or more. Our nation has given foundation resources a tax exemption for the public benefit we derive from their use of resources toward meeting community needs, addressing urgent social problems, and enhancing social and economic democracy. How foundations choose to invest and spend their tax-exempt funds defines how they live up to their public benefit purposes. The payout issue addresses philanthropy writ large; it is about much more than the fates of individual foundations.
Are there reasons why nonprofit leaders are not engaged in the payout debate besides not being invited to participate? Yes; in many cases, they do not know the facts, the cutting-edge themes in the debate, and the stakes:
- Most nonprofit executive directors and staff are unfortunately barely aware that private foundations are legally required to ‘spend’ at least five percent of their net assets each year; for many large foundations, the five percent floor seems to act as a ceiling.
- Foundation payout typically includes grant-related administrative costs, trustee fees, other administrative expenses, and loan-like program-related investments (PRIs) in addition to actual grants.
- The restrictions on administrative costs calculated as part of a foundation’s mandated payout were removed from the legislation long ago.
- Many foundations don’t even make five percent, four percent or, sometimes, even three percent payout in terms of grants-only expenditures.
- Some foundations won’t even go through the motions, opting instead to pay the penalty of a higher federal excise tax on the income from their investments rather than getting the money into the hands and budgets of nonprofits.
- Average payout has declined over the years since the payout requirement was reduced to five percent in 1981. Overall, foundation payout in grants declined from 6.8 percent in 1984 to 4.8 percent in 1997.
Efforts to discuss increasing the required minimum foundation payout to six percent, or expanding that requirement to include public foundations and donor-advised funds, engender virulently negative reactions from some quarters. The payout topic is often shrouded in arcane legal and financial arguments, making it difficult for all but foundation insiders to consistently discuss the issue. But for every investment analyst (armed with stock market performance trends going back decades) who defends lower spending rates, you can find some other analyst willing to swear that six percent is not only justifiable but, perhaps, even too low a payout rate.
A nonprofit dependent on foundations for day-to-day survival may feel more than a little queasy at the prospect of suggesting to funders that their spending behavior is inadequate. No reasonable person will deny that there is a marked power imbalance between foundations and most nonprofits; the reality is that most foundation executives, even if they view the issue of higher foundation payment as anathema, are hardly likely to take the foolhardy step of penalizing groups engaged in a dialogue around payout. The success of any campaign elevating the payout rate is predicated on a belief that the vast majority of foundation leaders and staff want to live up to their public benefit responsibilities. Nonprofits must shed their submissive attitudes, find the courage to speak out on critical issues in philanthropy and join with foundations as partners.
It’s time for nonprofits to speak up about this vital issue; to come together as social change proponents to address the functions of foundation spending, not simply in terms of how payout affects nonprofit operating budgets, but how payout functions in our economy and society. Payout should not simply exist as the province of foundation executives, program officers, and investment advisors. Last year, the National Committee for Responsive Philanthropy (NCRP) joined the NNG’s longstanding effort to promote a foundation-spending rate of at least six percent. The potential benefits to nonprofits of increased billions of dollars in foundation grantmaking are immense. But nonprofit involvement in the payout debate must begin with understanding the issue and then finding the arenas for discussion.
- There is a great deal of support for increased foundation payout. Suggesting that five percent payout is too low does not turn a nonprofit into a wild-eyed radical. There is widespread sympathy for elevating the payout rate among nonprofits of varying political perspectives. At the Independent Sector national conference in November 1999, when attendees voted electronically in a town hall-type meeting on the payout question, seven-in-ten came out in favor of increasing payout. When the foundation representatives at the conference were polled, 40 percent voted in favor of increased payout. This isn’t a nonprofit versus foundation issue. Questioning the adequacy of a five percent payout, or advocating a six percent payout rate, does not relegate nonprofits to some political fringe.
- Payout is not simply a question about foundations; it is a question about the roles of institutions with large and growing endowments in the New Economy. Despite all the hype surrounding this nation’s bustling economy, we are still a society of ‘haves’ and ‘have-nots.’ The U.S. has the most unequal distribution of wealth in the industrialized world; a mere one percent of the population owns half the nation’s wealth. It is impossible to exempt the growing endowments of private foundations (and private universities and hospitals, for that matter) from advocacy for a redistribution of wealth. Foundations are organizations created and largely controlled by persons, families, and corporations of wealth. Bridging the wealth divide in the U.S. has to include foundation endowments in the analysis. While foundation endowments are growing, foundation payout is flagging. Getting that money out to social justice and other nonprofits must be a component of reducing the nation’s inequitable distribution and control of wealth.
- Foundation assets have grown enormously over the past two decades. Foundations have trotted out investment advisors such as Goldman Sachs and Cambridge Associates to defend five percent as the prudent level of spending to guard against downturns in the market and the economy. Yet, after looking at the dramatic growth of foundation assets (in recent years growing sometimes 20 percent or more a year), many analysts insist that the current economic environment warrants a different spending level. It has been a strong market for foundations’ investments, with the Dow Jones increasing from 2,400 to over 10,000 in the past ten years alone—strong enough to warrant a higher level of payout given two decades of solid asset gains. One can even take President Clinton’s off-the-cuff remark at last October’s White House Conference on Philanthropy (though directed at individual givers) to apply to foundations as well: increasing giving by one percent in light of the current market and strong economy would not hurt them, and would greatly enhance the work and impact of the nonprofit sector.
- Suggesting increased payout rates does not require a booming market. Stock market analysts seem to thrive on disagreement. Some insist that the stock market is undervalued; others explain that the booming stock market is due to ‘irrational exuberance.’ Many observers forget that the payout rate was only reduced to five percent to help foundations recover from the effects of the stock market downturn in the early 1970s. The subsequent decades show conclusively that foundations have rebuilt their assets, recovered nicely, and are now strong enough to return to a payout rate of six percent or more. Moreover, as Urban Institute economist Eugene Steurl has suggested, there might even be a strong rat