The International Journal
of Not-for-Profit Law
Volume 6, Issue 1, September 2003
By Robert O. Bothwell*
A threat to foundations’ hallowed way of life! That is how the foundation trade association, the Council on Foundations, sees proposed legislation before the U.S. Congress about how much foundations are required to pay out annually. Currently, foundations are allowed to count both grants and administrative expenses against the annual pay-out requirement of 5 percent of assets. The proposed legislation would allow foundations to count only grants. This sounds like it might be an accountants’ quarrel. But the Council on Foundations sees it as a life-and-death issue. If administrative expenses are not allowed against the 5 percent pay-out, then staff salaries and benefits, trustee fees, communication with the public, and direct foundation expenditures for research, reports, conferences, and technical assistance would all have to be funded out of corpus. Assets would inevitably decline, perhaps to the point that some foundations eventually might be forced to close their doors. According to the Council’s website: “[F]oundations planning to exist in perpetuity would find it difficult or impossible to do so.”
Should foundations spend out? Could they make a greater impact by committing assets as well as income to fighting for their causes? Or should foundations provide stewardship for their assets in order to last in perpetuity? Not long ago, the Aaron Diamond Foundation took the first course. Led by donor Irene Diamond and executive director Vinny McGee, the foundation spent itself out of existence in 12 years–primarily to make the greatest impact possible on the world-wide battle against AIDS (it was quite successful). The Diamond Foundation is not the first to have taken this course. As founder of Sears, Roebuck & Company, at one time the nation’s biggest retail store, Julius Rosenwald created a foundation with his personal fortune, the Julius Rosenwald Fund, that was set up to spend out during his lifetime, hoping to have a larger impact–on schools for rural Blacks, international Jewish relief agencies, YMCAs and YWCAs–than by spending only the income or a portion of it. The Stern Fund and Field Foundation are other well-known foundations that more recently did the same. Interestingly, all these examples were known as liberal foundations.
Yet, for years, politically conservative foundations have been enjoined by prominent conservatives such as Heather R. Higgins to spend themselves out of existence, so that liberals won’t get ultimate control of the foundations, as conservatives claim happened in the case of the Ford, Rockefeller, Charles Stewart Mott, Carnegie, and other major foundations. Michael Joyce, when president of the Lynde and Harry Bradley Foundation, a leading conservative foundation, identified the problem: Foundations “have empaneled a mandarinate of highly credentialed experts whose claims to knowledge have emboldened them to build a comprehensive list of promises social science has shown itself manifestly incapable of delivering: racial harmony, rehabilitation of criminals, peacemaking….”
Since both liberals and conservatives have advocated spending out, the issue is not really an ideological one. In fact, the Philanthropy Roundtable, the conservative foundations’ trade association, actually publishes a monograph arguing both sides of the issue.
I believe Rosenwald offers the best argument for both sides: “Real endowments are not money, but ideas. Desirable and feasible ideas are of much more value than money, and when their usefulness has once been established they may be expected to receive ready support as long as they justify themselves. We may be confident that if a public need is clearly demonstrated, and a practicable way of meeting that need is shown, society will take care of it in the future.”
But spending out may be far more radical a result from the proposed legislation than reality may permit. The estimate by the National Committee for Responsive Philanthropy (NCRP) is that $3.2 billion per year may have to be paid out in grants in addition to the $30 billion annually paid out by all foundations (2002 projection). That is a lot of grant money (an 11 percent increase), which is why the NCRP supports the legislation. But against $486 billion in assets (2000, latest data), the extra pay-out is small potatoes (a decrease of less than 1 percent), though experts differ on what effects over time this annual decrease in assets would have.
In my mind, if the proposed foundation pay-out legislation passes, the biggest casualty may not be foundation assets, but foundation funding of new, small, controversial, and/or grassroots organizations. Some foundations now commit significant resources to staff to do outreach to these organizations so as to encourage and assist them in requesting grants. If foundation administrative expenses are cut in order to boost grants pay-out under the legislation, will fewer new, small, controversial, and/or grassroots organizations receive grants? Will the foundations fire their outreach staffs and simply give more money to older, larger, more accessible, less controversial organizations? What a shame if this were the result, when these organizations are already receiving the overwhelming proportion of grants from private foundations.
* Robert O. Bothwell is a member of ICNL’s Advisory Council, Principal of Visions Realized, and President Emeritus of the National Committee for Responsive Philanthropy. Reprinted from Issue #15, Philanthropy in Europe, Editor Karina Holly