Net Present Value

Tuesday, November 4, 2003

YouthSpeaks' annual Friendraiser coming up

Yep, it is that time again. YouthSpeaks is hosting its annual San Francisco friendraiser on Monday, November 17, 2003 featuring some of its incredible young talent of writers and performance artists.

Writer extraordinaire and Dave Eggers' 826 Valencia-volunteer, Julie Landry and I are hosting a table!

Monday, October 27, 2003

Naming rights at the Disney

With the price of the newly completed Los Angeles' Disney Hall having ballooned significantly, the naming rights to every piece of the fabulous Gehry building were up for sale, according to this New York Times story (registration required):

Terry Stanfill found what she was looking for — her name — before she got as far as the Henry Mancini Family Staircase and the Ron Burkle-Ralphs/Food 4 Less Foundation Auditorium. When you donate only $50,000, all you get is your name two inches tall on a stone paver of the terrace garden at the new Walt Disney Concert Hall here.

...Disney Hall, designed by Frank Gehry, is not just an architectural tour de force. With a budget that ballooned from the original estimate of $110 million to $274 million, it became a rare naming opportunity, a kind of permanent billboard for wealthy people to have their names inscribed. Every atrium, every staircase, every reception room, even every escalator in and around Disney Hall carries the name of a benefactor.

Wednesday, October 15, 2003

Administrative expenses included in 5% requirement?

While some philanthropists believe that their foundations should not live on in perpetuity, and they want to give away all their funds within a set period of time, many foundations were seen fighting H.R. 7 that would have disallowed them from continuing to include administrative expenses, too, in the 5% minimum that they're required by law to give away each year.

H.R. 7 passed the House of Representatives but only after a compromise on the administrative expenses:

  1. Reduces the excise tax on net investment income of private foundations to 1%.
  2. Increases the Section 4941(a)(1) excise tax penalty on self-dealing from 5% to 25%.
  3. Redefines the definition of what is allowed as an administrative expense and requires the Secretary of the Treasury to write regulations on this definition.
  4. Disallows compensation for "disqualified persons" for that portion of the compensation that exceeds $100,000 per year.
  5. Disallows private and chartered air travel and any commercial air travel that exceeds coach class accommodations.

The "time value" of money

The wonderful article by David Bank from the Wall Street Journal (subscription required) that encapsulates my own thoughts on foundations and the need for funds now. This article focuses on a new trend among donors which surmises that a dollar given today has much more value than a dollar saved and given in the future. And that despite the economic downturn there will be new funds available in the future to deal with future problems.

Bank gives the example of Charles Feeney who made his fortune thru the Duty Free Shops in airports around the world. "Earlier this year, Mr. Feeney pushed his foundation, the Atlantic Philanthropies, to adopt a plan to exhaust its $4 billion endowment over 15 years or so. Now 70 years old, Mr. Feeney told his board that the prospect of going out of business would focus the foundation on bold problem-solving rather than self-perpetuation."

Atlantic is among a small group of charities that are bucking the prevailing approach of established foundations, which have traditionally sought to sustain their endowments and their grant-making forever. A federal tax-code change in 1981 relieved foundations of the obligation to distribute at least as much as they earned on their assets each year. Since then, overall foundation "payout" rates have drifted down to near the legal minimum of 5% of assets.

In the same period, according to the Foundation Center in New York, foundation assets have greatly increased, from $47.6 billion in 1981 to $486.1 billion in 2000, the most recent year for which full information is available. Last year, foundations paid out about $29 billion in grants.

The Director of McKinsey's Institute on the Nonprofit Sector, Paul Jansen, has calculated what this thinking vs the status quo means in stark financial numbers, and the results are just staggering. A $100M foundation that paid out only 5% or $5M a year has a Net Present Value of only $50M!

Weighing social and financial returns, Mr. Jansen says, forces foundations to confront a provocative question: "Would we all have been better off if you had given that money out last year and had it deliver benefits, than we are now, with your having lost 15% to 30% of it in the stock-market decline?"

In making his calculations, Mr. Jansen used a standard business analysis of the time value of money. Just as financial returns need to be more heavily discounted the further in the future they are likely to occur, so must social returns that are delayed by conservative spending policies. Factoring in a typical discount rate, Mr. Jansen found that a $100 million endowment of a foundation that paid out only 5%, or $5 million, a year in grants really had a "net present value" of just $50 million or so.

Why this name?

Back on September 11, 2002 I had just read a great article by David Bank in the Wall Street Journal (subscription required) on nonprofits and the need for them to give away their money faster, even at the expense of shutting themselves down once the money runs out. The two name contenders that this article inspired:

5 Percent - This comes from the minimum foundations are required to give away each year; most of these foundations are set up to exist in perpetuity since their founders want immortality.

Net Present Value - The term used to ascribe the value of all future giving, with the farther out the giving, the lower its current value. Thus a $100M foundation that gives away only the minimum 5% of its assets each year is in fact worth only $50M.

Back again

I've gone back and forth on this subject since I was concerned about the blog creep on Blogging Network -- since it is so easy to create new blogs here and so very tempting to want to comment on every subject in the world. I'm referring to it as blog creep since one blogger on Blogging Network wrote a post about this today.

And the categorization, unless you're in one of the free form categories such as Opinion or Journal, forces us to focus on one subject even while being opinionated. After all, blogs are interesting reading because they are so personal. But of course that leads to us bloggers wanting a blog in each category.

However, I'm back to feeling that my old Net Present Value blog needs to remain separate from Ready Fire Aim, my blog on technology and business. My next post is a re-post from Day 1 of the original Net Present Value...that was back on September 11, 2002 when Blogging Network had just gone into beta as the first network of blogs that lets writers earn a regular income.

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