Groups Put Pressure on Foundations to Increase Their Grant Making

This fall, foundations will come under more pressure to increase the amount they give

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as two prominent philanthropy organizations step up their efforts to call attention to the issue:

* Next month the National Committee on Responsive Philanthropy plans to formally announce a drive to urge Congress to increase the minimum percentage of their assets that foundations must give, on average, each year, from 5 to 6 per cent.

* The National Network of Grantmakers — which last year announced a campaign to encourage foundations to voluntarily increase the share of assets they give annually by 1 percentage point (The Chronicle, May 6) — hopes to gain momentum this fall by releasing a report by a Columbia University economist who has studied how much grant makers can afford to give without harming their endowments.

The two drives come at a time when swelling foundation assets, caused by the booming stock market and large new donations, have led some non-profit leaders to question whether grant makers are being too stingy.

Many grant makers are opposed to changing the legal requirement. Foundation leaders say that if they are legally required to give much more than 5 per cent — especially during hard economic times — they will gradually erode the value of their endowments and end up with no money left to give.

To rebut that argument, the National Network of Grantmakers, whose members represent some 200 social-change groups, soon plans to release the results of a study by Perry Mehrling, chairman of the economics department at Columbia. He studied foundation grant making over the past 20 years to determine how much of their assets grant makers could give without eroding their endowments.

Diane V. Feeney, the leader of the network’s campaign — called “The Payout Initiative: 1% More for Democracy” — offers her own example to those who say it’s impossible to give away more than 5 per cent a year and still preserve a foundation’s endowment. Her family foundation, the $40-million French American Charitable Trust, in San Francisco, has given away approximately 6 per cent of its endowment in grants annually since it started formal grant making in 1995 and has not seen its assets drop in value. This year the trust plans to give away about 8 per cent.

So far the network’s drive hasn’t radically changed foundation giving patterns. It has persuaded only 30 of the 200 foundations it represents to increase their giving by at least 1 percentage point of their assets, but it hopes that at least 50 will do so by the end of the year.

Ms. Feeney says she has been surprised by the strength of the resistance to changing the amount foundations give. In an article that appeared in the Council on Foundations’ bimonthly magazine, Foundation News & Commentary, Ms. Feeney and her co-author, Terry Odendahl, executive director of the National Network of Grantmakers, wrote that they heard “disturbing accounts” of foundation officials’ putting pressure on their colleagues and their grantees to prevent them from openly debating the payout requirement. “What is it about the mere discussion of the payout issue that so threatens the leadership of larger foundations?” they asked.

The network’s campaign is controversial not only because it is calling national attention to the amount that foundations give away, but because it is urging foundations to channel the extra money they give to social-change groups like those Ms. Feeney and her network colleagues finance.

“It’s a politically motivated campaign that basically would like to have foundations give more money to causes that they and their members deem worthwhile,” says Leslie Lenkowsky, professor of philanthropic studies and public policy at the Indiana University Center on Philanthropy. “They ought to just say that rather than cloak it in all this rhetoric of democracy. If foundations increased their payout but gave out more to conservative think tanks, I don’t think the National Network of Grantmakers would be very happy.”

Ms. Odendahl says she agrees that the campaign is motivated by a desire to get money to groups that have a progressive agenda.

“It distinctly is a campaign about values,” Ms. Odendahl says. “And we are not asking conservative foundations to give more money. We are asking our members who are part of a network of individuals with progressive values to increase their grants payout.”

The campaign by the National Committee on Responsive Philanthropy, a watchdog organization in Washington, is likely to attract even more controversy than the “1% More for Democracy” drive.

The committee plans to ask Congress not only to increase the minimum that foundations must give, but to prohibit them from counting in that figure any of the administrative costs of making those grants — such as employee salaries, trustee compensation, and other expenses. Such costs can now be legally considered part of the payout amount.

Rick Cohen, head of the watchdog group, says that the bundling of foundations’ own administrative costs and the amounts they give away “causes confusion as to what foundations are really delivering to the non-profit sector at large.”

Pablo Eisenberg, a co-founder of the committee, estimates that increasing the payout minimum to 6 per cent and changing the administrative-costs requirement would produce an additional $6-billion to $7-billion a year in foundation grants to charity.

When Congress first passed a minimum-distribution rule in 1969, it required foundations to give away about 6 per cent of their investment assets — depending on interest rates and market performance — or the entirety of their net investment income, whichever sum was greater. Seven years later, Congress changed the rule to net investment income or 5 per cent of assets, whichever was greater. In 1981, Congress again revised the rule, putting it into the form that stands now, with foundations required to distribute at least 5 per cent of their investment assets regardless of the size of their investment income.

Mr. Eisenberg, who is also a board member of the watchdog group, says he considers the elimination of administrative costs in the payout calculation to be as important as increasing the minimum giving level. He says that in recent years the percentage of administrative costs has risen much more than the actual percentage increase in grant dollars being awarded. He notes that a study of Internal Revenue Service data found that from 1985 through 1994 foundation assets grew by 132 per cent, while administrative costs grew by 220 per cent.

“You have this enormous increase in assets and you also have an enormous increase of administrative costs,” he says, “and yet the increase in grants in terms of percentages is not as much as the increase in administrative costs.” That, he says, is why Congress needs to make the two changes proposed by the committee.

“It cannot be voluntarily done,” Mr. Eisenberg says. “The big foundations are where the big money is, and they’re not going to do it voluntarily. So there has to be a legislative mandate to change that.”

Many foundation leaders fear that the two payout drives could lead to legislative action that they say would seriously damage philanthropy, and even cause some foundations to eventually disappear.

“I believe that donors should have the freedom to create a foundation in perpetuity,” says Susan Berresford, president of the Ford Foundation, in New York. She says studies have shown that if foundations give much more than 5 per cent away annually, their endowments will shrink in value considerably.

Some critics of the 5-per-cent rule say that part of the problem is that nobody in recent years has thoroughly examined the issue to take into account the ways that the booming economy has affected philanthropy. The last study by the Council on Foundations was conducted in 1995.

The council says it now has a new study in the works so that it will be able to formulate a position based on up-to-date information. The results, to be released by the end of they year, will show what would happen to foundation endowments if the nation continued its current level of economic growth and foundations gave away 5 to 7 per cent of their assets. The study will also analyze what would happen if they gave away those amounts and the economy soured.

Dorothy S. Ridings, president of the council, says it is the future health of the economy that has her most worried about a change in the required payout.

“I think it’s a mistake to avoid the issue of long-range preservation of foundation portfolios,” she says. “Americans have short memories. We’ve had extended periods of economic downturn as well as our current economic strength; we tend to forget that.”

But, she says, the many years of prosperity that the nation has enjoyed could be an argument for increasing the minimum payout level.

“We’re all aware that during this particular time of strong economic health, there are increased pressures and increased opportunities for foundations to do more,” she says.

History:

Established as a family foundation in Bermuda in 1990 by Charles F. Feeney, co-founder of Duty Free Shoppers Group. Purpose and areas of support: Supports grassroots groups that “address fundamental inequalities and injustices” in American society. It makes grants in three areas: environmental health, social and economic justice, and bolstering the organizational capacity of non-profit groups. The foundation also makes grants to community-based groups in France. Assets: $42,868,478 as of June 30, 1999. Grants and operating programs: Will distribute about $3.5-million this year. Key officials: Diane V. Feeney, president; Danielle Feeney, chairman of the Board of Directors. Application procedures: Does not accept unsolicited grant proposals. Address: 303 Sacramento Street, Fourth Floor, San Francisco 94111; (415) 288-1305.