Some foundations are electing to spend it all now
From Wednesday, September 11, 2002
A great article by David Bank from the Wall Street Journal (subscription required) yesterday that really encapsulates many of my own thoughts on foundations and giving and the dire need for funds now. This article is one of the reasons I started this separate blog and talks about the new trend among donors:
...Applying business practices to their giving, they are analyzing the "time value" of their money and concluding that a dollar spent now can be worth more than one, or even two, spent later. They argue there is plenty of money on hand to accelerate spending on today's critical problems. They also say that despite the recent downturn in the stock market, long-term economic growth will generate plenty more to deal with tomorrow's issues.
One such donor is Charles F. Feeney, the reclusive millionaire who co-founded the Duty Free Shoppers Group Ltd. chain of airport stores. 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.
...Weighing social and financial returns, Mr. Jansen [Director of McKinsey's Institute on the Nonprofit Sector] 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.