While there is no shortage of charitable causes, there is a shortage of money to fund all of the groups doing good work. This simple truth has some wondering how to increase the amount of money available to civil society.
For example, Congressman Kevin Brady (R-Texas) chairs the House tax-writing committee and has said one goal of tax reform is to “unlock more charitable giving in America.”
One way to do that would be to allow all Americans to deduct their charitable contributions, including taxpayers who do not itemize. This is an idea that many in civil society have gotten behind, and there are other ideas out there too, such as eliminating the cap on how much can be deducted from income (currently only 50 percent of adjusted gross income can be deducted) that are worth considering.
One idea that should not be considered, but is sometimes proposed, is requiring foundations to increase their annual payout rate from the current five percent.
A recent opinion piece at Fortune.com even called for the payout to be raised to ten percent, ostensibly to make more money available to the victims of recent hurricanes. While well-meaning, this and similar proposals would have a long-term negative effect on civil society and future community needs.
It would also effectively be a backdoor way to end the ability of foundations to operate in perpetuity.
At the Philanthropy Roundtable we generally encourage philanthropists to consider spending down charitable assets rather than establishing a perpetual foundation, but we also think it should be up to the person establishing the foundation to decide.
The math is fairly straightforward – according to a recent Council on Foundations report, the ten-year average for foundation investment returns is under five percent. A ten percent payout combined with five percent returns means that every year, foundations shrink in size and give out less money than the year before. Over time, foundations would be depleted and close their doors.
Forcing foundations into terminal decline would deprive many communities of the funds that enrich local civic life and even serve as an emergency backstop.
For example, the Houston Endowment was founded in 1937 and has grown from an original gift of $1 million in its early years to about $1.7 billion today, allowing it to provide an average of $71 million in grants to Houston-area nonprofits each year.
In the wake of Harvey, the Houston Endowment has been able to address urgent-short term needs that wouldn’t have been covered by other funding sources. Had a ten percent payout been required over the Endowment’s lifetime, payouts would have outpaced the foundation’s interest earnings. As a result, the Houston Endowment might have been spent down long ago and wouldn’t have been around to meet the needs of the community following Harvey.
Moreover, the perpetual nature of foundations like the Houston Endowment – made possible by the current five percent requirement – not only ensures that they are still around when disaster strikes, it also allows them to take the long view and make and sustain investments that may not be realized for years to come to prevent future crises.
Other Texas-based foundations are already planning for the long-term recovery from Hurricane Harvey. Long after the television cameras are gone, the flow of federal funds has ceased, and individuals giving to charities experience donor fatigue or have their attention drawn elsewhere, these foundations will remain to fund those parts of the recovery that last for years or even decades.
Similar stories abound nationwide of local foundations serving as vital resources for communities in times of crisis. For example, the Charles Stewart Mott Foundation in Flint, Michigan has pledged up to $100 million over five years to help meet the needs of residents exposed to high levels of lead in that city’s drinking water.
Perpetual foundations also are the mainstays of many charities, providing steady support year after year for local community needs including homeless shelters, arts programs, conservation efforts, youth sports programs, and other important pillars of civil society. Such charities might receive an initial boost with an increased payout requirement, but it could not be sustained and over time funding would dwindle and eventually disappear.
It should be up to each donor to decide whether to concentrate his giving over a short time period or establish enduring assets that can meet community needs well into the future. Forcing foundations to spend themselves out of existence by increasing the payout rate is a short-sighted way to boost charitable giving, and those wanting to increase the resources available to civil society should look elsewhere.
Sean Parnell is vice president for public policy at The Philanthropy Roundtable.