Community Fund’s Solution to the Payout Debate Pays Dividends

To the Editor:

As noted in your coverage of the recent Council on Foundations conference (“Cheers and Challenges,” May 6) and as we have found from our own polling work, the debate over how much foundations should pay out in grants is heating up again. Fueled by headlines showing foundation investment returns in the 20-to-30-per-cent range last year, and averages in the high teens for the past decade, some non-profit groups are demanding more — and some people on Capitol Hill are quietly watching.

The battle over the payout provision has raged in philanthropic circles since it was first enacted in the Tax Reform Act of 1969. Originally set at 6 per cent of assets or all the investment income, whichever was higher, the amount was modified upward in the mid-1970s to 6-and-one-half per cent, then reduced to 5 per cent of assets in 1981, where it remains today.

The 5-per-cent figure was enacted only after intense study and lobbying by private foundation groups, which claimed that any amount over that figure would erode foundations’ relative grant-making power over the years. Using “current dollar” scenarios, and assuming inflation rates in the 4-to-8-per-cent range (a range that seemed entrenched and inevitable in the late 1970s and early 1980s), foundations argued that anything over 5 per cent would eventually sound their death knell.

The trouble is, inflation rates have dramatically decreased in the past decade, and our robust economy has turned small foundations into big ones, and big ones into behemoths. Using constant 1989 dollars, the Lilly Endowment hasn’t just remained relatively as large as it was 10 years ago — it’s many times larger.

The National Network of Grantmakers says it’s time to share the wealth, to increase giving to 6 per cent. Some inside the foundation world, such as the Jessie Smith Noyes Foundation, say to take it up to 7 per cent.

But hold on, say some foundations. What happens when the stock bubble bursts, and inflation kicks in again? We’ll be ruined — and, by degree, so will the non-profits depending on us.

Is there a way to share the good times with non-profits (which are usually not invested in the stock market and haven’t enjoyed the market run-up), while still protecting assets in bad times?

Yes, there is. It’s called the “community dividend,” a grant payout based on a formula that embraces the moving targets of return and inflation. The formula was designed by the Board of Governors of the California Community Foundation this year, and instantly increased our grants budget by 50 per cent.

Community foundations are not legislatively forced to pay out a fixed amount, as are private foundations, but most give away at least 5 per cent per year. For our discretionary and scholarship funds, the California Community Foundation has set a grant-spending policy of 5.5 per cent of assets, averaged over time, to reduce volatility. Under this spending policy, the community foundation made about $7-million in discretionary grants in fiscal year 1998-99.

The new community-dividend formula takes our total return, averaged over the past three years, then subtracts from it the 5.5-per-cent grant-spending floor, total administrative costs (in our case, 1 per cent), and the average inflation rate for the same three-year period. The remaining amount is then halved, returning one-half to the corpus and adding the other half to the grants budget as the community dividend.

Using this formula, our discretionary grant budget will increase to $12-million in fiscal year 1999-2000. The community wins, and we still have managed prudently to add to the corpus for those rainy days when the stock market takes a dive.

The beauty of the community dividend is that it provides a vehicle for increasing grants during good years, without creating an arbitrary and artificial fixed payout. Using the three-year average, it also avoids huge fluctuations in available grants.

What happens if the total return drops below the combined sums of spending policy, administrative costs, and inflation? We’ll continue to give at the 5.5-per-cent rate even if it carves into the corpus, because grant making is what we do.

Grant making is the business of foundations, and it’s hard to explain to grant seekers, the press, and the public why we could ever be comfortable earning 25 per cent and giving away 5 — even if we have dusty charts showing how prudent that may seem over a 50-year period. The community dividend allows foundations to share with their constituents their good fortune, while risking absolutely nothing. It’s a formula that spells win-win.

Jack Shakely
President
California Community Foundation
Los Angeles

* * *

To the Editor:

Thank you for covering the issue of foundation payout and helping advance the dialogue on this critical subject. I would like to add several points to clarify the issue and to better describe the National Network of Grantmakers’ campaign “The Payout Initiative: 1% More for Democracy.”

First, increasing the payout rate from the Congressionally mandated 5-per-cent minimum will not result in foundations’ going out of business. Many foundations have been paying out more than 5 per cent without jeopardizing their endowments — some even before this phenomenal period of growth in their endowments. For example, the Needmor Fund paid out 12.43 per cent in 1996 and 11.12 per cent in 1997, and the Norman Foundation paid out 7.15 per cent in 1995 and 6.7 per cent in 1996. And this was done voluntarily, without Congressional fiat, because it was the right thing to do.

Second, as Archbishop Desmond Tutu reminded us at the Council on Foundations’ annual conference, our work is not about ameliorating situations. Rather, it’s about bringing about fundamental change. The National Network of Grantmakers is stepping up to the plate with its “1% More for Democracy” campaign, which seeks to increase payout among its members by one percentage point and earmarking that amount for social-change groups that are working to break the cycle of poverty.

As grant makers, we have a responsibility to share the bounty of economic growth with those in need, particularly during this time of record investment returns. We are, after all, in the business of giving away money, not accumulating it.

Diane V. Feeney
Trustee
French American Charitable Trust
San Francisco