How Long Should Gifts Just Grow?

As nonprofit institutions have seen donations and investments grow spectacularly in recent years, the urge to keep the money rolling in is being supplemented by a new pressure: make it flow out faster. Politicians, consultants, watchdog groups and even some philanthropists say that foundations, universities, museums and other charitable institutions often spend only what they must while their coffers expand, partly because of double-digit returns on investments. These spend it sooner proponents say that the minimum that private foundations are required to give – 5 percent of their assets each year – has in many cases become the maximum. To really attack social problems, they say, foundations and other nonprofits need to open their spigots much wider. There are certain dynamics that take over in terms of behavior, and one of those forces is usually the drive to perpetuate institutions, said Warren E. Buffett, who is giving more than $30 billion to the Bill and Melinda Gates Foundation with the stipulation that it be spent promptly. That dynamic – though undoubtedly subconscious – sometimes takes precedence over considering what might be best for society. Foundations, universities and other nonprofit institutions say they need to watch their spending to safeguard their nest eggs, because there is no guarantee that the enormous growth will continue. If they spend their assets by giving out more money, they contend, the results could be catastrophic in an economic downturn. We’re here to ensure the long-term health and function of Grinnell College, said Russell Osgood, its president, explaining why the university, with just 1,500 students, maintains a $1 billion-plus endowment. That’s our sole objective. Some foundations, however, are heeding critics’ voices and starting to increase the outward flow of cash. That, in turn, has created new problems, as foundations have often discovered they can’t give out the money fast enough. I’m working harder now than I did when I was running two Fortune 500 companies, said Eli Broad, the billionaire founder of the Broad Foundations, which finance projects in education, arts and medical research. Mr. Broad and many of the newer, wealthier donors intend to distribute the money they have committed by their death or within a set time thereafter. Nonprofit institutions had nearly $2.5 trillion in assets by the end of 2005, more than double the amount a decade earlier, says the National Center on Charitable Statistics. Hospitals, groups like the American Cancer Society, medical research institutions and others have the biggest slice, with more than $825 billion in assets in 2005. Educational institutions claimed close to $600 billion in assets that year, while foundations held more than $460 billion. The accumulation has caught the eye of Congress, which has held hearings to examine why college tuition was increasing faster than the rate of inflation when so many institutions sit on billions of dollars. It also wants to look at whether donations are benefiting a broad enough range of organizations or primarily those that are already wealthy. The point of giving is to help the community and those in need and not to help a charity build an even bigger bankroll, Max Baucus, chairman of the Senate Finance Committee and Democrat of Montana, and Charles E. Grassley, the committee’s ranking member and Republican of Iowa, wrote in a letter to the Internal Revenue Service this year. Mr. Grassley and others have broached the idea that colleges be subject to the same kind of minimum spending requirement that applies to private foundations. Critics point out that the tax deductions for the gifts that have spurred the growth in assets are taken almost immediately by donors, but the benefits of those donations may not come for years. Among the new foundations that are committed to spending down all their assets is the Atlantic Philanthropies, which is built on the fortune of Charles Feeney, a founder of a chain of duty-free shops. At the end of last year, Mr. Feeney had given away about $4 billion. He still has roughly $4 billion in Atlantic that must be spent over the next nine years. A hanging concentrates the mind, said Gara LaMarche, Atlantic’s president and chief executive. When you know you’re no longer going to live forever, you focus more urgently so that after you’re gone, you leave behind some enduring changes and enable the organizations you’ve supported to achieve sustainability. The challenge lies in the fact that the assets, which stood at $3.2 billion at the end of last year, keep increasing. In real terms, it has gone down, but in nominal terms, we are at about where we started, said Philip Coates, Atlantic’s chief investment officer. The Gates Foundation, which aims to exhaust its $33 billion endowment within 50 years of the last of its founders’ deaths, must give away about $1.5 billion a year to maintain compliance with the federal payout requirement. That is a big challenge, but in 2009, the foundation will have to dole out more than twice that amount, thanks to a first installment from Mr. Buffett’s gift. He stipulated that any money he gives to the foundation must be spent within a year, bringing the annual payout to $3 billion to $4 billion – more than the assets of all but a few foundations. A challenge, no question about it – but what a problem to have, said Patty Stonesifer, the foundation’s president. I had two thoughts when I first heard about it: ‘Wow!’ and ‘Holy cow! How are we going to get this done?’ Program officers at the Rockefeller Foundation were surprised when the Gates Foundation announced last fall – instead of early this year, as planned – that the two had formed a $150 million partnership to advance African agriculture. They assumed, they said, speaking on condition of anonymity, that Gates needed to get its $100 million out the door to meet its payout requirements. Ms. Stonesifer noted, however, that in the last few years the Gates Foundation has given away more than is required, partly because it has identified and, in some cases, helped build outlets capable of taking on bigger amounts of money, like the GAVI Alliance for immunization programs; the Global Fund to Fight Aids, Tuberculosis and Malaria; and the United Negro College Fund. Having those commitments means you never have to rush, Ms. Stonesifer said. Those folks are always going to need the money. The foundation has allocated money toward 22 long-term goals. For instance, it has already put $1 billion into what Ms. Stonesifer calls an envelope to address malaria, but more money can be added if the foundation sees progress in a particular cause. Thus, the $600 million for improving African agriculture has been increased. Part of the problem that Gates and other foundations struggle with is finding organizations that can handle a lot of money. One reason that universities, hospitals and museums attract so much donated money is that the contributors are confident the gifts will be managed and used properly, although the accumulation of assets at these institutions suggests that some of the confidence is misplaced. Productive use of assets is an issue, said Nancy Roob, president and chief executive of the Edna McConnell Clark Foundation. In 2000, Edna McConnell Clark radically overhauled its practices, cutting the number of grants and working closely with current recipients to strengthen their management to ensure that they can use large amounts of money. The critical issue is ensuring they’re in a good position to say to investors, here’s the road map for how your dollars are going to be spent, Ms. Roob said. Approaching the problem this way requires more effort by foundations and donors than simply writing a check and waiting for reports. Edna McConnell Clark’s staff serves as sort of a consulting team, back office and black couch for the groups it supports, a role that not all foundations and donors are willing to take on. One of the great lines from our experience was when we were sitting with a donor who said, ‘I know how to give $100 million to my Ivy League university, but I don’t know how to give $100 million to help kids in the city,’ recalled H. Peter Karoff, founder of the Philanthropic Initiative, a strategic planning and consulting firm. We told him he would have to hire 20 people to do that well, and he wrote his check to the Ivy League school. Many of these huge gifts are what I call default gifts. The attention devoted to the wealth of universities, hospitals and museums has created envy among less rich nonprofits, many of which are establishing their own endowments. These reserves are considered necessary cushions against the vagaries of fund-raising. It’s a mix of things, said Lilliam Barrios-Paoli, executive director of Safe Spaces, a small social services organization in New York City that hopes to build a reserve. She said that government money does not cover the cost of services that Safe Spaces provides to the city. We need to pay our staff better, she added, but government contracts don’t allow it, and foundation grants are getting more erratic. Several of the charities that received roughly $34 million each when H. Guy DiStefano, a millionaire, died last summer, are creating reserves. It provides the security of knowing that if, for some reason, the economy went into a dive and fund-raising suffered, we could survive it and not have to cut back programs, said Marie Belew Wheatley, chief executive of the American Humane Association, a beneficiary of Mr. DiStefano’s estate. The association will spend about $2 million on programs, and some of the money is going to a new research center aimed at improving record-keeping on child protective services. The rest of the DiStefano gift, about $30 million, will go into reserves. The BBB Wise Giving Alliance recommends that a charity maintain no more than three times its annual budget in net unrestricted assets – assets other than real property and with no strings attached. It lists 15 such charities of the more than 1,000 that it rates that do not meet that standard. Two of them are considering adopting the standard, and two have not responded to its requests for information. Charities do need a minimum level of reserves, said H. Art Taylor, the alliance’s president and chief executive. That’s just prudent business practice. Universities that have many times their annual budgets in their endowments make the same argument. Grinnell College’s decision to raise tuition this year helped incite the current Congressional scrutiny of college endowments. I was quite shocked when, in my own state of Iowa, Grinnell College recently announced a 12.6 percent increase, Senator Grassley said at a hearing in September. Mr. Osgood, Grinnell’s president, said that 85 to 90 percent of students receive financial aid worth about $23 million, compared with revenue from tuition and fees of about $22 million. He said that those who were critical of college endowments fail to realize their impact. Society at large benefits from those monies being invested in our economy, Mr. Osgood said. The United States has a problem with its rate of savings, and one of the few bright spots are colleges and universities, which are two of the largest contributors to the national rate of savings. Anyone thinking about reducing endowments should think long and hard about what that might do to the overall ability to generate jobs and fund good ideas. But Senator Grassley said that high tuitions charged by well-off institutions might be partly responsible for the low savings rates. Creating jobs and investing in corporate America are fine, but a college’s first priority should be educating students, he wrote in an e-mail. You wonder if education gets lost in the shuffle when building a huge, untouchable endowment seems to be the most important goal. While universities fight suggestions that Congress push for a payout rate, experts say there is anecdotal evidence that more donors favor spend-down policies. You shouldn’t be determining the scale of your philanthropic efforts based on some minimum set by Congress, Mr. Buffett said. Why in the world would the tax law provide the exact percentage of resources each year that makes the most sense in terms of carrying out a foundation’s mission? Yet if this law said 3 percent was the minimum required payout, I’m sure many foundations would quickly adjust their spending downwards. The spending requirements of Mr. Buffett’s gift to the Gates Foundation appears to have stirred new thinking about perpetuity and asset accumulation. A report called Beyond Five Percent: The New Foundation Payout Menu, which was partly underwritten by a group led by Mr. Feeney’s daughter, Diane Feeney, describes how about a dozen foundations decided to spend down or spend more than the required amount. The Aspen Institute and the Urban Institute are doing their own research on the issue. I think a lot of new donors are trying to be strategic about their giving, and depending on their strategy, perpetuity doesn’t always make sense, said Phil Buchanan, president of the Center for Effective Philanthropy, which does research and consulting for major foundations and donors. If one of the issues you care about is global warming and you see it as an imminent threat, a 5 percent annual payout rate just isn’t logical.