The Real Question

The LA Times story about the questionable investment practices of the Gates Foundation has attracted comment from more than one philanthropy blogger.  And certainly there’s reason to rue a big foundation’s decision to give 5% of its money to good-deed-doers while investing the other 95% in companies that make good-deed-doers necessary.  But apparently only the Nonprofiteer is simple-minded enough to ask whether a group can really be called "charitable" when 95% of its money is devoted to making more money for itself. 

She doesn’t care, really, where foundations make their money–only where, and to what extent, they give it away.  Admittedly, the Gates Foundation isn’t as good an object of this plaint as most of its fellows: it’s agreed to spend down its assets to zero no later than 50 years after the death of its longest-serving trustee, so at least it isn’t permanently engaged in the business of piling up money to be used–someday.

No business would try to accomplish its primary goal using only 5% of its resources.  So for once the critics of our sector are right: some nonprofits, at least–the ones with the big treasuries–should take a lesson from their for-profit brethren and start aligning expenditures with aims.

Failing that, of course, those nonprofits could have their wings clipped by the public sector.  Just as soon as it takes expenditures of 7%, or 10%, to escape taxation, foundations–some of them, at least–will discover causes worthy of receiving that much more of their resources. 

(For less heat with more light on this subject, see the 2005 work of Professors Sansing and Yetman, a remarkably clear account of the current statutory scheme coupled with analysis of tax returns documenting the variable impact of the IRS’s minimum distribution requirements on foundations depending on their size, age and likelihood of fresh donations.) 


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6 Responses to “The Real Question”

  1. Gene Finley Says:

    Five percent in today’s investment environment is exactly right. We have to make three percent to pace inflation and keep the endowment from shrinking in real dollars then five percent to avoid excise taxes. These days, you’re lucky to get away with 8% total return, the amount needed to sustain the above percentages.

    Foundations should always be vigilent to avoid shrinking their sizes in real dollars. Look at the work of the great foundations. To know they’ll be here in perpetuity is a comforting thought.

    If there is a fault of Gates, it is that they plan to fully distribute the funds within fifty years of their deaths. Why not have such a wonderful gift last forever.

    As to investment choices, many foundations are making much more questionable investments. Private equity, for example.

    I’ve learned over the years that overdoing socially responsible investing finds you holding an undiversified portfolio of Ben and Jerry’s. Good foundations simply ignore the criticism, make the money and do a lot of good for a lot of charities. Without the Exxon/Mobil’s none of us would be having successful capital campaigns.

    If you don’t like what they invest in, don’t ask for a grant.


  2. Anita Bernstein Says:

    The Nonprofiteer wasn’t telling anyone to engage in too much “socially responsible investing.” She just expressed some dismay about foundations that swell and bloat without spending their income on their ostensible reason for existing.

    The raison d’etre isn’t a reason to never ever let oneself get smaller. I agree that a foundation is not a suicide pact, but it should accept becoming thinner if its mission so demands. Five percent could be too little. I think I’d be fine with the IRS having discretion to discipline a foundation for too much hoarding even if the 5% hurdle is cleared, similar to the way it can go after investment transactions motivated by a desire to avoid paying tax. Any donor or foundation exec who’d harrumph about big gummint probably cares more about preserving wealth concentration than fulfilling the mission.

  3. Gene Finley Says:

    Now you’re making me think. I believe that preservation of the foundation is truly important. The stock market averaged 11% in the last century. Maybe in an investment environment like that, 5% is too little. Lately, 8% return is a lot to hope for.

    I agree that a foundation should be prepared to go beyond a normal payout when times are not normal. The storm in New Orleans is a prime example.

    Perhaps foundations should add the excess returns to an extraordinary event fund, one not paid out each year but which is depleted when events demand.

    Thanks for making me see a different point of view on the subject.

  4. Keith Jonak Says:

    “If there is a fault of Gates, it is that they plan to fully distribute the funds within fifty years of their deaths. Why not have such a wonderful gift last forever.”

    A never ending “gift”? There comes a time when a non-profit organization needs to actually spend their accumulated wealth. As The Nonprofiteer noted, many organizations are raising funds and/or investing with the sole purpose of fattening the “Net Assests” that they control.

    If the public knew how their donated monies were being spent, or rather not spent, they would cease to support these groups. I imagine that the generous people who donated to charities following hurricane Katrina would be upset to see how the coffers of those organizations ballooned. To whose benefit is a foundation or 501(c)3 that never spends any money?

  5. Gene Finley Says:

    I simply believe that foundations should maintain their size in real dollars in perpetuity. That simply means distributing income in excess of inflation.

    Distributing the corpus of the foundation is shortsighted unless the foundation was established for a narrow purpose.

    The point is well taken that foundations should not grow fat.

    I can’t imagine a charity having a successful capital campaign without the old established foundations supporting the effort. It is important to preserve those for future generations.

    I agree with your Katrina example. The American Red Cross’ recent governance examination and changes are the result of donor outrage. There is an interesting document about their governance on their web site.

  6. Nonprofiteer Says:

    We have a fundamental disagreement, then: there will always be new fortunes made, and from those new fortunes will come new foundations; therefore, there’s no particular point in having the old ones hang around, especially when the alternative is for them to spend enough money to really make a difference. I’d like to see at least one major foundation try the following experiment: evaluate all the applications that come before them purely on merit, and not against a preset expenditure limit. If they funded everything they liked at the levels requested, how much would they really spend? I doubt they’d empty the kitty, but I’m sure they’d be able to do a lot more good than they’re able to do now.

    If it takes $1 million to solve a problem, and you have $1 million and want to solve the problem, what’s the point of spending $50,000–which won’t solve the problem– to make sure that you have $1 million to solve the problem later?

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