May 21, 2014; Foundation Source
We love data that provide hints of the structure and behavior of nonprofits and foundations, but all the studies that we see have to be examined with an understanding of their methodological limitations. Usually, the typical problem is that results are reported based on responses to surveys that lack any kind of randomization to back up their claims that they describe or reflect the nonprofit or foundation sectors. A similar problem occurs when consulting firms, whether nonprofit or for-profit, report statistics about their clientele that may or may not—usually not—be reflective of the larger universe of groups.
Foundation Source provides outsourced administrative and management services for some 1,100 family, corporate, and institutional foundations in the U.S. Although Foundation Source works with foundations of all sizes, including some with hundreds of millions of dollars in assets, it released today a report on the transactional activities of 714 of its clients, those with assets less than $50 million.
While limited by the fact that these are foundations that have turned to Foundation Source for some enlightened managerial guidance, presumably in contrast to many other foundations that might be less progressive in their managerial outlooks, it is useful nonetheless to examine the Foundation Source report for insights into foundations other than behemoths such as Gates, Ford, and Kellogg which dominate national press coverage but may be seriously unrepresentative of foundations that are much smaller.
Of the 714 foundation clients of Foundation Source examined in the report, 28 percent had assets of between $250,000 and $1 million and almost 36 percent showed assets between $1 million and $5 million. Just short of 19 percent of the foundations were somewhere along the continuum of $5 million to $50 million. So the midpoint by size is probably in the $1-2 million asset range, and more than half of the Foundation Source foundations in the report have been around for less than 10 years.
With a hot stock market in 2013, it is no surprise that these foundations had an average asset jump of 14.1 percent over the previous year. Foundation Source very helpfully notes that investment returns were up 14.7 percent and new contributions up 7.9 percent—the difference between those sources and the overall increase in assets reflects the expenditures and distributions of foundations over the year. It is a very worthwhile point of this exercise to remind observers that foundation assets are growing rapidly and many foundations have living donors who are kicking in additional moneys beyond returns from the stock market. Obviously, even after factoring in foundation distributions, foundation assets experienced double-digit growth over the 12-month period, suggesting that there might be room for significantly higher levels of distributions than some might assume.
For nonprofits, the truly interesting information is about distributions—grants plus related administrative expenditures. For the Foundation Source foundations—remember, all below $50 million in assets—average distributions (call it payout) were 7.3 percent, a couple of points higher than the legally required 5 percent payout. The smaller the foundation, the higher the payout: 6.7 percent for foundations with $10-50 million assets, 7.3 percent for foundations with $1-10 million in assets, and 14.0 percent for foundations below $1 million. No one should be surprised. Small foundations typically pay out at a higher rate than larger ones. For foundations above the size limitations of this study, expect foundation payouts to trend toward the 5 percent line—and if administrative costs were removed from mandatory payout standards, as they should be, grants payout would be less than 5 percent.
What may surprise is that despite the fabulous returns of 2013, foundation grantmaking declined in the aggregate for the 714 foundations by 2.5 percent compared to 2012. For all of the foundations, the total grantmaking was only $148.1 million, so we’re not talking about a significant financial impact on nonprofits one way or the other. But smaller grantmakers are sometimes likely to reach the smaller nonprofits that routinely fall off the radar screens of big national foundations. The average grant sizes of the Foundation Source foundations ranged from $4,767 for foundations with assets of less than $1 million to $14,229 for those in the $10-50 million asset range.
Like most of their foundation peers of other sizes, education gets the lion’s share of their grant dollars—29 percent—though human services clocks in second with 17 percent. What does set some of these foundations apart is, particularly at smaller asset sizes, a commitment to general operating support. Almost half of the grantmaking of foundations below $10 million in assets went to general operating support, though for the $10-50 million foundations, general operating support plummets to 28 percent of their outgoing dollars.
Citing the donors’ willingness to add fresh capital to their foundation assets, the Foundation Source authors see that as “evidence of donors’ commitments to their foundations and…that these organizations have an outsized impact relative to their size.” For us, it is difficult to determine what the specific motivations of the donors might be or to be able to ascertain their outsized impacts. Rather, without overstretching the possibilities of interpretation from the Foundation Source report, we see other dynamics at work:
- In the Foundation Source data, and in other sources of statistics on foundations in general, it appears that the larger the foundation, the lower the grants payout. It doesn’t mean that big foundations can’t give out more, but they don’t and won’t—unless pressed by more than friendly suasion. The data also indicate that the larger the foundation, the less likely the foundation is to give out flexible funding for core operating support or other general purposes. In our experience, very small foundations are sometimes quite close in temperament to their typically small grantees, more likely to see them as peers that need general operating support grants, and less likely to want to exercise indirect control by tying up grants with program- or project-specific restrictive requirements.
- Despite the tendency of small foundations to give out more than larger foundations, it is hard to dismiss a suspicion that these foundations that sought to outsource their management functions to a professional operation like Foundation Source may be a bit more prone to enlightened foundation citizenship than the bulk of their peers. Of the 84,000 foundations that fit the asset category of the Foundation Source study cohort, there are plenty, probably way too many, that don’t quite engage in grantmaking like these foundations. Small foundations in the aggregate are likely to be more prolific grantmakers than larger foundations in terms of the ratio of distributions to assets, but the numbers might not be at the average 7.3 percent exhibited by these.
- Even as the rate of distributions increases, the fact that these largely generous foundations chose 2013 as a time to retrench and reduce their grantmaking is troubling. If one’s evaluation of the economy is based on stock market returns, perhaps these foundations could imagine that it’s time to sit back and let the economic rebound work its magic. But 2013 was a time of continuing and deepening poverty, obstinate numbers of long-term unemployment, and continuing socioeconomic problems seen in homelessness and other issues. It wasn’t a time for sitting back and recouping on mission.
- Finally, it is a bit facile for critics like us to complain about what the study didn’t address. The Foundation Source analysis was fundamentally transactional, calculating cumulative asset flows in and out of the 714 foundations. Yet, the authors were somehow able to conclude with a finding of “outsized impact” that isn’t exactly evident in the transactional data. Moreover, in its focus on the asset growth of these foundations, the analysis doesn’t reveal the nature of the investments. Do these smaller foundations use any kinds of social screens in their investment choices? Is Foundation Source guiding them toward considerations of how their investments relate to issues such as climate change and fossil fuels? The data lurks beneath the analysis and would be tremendously valuable for public discussion.
While limited in terms of methodology, the Foundation Source analysis provides grist for good questions about philanthropy. Just be cautious in how much one might think about extrapolating from the Foundation Source sample to characterize small foundations in general.—Rick Cohen