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One of the most hotly debated legislative issues among foundations today focuses on payout rates and the appropriate pace at which institutional funders give away their assets. Federal law requires spending 5 percent of the foundation’s assets each year for charitable purposes, and while this proportion was created as a minimum, it has become the norm. Some funders like Atlantic Philanthropies and the John M. Olin Foundation are committed to spending down all of their assets over the next several years—a practice that dates back to the Julius Rosenwald Fund in the 1940s—thereby significantly increasing the rate at which they spend the money they have. But many other foundations, required by mandate from their founders to maintain their endowments in perpetuity, have resisted the idea of distributing more than the 5 percent of their assets as required by law.
Wall Street Journal reporter David Banks discussed the growing trend of spending down in a 2002 article entitled “Giving While Living."
The Atlantic Philanthropies decided in 2003 to spend down its nearly $4 billion endowment over the next 12 to 15 years, aiming to make enduring changes to systems and structures related to four key issues: aging, disadvantaged children and youth, health of populations in South Africa and Vietnam, and reconciliation and human rights.
James Piereson, executive director of the John M. Olin Foundation, reflected on the process of spending down the assets of the Olin Foundation after the death of its founder and a key trustee in “The Insider’s Guide to Spend Down: Switching off the lights at the Olin Foundation," (Philanthropy, 2002).
Other resources for those interested in payout rate include:
A Council on Foundations Board Briefing (Fall, 2000), which lays out much of the history of the “great payout debate" that has emerged since the Tax Reform Act of 1969 first set a requirement for foundation disbursements to charitable causes.
A 2002 op-ed piece in the New York Times entitled “Faster Charity," in which former Senator Bill Bradley and McKinsey & Company Director Paul Jansen suggested that as social sector needs continue to grow, foundations should be distributing more of their funds now, rather than saving for the future.
The “Faster Charity" argument was rooted in a longer analysis by Paul Jansen and David Katz that was published in The McKinsey Quarterly in a 2002 article called “For Nonprofits, Time is Money." The authors applied the “time value of money"—the financial concept that $100 now is worth more than $100 sometime in the future—to charitable endowments and giving. They concluded that “if foundations or other endowed institutions are going to deliver benefits whose value to society equals that of the original tax-deductible donation, they will need to reconsider their payout strategies. Lifting payout rates above the current 5 percent is essential."
In a 2003 article, “When Time Isn’t Money: Foundation Payouts and the Time Value of Money," (Stanford Social Innovation Review), Stanford Law School professor Michael Klausner argued that the approach of discounting future grants to present value used by Jansen and Katz wasn’t applicable to foundation payout rates. Klausner explained that giving for future generations is just as valuable as giving for current ones, and that current charity comes at the expense of future charity. And "because charity deferred to the future earns a return in the foundation's investment portfolio, a dollar withheld from the current generation can be expected to yield more dollars of charity for future generations." But he concludes that, in some cases, current giving is a better approach than future giving; the best use of philanthropic dollars will vary depending on the mission of the foundation. For certain types of charity, giving more now may be the most cost-effective way to provide value for both current and future generations. “For example," he writes, “if a foundation’s goal is to preserve open space, doing so sooner may be better than doing so later, when the choice of open space to preserve will be more limited."
Harvard scholar Peter Frumkin’s speech to the annual meeting of the Philanthropy Roundtable in 2003, “The Foundation Payout Debate: From 1969 to 2003 and Beyond," (as well as in his longer 2001 working paper, The Foundation Payout Puzzle, for the Hauser Center for Nonprofit Organizations with Akash Deep), summarized the range of arguments on both sides of the foundation payout debate. After describing the pros and cons of higher payout rates, Frumkin came to a similar conclusion as Michael Klausner. “I would argue that today’s debate over payout is a bit off, because we’re focusing on the questions, “How high should the rate be? Should it include administrative expenses?" he explained. “The real issue is, ‘Are foundations’ financial decisions strategically aligned with their missions?’ If you’re working in the area of AIDS or some medical disease that has a time horizon of, say, 20 to 40 years, I think you’re foolish to pay out the bare minimum of 5 percent. But if you’re working on the global environment or some problem you think has a long time horizon, 5 percent may be too high."
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