Wednesday, October 23, 2002

Here's something I've been writing for work. It's not final or approved yet, so don't take it as an official CompassPoint statement. The final version will probably be about 400 words, compared to the current 623, so it will change considerably before it's published. I just thought some of you might find the full-length, un-edited version interesting. It may give you a bit of an insight into the kinds of things I'm thinking about during the day.

“I don’t think any foundation should exist in perpetuity,” said Richard Goldman, of the Richard and Rhoda Goldman Fund, one of the Bay Area’s largest foundations, in a recent San Francisco Chronicle article. Goldman is one of a handful of philanthropists leading the movement towards “giving while living.”

Foundations and other endowed nonprofits are required by law to distribute a minimum of five percent of their assets each year. Most have kept their payouts at that level, thereby maintaining their endowments for future generations. This practice, however, has been called into question this year in reports published in the Wall Street Journal, the New York Times, and the McKinsey Quarterly. As the McKinsey article points out, “The minimum has become the maximum.”

In the New York Times, former U.S. Senator Bill Bradley wrote that foundations “should be judged by their achievements, not by their endowments.” Bradley went on to say that more could be done for the 13 million US children who live in poverty, or the nearly 41 million who have no health insurance, if foundations spent “more of their money now instead of saving for the future.” Bradley concluded that to not spend more now “suggests that for some, the endowment has become an end in itself.”

Not only does it make social sense to spend more than five percent of endowments now; it makes economic sense as well, according to several of the articles. Using the economics concept of the “time value of money,” Bradley and others show that foundations could be more effective by having a higher payout rate.

Would you rather have $100 today or a year from now? Most people would rather have it now, discounting the future value of the $100. In business it is recognized that future returns are to be discounted, or treated as less valuable than money earned this period. Similarly, by sticking to a strict five percent payout rate, a foundation may make $6 million dollars in grants over 50 years from an initial $1 million endowment, but the present value of those grants would only be $600,000.

During the 1990s, when foundation assets were growing, with grants growing along with them, the subject of increasing payout rates was rarely raised. In today’s economic climate, with government funding cuts and fewer individual donor dollars, coupled with rising unemployment and requests for the services that nonprofits offer, we need foundation grants more than ever. Foundation grant budgets, however, are being cut - despite the fact that their endowments are still huge. As the S.F. Chronicle pointed out, “Bay Area foundations are becoming stingier just when their money is needed most.”

There is no question that nonprofits are hurting, locally and nationally. At CompassPoint we hear it from our clients every day. Many organizations that we know are on the brink of bankruptcy. Some have already ceased operation. Daniel Borochoff, president of the American Institute of Philanthropy, has put out a challenge for large foundations to step forward, saying, “...the ones with significant assets. They are in a position to rescue nonprofits.”

Philanthropists like Richard Goldman are already ahead of the call. The Goldman Fund gives out a minimum of ten percent of their assets annually. Goldman has also ordered the foundation to spend all their money and cease operations within ten years of his death. Others ahead of the curve include the Atlantic Philanthropies’ founding chairman Charles Feeney, and George Soros, chairman of the Open Society and other efforts.

While we recognize that many foundations are bound by bylaws that strap them to the federally determined five percent payout rate, we applaud Goldman, Soros, Feeney, and the others for leading the trend towards “giving while living,” and encourage others to follow in their path.

Now, like I said at the beginning, this is my personal draft - It is as yet unapproved as an "official CompassPoint statement." If you have an argument with it, speak to me, not my boss. Until further notice, my opinion only. (Think I put in enough disclaimers?)

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