Foundations Should Increase Their Payouts

One aspect of the current financial crisis that I haven’t seen discussed at great length recently is its effect on the non-profit sector. Make no mistake, these effects are likely to be very, very large. Universities are already announcing significant cutbacks in spending (I just received a circular email from the president of my former institution to this effect–the impact on public universities may be even larger). There is one class of institution that could seriously blunt this effect, if it chose to, and that is large charitable foundations. To put the matter bluntly, we should shame them into stepping up to the plate.

A large percentage of foundations spend each year only what federal tax law requires–five percent of assets. But this includes administrative costs. If foundations sit down at the end of this year to figure out what to spend in the coming year, and see that their assets are down by 1/3, they will be tempted to cut their grant-making by 1/3 as well. This is precisely the opposite of what they should do. They should at least keep their grant-making steady, and do so by increasing their pay-out rate. Especially where innovative, entrepreneurial non-profit groups are concerned, a one-third cut in funding could have devastating, and irreversible effects on their ability to drive social change.

Most non-profit groups have no buffer to cushion them in economic down times. Foundations do. Many foundation professionals will say that increasing the payout rate is financially irresponsible. But that’s nuts. It’s only irresponsible if your basic mission is to stay in business forever. That’s not the purpose of charitable foundations. Their purpose is to support groups and causes that reflect the objectives of those who endowed the foundation in the first place. Increasing the payout rate for two or three years will draw down the assets of these foundations for a few years, but when (if?!?!) the markets stabilize, they can go back to 5%, although it will be 5% of a diminished asset-base.

The point here is that lots of good, innovative non-profits are going to need money in the coming year, and their needs should not be sacrificed at the altar of the (wrong–but that’s a post for another time) idea that foundations need to exist forever. Now–and I mean in the next few weeks–is the time for everyone who has a platform of any kind to start shaming large foundations into increasing their payout rate. If we don’t do so, lots of really great groups are going to find themselves hurting in the new year.

Author: Steven M. Teles

Steven Teles is a Visiting Fellow at the Yale Center for the Study of American Politics. He is the author of Whose Welfare? AFDC and Elite Politics (University Press of Kansas), and co-editor of Ethnicity, Social Mobility and Public Policy (Cambridge). He is currently completing a book on the evolution of the conservative legal movement, co-editing a book on conservatism and American Political Development, and beginning a project on integrating political analysis into policy analysis. He has also written journal articles and book chapters on international free market think tanks, normative issues in policy analysis, pensions and affirmative action policy in Britain, US-China policy and federalism. He has taught at Brandeis, Boston University, Holy Cross, and Hamilton colleges, and been a research fellow at Harvard, Princeton and the University of London.