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Few Big Foundations Exceed Required Distribution Minimum

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Private U.S. foundations are legally required to distribute 5% of their assets annually, and most large organizations do that, but no more, The Chronicle of Philanthropy reports in a new study.

Georgetown University law professor Brian Galle, citing Foundation Center data, told The Chronicle that an estimated $900 billion in foundation endowments was gaining investment returns but not being put to work. 

Grants, tax payments and some administrative costs qualify as distributions.

Critics who push for foundations to significantly increase their spending find the inclusion of administrative costs in the 5% calculation particularly troubling.

The report, based on an analysis of IRS data compiled by the Foundation Center, said foundations take advantage of administrative costs to varying degrees.

For example, between 2010 and 2014, MacArthur Foundation expenses ranged between 12% and 16% of distributions, while at the Walton Family Foundation, which employs fewer staffers, they were between 2% and 5%.

The Chronicle noted that in 2003, foundations successfully lobbied against federal legislation that would have disallowed the use of administrative expenses in calculating the distribution rate.

Overhead spending also bothers many donors. And many very wealthy donors worry about how their money is being used.

Policy makers on Capitol Hill appear to be taking notice. Last year, Rep. Tom Reed, R-N.Y., introduced legislation that would force colleges with large endowments to funnel at least 25% of their endowment income into student aid.

The Chronicle noted that the bill would not apply to foundations, which have yet to be scrutinized in the same way as elite universities. However, with a tax overhaul on the congressional agenda, many philanthropy observers say Congress might ask grant makers to increase their spending.

“It’s quite prudent for people in the philanthropy field to keep a very careful eye on this,” Hadar Susskind, senior vice president for government relations at the Council on Foundations, told The Chronicle.

Foundation managers in the report said they had a duty to protect their endowments so they can serve future generations.

In an up market, foundations that distribute the minimum are able to stockpile wealth, making them an easy target for proponents of raising the distribution requirement, foundation officials said. But 2016, foundations’ endowment returns were flat.

Foundation money managers worried that future down markets would make it hard to meet even the 5% minimum and still maintain the purchasing power of their endowments.

“If you pay out more than 5%, you’re going to eat into your corpus in real dollars,” Donald Williamson, vice president for finance at the W.K. Kellogg Foundation, told The Chronicle.

Not all foundation leaders are concerned about having to increase their spending, even if that results in a smaller endowment.

James Piereson, president of the W.E. Simon Foundation, said each generation of wealth generators — today, mainly in technology — creates its own wave of philanthropy, and expressed confidence that future generations would follow suit. He told The Chronicle that because more money was coming, foundations should spend faster on problems right before their eyes, not on nebulous goals.

Discrete problems can be solved if foundations finance the search for solutions, he said. In contrast, broad goals that will take decades to address create a built-in rationale for foundations to conserve their wealth and make minimal disbursements.

According to The Chronicle, the W.E. Simon Foundation plans to spend down its assets by the end of 2023.

— Check out Health Care Is Impact Investors’ Top Cause: Survey on ThinkAdvisor.