Last Monday I got to see a demonstration of software meant to make the administration of private foundations much easier. Among other things, the program offers compliance services, including a review of grants to ensure there is no self-dealing; a review of potential recipients of grants to ensure they are, in fact, 501(c)(3) organizations, and thus eligible to receive tax-deductible donations; and a constant vigil over total annual foundation disbursements to ensure that the foundation hits its five percent (5%) minimum distribution requirement.

It was this last service that caught my eye.

Our family has chosen to use its foundation largely as a pass-through: fund it once a year and then disburse all but a few thousand dollars in the following calendar year.

Now, there are arguments–and our counselors have urged us seriously to consider the arguments–for creating a longer-term endowed fund. But it strikes me: why should the government have had to establish rules that require foundations to disburse, over the course of every two-year period, an average of five percent of their net assets per year? Shouldn’t a foundation, interested in doing good, be able and willing and even excited to distribute at least the equivalent of net ROI each year to achieve the good things for which it was established?

And shouldn’t ROI average better then five percent of the foundation’s assets? (If not, shouldn’t the foundation question its investment policies?)

But here I was, listening to a presentation in which, it became quickly apparent, a large percentage of foundations struggle “even” to distribute funds equal to five percent of their net assets. They have to be “reminded” and cajoled to make sure they distribute that percentage.

I know of foundations with hundreds of millions of dollars of investments. Others have multiple billions of dollars. And, in normal circumstances, their asset bases grow every year–not only due to returns on investment, but as a result of ongoing influxes of donations from contributors.

So let’s take a foundation that, a year ago, say, had a very modest endowment of only a million dollars after 20 years of slow accumulation of assets due both to investment returns and charitable donations. Since the foundation was first formed, it has always distributed the equivalent of just five percent of its assets . . . every year.

Now, five percent of a million is $50,000. And $50,000 is all this foundation would distribute to the favorite charitable causes of those who oversee it.

But, I thought, the stock market has recently dropped by 40% to 50%. What will the foundation do now?

If their corpus has dropped, say, to $500,000, will they continue to distribute/contribute only five percent of that corpus (or $25,000) to their favorite causes?

That’s what I figured they would do. That’s their practice, isn’t it?

But I got thinking a little more. Specifically, I thought: What is the endowment for? Isn’t it for times like this . . . to enable the foundation to carry on its charitable work during times of scarcity as well as times of plenty? Otherwise, truly, what is it there for? If, during “normal” times, the corpus keeps growing, isn’t it during times like this, when the need is greater, that the corpus should be spent down? . . . So it takes a few more years to bring the asset base back up to where it was when the recession first hit. Isn’t the money there for being spent?

Or am I missing something?

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This entry was posted on Monday, December 8th, 2008 at 2:48 pm and is filed under charity, giving, philanthropy, purpose, resources. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.