Increasing Payout to Meet Increasing Need
As foundations and donors grapple with everything going on in our world right now—a global pandemic, human rights protests in response to systemic racism, police brutality of Black citizens, climate change, fires, and other natural disasters, as well as unequal access to education, housing, and living-wage employment—there is a rising call for foundations and donor-advised funds (DAFs) to increase payout (either temporarily or permanently) to meet growing needs. The call to increase payout has cut across sectors and gained momentum when an open letter to Congress was drafted in May, which has since garnered over 550 signatories, including prominent philanthropists, foundation leaders, nonprofit executives, and government officials.
Advocates for changing the payout requirement point to hundreds of billions of philanthropic dollars sitting in investment accounts that could be used to sustain the critical work of nonprofit organizations supporting immediate social, environmental, and health needs. Simultaneously, as these organizations continue to face increasing demand for services, it is estimated that nearly 38 percent of nonprofit organizations could close as a result of the pandemic and its economic impacts. According to a recent article published by Philanthropy News Digest, the Institute for Policy Studies estimates that a mandate to increase payout would result in foundations and DAFs releasing an additional $200 billion — of the approximately $1.2 trillion they currently hold — to nonprofits impacted by COVID-19.
You are likely familiar with the 5% payout requirement for private foundations. If you need a refresher, PFS’ Controller, Carl Farish, wrote this blog post, which was updated earlier this year to reflect recent excise tax changes. Much like a minimum wage is the very least an employer is allowed to pay an employee, the 5% is the minimum amount a foundation must pay in grants (and reasonable expenses) to stay compliant with the IRS and the State Attorneys General. Many employers choose to pay a living wage instead of the minimum wage, because it is the right thing to do. Likewise, many foundations have chosen, in this critical moment of history, to give beyond their minimum requirement.
There are historic reasons why the IRS implemented the 5% rule in 1969, but primarily, it was to allow foundations to last in perpetuity. The general idea is that foundations should be sustained indefinitely in order to maintain their ability to address community needs now and into the future. But there is a fundamental flaw in the logic of perpetuity: it assumes that great wealth will cease to be created and that both today’s and tomorrow’s problems must be addressed by the foundations in existence today. The philosophical rebuttal is that today’s philanthropists should try to solve today’s problems, and we can trust that future philanthropists will step up to tackle the problems of tomorrow.
There are good reasons to maintain a giving strategy that protects an endowment: fiduciary responsibility, donor intent, multi-generational family cohesion around grantmaking and common values, and the practical issues around cost and effectiveness of increased payout. Giving money away is challenging, and you can’t just double or triple payout without a lot of thought and hard work. I have the good fortune of being part of the 5th generation of the Bothin Foundation, so I can attest to the wonderful benefits of a foundation bringing a family together across generations to work together. But remember that it is not a binary decision to either last forever or spend out entirely: while increasing payout probably means that a foundation will deplete its endowment over time, it will still take a long time for a foundation to give itself out of existence.
In these times, it is worth seriously considering increasing payout. In addition to helping solve real problems that are facing us right now, voluntarily increasing payout may be the best approach to self-preservation. Before Congress compels foundations to act, we could collectively meet the call for increased payout by acting forcefully now to meet the challenges of the day.
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