Limits on the Life Spans of Foundation Endowments Make No Sense

In a recent Chronicle opinion article entitled “Now or Forever: Rethinking Foundation Life Spans,” the scholars Ray Madoff and Rob Reich contend that there is an imperative to consider spending down the endowed assets of foundations and donor-advised funds to address the world’s urgent problems. Given challenges such as climate change that threaten humanity itself, they ask, why should philanthropic capital should be preserved for a “long-term future that might not exist”?

Driving their concern “is that government funds are increasingly strained at a time when charitable resources, especially in family foundations and donor-advised funds, have grown” — a false construct that would be quickly dismissed if not written by academics from Boston College and Stanford University.

Making matters worse, the authors do not present a balanced picture, exaggerating the potential benefits of their idea while ignoring any discussion of the real harm it would cause. Because silence is often interpreted as agreement, it is important to publicly refute these views.

There are two fundamental flaws with Ms. Madoff and Mr. Reich’s authors’ argument.

The first is that they focus only on donors who have established endowed charitable vehicles, then incorrectly extend their conclusions to describe all donors. Social scientists call this the “fallacy of composition.” It’s as if one studied penguins and concluded that since they are birds with wings that don’t fly, all birds with wings are unable to fly.

Our nation’s philanthropic ecosystem consists of donors who establish endowed foundations (stand-alone or within donor-advised funds) and donors who make gifts directly to nonprofit organizations. By looking only at the former group, the authors ignore that the overwhelming majority of donors, generation after generation, choose to give while they live.

Without the annual giving of living donors, America’s robust nonprofit system would collapse. According to Giving USA, total giving in 2014 was $358.4 billion. An amazing 72 percent — $258.5 billion — came from individuals who contributed directly to charitable causes. This number grows to 80 percent when you add the $28.1 billion from bequests.

Foundation giving that year amounted to $54 billion, only 15 percent of total giving, and corporate philanthropies contributed the remaining 5 percent ($17.8 billion).

As Ms. Madoff and Mr. Reich acknowledge, it is estimated that 12 percent of foundations have plans to spend all their assets in a set time and another 25 percent have not made a decision. This means that 12 to 37 percent of foundations will go out of business of their own accord.

This leads to the authors’ second flawed argument — that spending down the combined assets of individual foundations can rival the power and influence of the federal government.

If government funds are strained, it’s because citizens lack the public will to vote to increase taxes. Foundation funding is not a substitute for government funding. Furthermore, foundations do not have a responsibility — and, more crucially, do not have the necessary capital — to replace shortfalls in government funding. This is true whether endowed philanthropy is growing or not.

For nonprofit organizations struggling to keep the lights on while addressing heart-wrenching problems, receiving a windfall from foundations spending down their assets has understandable appeal. To his idea, the old saw that “If it sounds too good to be true, it probably is” applies.

The Foundation Center estimates that in 2012 the assets of all 86,000 US foundations totaled $715 billion. For the sake of argument, let’s posit that these assets are distributed all at once to nonprofits by the foundations’ boards or given to the federal government.

In the former instance, there is no reason to believe that these disparate institutions with different missions, working independently, would suddenly produce dramatically different results than they have achieved in the past. There is also no reason to think these foundations would achieve better results than what other donors achieve through their annual giving. Neither larger grants to specific nonprofits nor a larger number of grants to different organizations has been shown to produce significantly better or breakthrough outcomes.

Yes, in the short run more money would be available to charities. Assuming foundation assets were equally distributed, the nation’s roughly 1.5 million nonprofits would each receive a one-time grant of about $477,000. This would surely help nonprofits in the short term but would not yield world-changing outcomes. Moreover, after the last of the foundation grants were expended, many programs would likely need to be cut back or eliminated due to inability to replace the funding.

In the government scenario, $715 billion wouldn’t buy much for very long. In fiscal 2016, combined federal, state, and local government spending is estimated at $6.7 trillion. Of this amount, the federal budget is $3.9 trillion. Spending every penny of every foundation’s endowment amounts to 11 percent of all government spending and only 18 percent of the fiscal 2016 federal budget.

Viewed another way, the total assets of all foundations would only cover 62 percent of the federal government’s discretionary spending of $1.15 trillion on such things as housing, education, health, veterans, and the military, this year. After that, these resources would be gone — forever.

While foundation assets are considerable, they are insignificant compared to the federal budget. Suggesting that if only foundations were to spend down their endowments they could succeed where governments have failed in solving income inequality, climate change, bioterrorism, nuclear warfare, and other issues is simply not credible.

It’s easy to imagine the disastrous consequences if every foundation spent down its assets, an issue Ms. Madoff and Mr. Reich fail to address. It would devastate communities that rely on place-based endowment funds such as those held at community foundations for assistance, through good times and bad. It would play havoc with support for basic scientific and medical research, the practical applications of which may not be known for decades. It would deprive successive generations of low-income students of educational scholarships. It would undercut cultural institutions that bring joy and creativity to our communities. It would, without question, do all of this and more.

Unquestionably, deciding whether to create an endowed foundation is an important consideration for people with the wherewithal to do so. This was the subject of a panel discussion convened by Ms. Madoff and Mr. Reich at Stanford his month, in which I participated.

By the discussion’s end, there was unanimous agreement that the best advice to offer donors is that they be intentional in deciding whether to give while they live or establish an endowed charitable vehicle. They should take into account their grant-making focus, their trust in successor generations, and their own predisposition about perpetuity. If they opt to create an endowed vehicle, donors should be equally thoughtful in choosing among permanency, spending down over time, or leaving that decision to successors. What was clear is that these are personal choices, for which there is no one-size-fits-all solution that can or should be legislated.

Rather than relying on John Stuart Mill’s philosophical quandary in understanding perpetuity, as the authors do, perhaps we should look to Benjamin Franklin’s real-life example.

In 1789, Mr. Franklin established two endowed bequests to provide for the residents of Philadelphia and Boston at 100- and 200-year intervals. We need only ask the residents of these cities if they wish that Franklin had spent the money during his life instead.

Endowed charitable vehicles are insurance policies on behalf of future generations in whose continued existence we believe and whom we wish to support. As any financial planner will tell you, it’s only prudent to have both checking and long-term investment accounts — one to provide for daily expenses, the others to save for future opportunities or hardships. It’s important that the whole of philanthropy continues to do the same.

Emmett Carson is chief executive of the Silicon Valley Community Foundation.