Foundation Spending Patterns Driven by Multiple Factors, Report Finds

Foundation type, size, staffing patterns, and operating activities are the key factors that consistently drive foundation expense and compensation patterns, a new report from the Urban Institute, the Foundation Center, and GuideStar finds. Moreover, even under changing or volatile economic conditions, the administrative expense and compensation patterns of U.S. foundations are consistent and predictable.

The report, What Drives Foundation Expenses and Compensation? Results of a Three-Year Study (104 pages, PDF), presents the findings from the first large-scale, long-term study of independent, corporate, and community foundations' expenses and compensation, and uses data from 2001 to 2003, the most recent data available when the study began. Funded by the Charles Stewart Mott, Ford, California HealthCare, W.K. Kellogg, and Rockefeller foundations, the report provides information and analyses about charitable administrative expenses — those expenses that relate exclusively to programs and count toward the federal government's 5 percent minimum payout requirement for private foundations — as well as compensation levels of executive staff and board members and the factors that determine both types of expenditures for the ten thousand largest grantmaking foundations.

A follow-up to the 2006 report Foundation Expenses and Compensation: How Operating Characteristics Influence Spending (68 pages, PDF), the new report finds that employment of staff is the single most important factor affecting expense levels, followed by staff size and level of program activities. Less than three thousand of the foundations studied have paid staff. Foundations with staff incur significantly higher charitable administrative expense-to-qualifying distribution ratios than those without staff, and expense ratios increase along with staff size.

In addition, the report points to the need for improvements to IRS Forms 990 and 990-PF — the main sources of data for the study — which do not allow for adequate reporting of new types of foundation expenses, non-grantmaking activities, in-kind gifts, or donated labor, and make it difficult to fully assess foundations' administrative costs. The forms also fail to distinguish board members who serve as paid staff from those who are involved mainly in governance, leading to confusion over foundation compensation patterns.

"With current assets of roughly $600 billion dollars and annual grants surpassing $40 billion, the nation's foundations are essential engines of civil progress," said Elizabeth Boris, director of the Urban Institute's Center on Nonprofits and Philanthropy and co-author of the report. "Understanding the factors that propel their expenses and being able to compare foundations with similar characteristics is a huge step forward for foundation managers, trustees, and policymakers. The study's detailed data and findings show how expense ratios vary and reveal in stark terms the wisdom of avoiding one-size-fits-all thinking about foundation expenses."