Foundations, Charities Urged to Spend More

Proponents of more grantmaking by foundations say the mandatory payout rate of 5 percent that private foundations are subject to has in many cases become the maximum and further argue that to really solve a host of social problems, foundations and other endowed, tax-exempt institutions need to open their coffers wider, the New York Times reports.

Politicians, consultants, watchdog groups, and others argue that foundations, universities, museums, and other charitable institutions are spending only what they must, even as their endowments have grown rapidly due to double-digit returns on their investments. For their part, many endowed institutions argue that they have to safeguard their endowments against economic downturn. Nonprofit institutions held nearly $2.5 trillion in assets at the end of 2005, with educational institutions accounting for nearly $600 billion of that. The accumulation of tax-exempt wealth has caught the eye of Congress, which held hearings earlier this year to explore why, when so many institutions are sitting on billions in assets, college tuition is increasing faster than the rate of inflation.

The challenge many of the largest foundations face is that their assets continue to grow. By the end of 2005, for example, the philanthropy created by reclusive billionaire Charles Feeney, Atlantic Philanthropies, had awarded approximately $4 billion of Feeney's fortune to charitable causes around the world. But Atlantic, which has committed to spending its assets down by 2015, still has roughly $4 billion to dispose of over the next eight years. Similarly, the Bill & Melinda Gates Foundation, which already gives away some $1.5 billion a year, will soon have to award twice that much a year, thanks to Warren Buffett's decision to leave the majority of his fortune — some $31 billion — to the foundation. To date, the foundation has been able to meet its payout requirement without a huge increase in staff in part because it has partnered with — and in some cases helped create — NGOs capable of re-granting large amounts of money.

Buffett's gift to the foundation also appears to have generated new thinking about perpetuity and asset accumulation — as Buffett himself hoped it would. "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 in Cambridge, Massachusetts. "If one of those 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."

Stephanie Strom. "How Long Should Gifts Just Grow?." New York Times 11/11/2007.