Editor’s Note:
Recently, in light of the COVID-19 crisis, there has been increased attention paid to whether foundations should step up their grantmaking from budgeted giving levels to respond to the unprecedented needs of the current moment. Last month, CEP and eight other philanthropy-serving organizations called on foundations to consider doing so.
Given this, we thought it would be timely to revisit a relevant passage from Phil Buchanan’s 2019 book, Giving Done Right: Effective Philanthropy and Making Every Dollar Count. In this excerpt, Buchanan argues that there is value in both perpetual and limited life foundations, and that perpetual foundations should seek to be counter-cyclical forces by increasing spending during times when grantees are under pressure. (And, Buchanan argues, they can do so without jeopardizing their future existence.)
It’s said that “perpetuity is a very long time,” and indeed it is. Yet, most givers to foundations have designated that their foundations should be established to exist forever, with spending on grantmaking and related administrative costs hovering around the legally mandated minimum of 5 percent. Among 49 of the largest U.S. foundations that responded to a 2015 CEP survey, for example, just six are committed to a limited life.
What this means, from a macro perspective, is that more and more foundation resources are sitting, untapped, in endowments. Meanwhile, there are pressing social challenges that require attention today. That fact, along with concerns about whether future staff and board can be relied upon to be faithful to donor intent, are the chief arguments against perpetuity. On the other hand, advocates for perpetuity argue that society benefits from institutions with a long-term view.
The arguments are well-trod. From my perspective, this is a pointless debate in the abstract. Like nearly all the choices a donor faces, this one should be considered in the context of goals and strategies.
If you’re focused on the arts in Baltimore, for example, you may well want your foundation to exist in perpetuity to ensure that your grantmaking can provide support for key institutions for the long term. If, however, you’re focused on eradicating a disease, you may be best served to spend down in the short term to find a cure and prevent future suffering.
The mistake donors make is to decide too early what their giving timetable will be — in the absence of this context. While the giver can always revisit the decision to spend out by a specific date, the decision to establish a foundation to exist in perpetuity, if communicated clearly in founding documents, lives long after the giver is dead. Givers would be wise to allow future generations to decide to spend down their foundations.
On the flip side, Duke University’s Joel Fleishman has argued that pressure on mega-givers who commit to spending all their resources in a given time can lead to less than effective philanthropy. He noted that even Andrew Carnegie, perhaps the most prominent early advocate of giving while living, ultimately left behind endowed institutions that still exist today because he recognized that this would be more effective than rushing to disburse all his assets in his lifetime. Fleishman’s hope is that some of those who have committed to giving all of their charitable assets away by a set time, such as Gates and Zuckerberg, might rethink their choices, too.
The point, again, is to decide how much to give in light of what you’re trying to achieve. My view is that there is value in both perpetual and limited-life foundations.
Being a Counter-Cyclical Force
But foundations shouldn’t just default to the mandated minimum 5 percent payout. Many observers have noted that the payout requirement floor has become the ceiling for many foundations. Debate about what is a reasonable spending level to maintain an endowment’s real purchasing power is vigorous.
Endowed, perpetual foundations especially should be mindful of their potential to be a counter-cyclical force, providing support for grantees during economic downturns to help offset reductions in individual contributions, government funding, or other earned revenue. Some, such as the Rockefeller Brothers Fund and the MacArthur Foundation, did this during the Great Recession, confident that they’d be able to grow their endowments later.
Similarly, the Rockefeller Brothers Fund and other foundations, such as the Nathan Cummings and David and Lucile Packard Foundations, increased their payout rates after Donald J. Trump was elected president, believing progress toward their goals was imperiled by the new administration and that the nonprofits they supported needed additional funds in a suddenly more challenging context.
Rose Letwin, the living donor behind the Wilburforce Foundation, similarly stepped up her foundation’s giving toward environmental conservation by 15 percent in response to the changing political environments in both the United States and Canada, to build and engage new constituencies, address immediate threats, and seize conservation opportunities.
Unfortunately, this is more the exception than the rule. Givers tend to retrench when nonprofits retrench, essentially forfeiting one of their most powerful potential roles out of worry that they won’t be able to claw their way back to the same endowment or asset levels afterward. In putting the preservation of their assets above all else — often, in the case of foundations, mistakenly believing that it’s their fiduciary responsibility to do so — they simply exacerbate challenges for nonprofits during an already difficult time.
Foundations’ relentless focus on endowment size is misguided. The goal should not be to have the largest endowment or always to be at peak real purchasing power relative to the past. The goal should be to balance the need to steward resources wisely with the mission of the foundation, which requires supporting nonprofits working today to address shared goals.
Nonprofits must concern themselves with meeting payroll, and few have significant reserves. Foundations don’t have this worry, and they can serve as a buffer for key grantees by taking a less rigid approach and flexing their grant spending in reaction to changes in context.
Individuals, too, can challenge themselves to be counter-cyclical forces — stepping up their giving in times when it’s needed most and taking the long view of their assets and wealth. They can also carefully consider how much they really need for retirement and how much of their wealth they hope to pass along to their children — and from there, push themselves to give as much as they can. If that’s not enough to convince you to give more, check the research, which shows a correlation between giving and happiness.
Phil Buchanan is president of CEP and author of Giving Done Right: Effective Philanthropy and Making Every Dollar Count, published by PublicAffairs. This post is excerpted from the book with permission from the publisher. Follow Phil on Twitter at @philxbuchanan.
