It’s an unprecedented time to be a trustee at a private foundation. Earlier this year, IP’s Michael Kavate reported that the nation’s over 125,000 private foundations were sitting on $1.5 trillion in assets and likely disbursed a little less than $100 billion in 2023. If current trends hold, U.S. foundation assets could soon be twice the value of the combined endowments of the top 700 richest U.S. universities, institutions legendary for their massive endowment-to-outlays ratios.
Thanks to their growing wealth, foundations have become a target of increased scrutiny from politicians, while groups like Excessive Wealth Disorder Institute, Donor Revolt and Patriotic Millionaires are calling for them to boost annual payouts past the 5% required by law. Even some foundation leaders now decry their peers for “hoarding and restricting resources.”
The unspoken issue that lies at the heart of these conversations is perpetuity. If more large, bellwether foundations sitting on billions in assets announced plans to sunset, politicians might be less inclined to prioritize overly draconian regulation of philanthropic funders, and at least some of the more scathing accusations of uncharitable wealth hoarding would be rendered moot.
Of course, trustees argue that if they blow past the 5% payout and set themselves on a path toward spending down, they won’t be around to support organizations tackling the climate emergencies or unfettered AI of, say, 2094. Perpetuity critics respond that alleviating present-day suffering and going all-in to minimize or even avert climate- and AI-related cataclysms now should take utilitarian precedence.
And so the argument goes, back and forth ad infinitum, and only our friends in Congress have the power to alter its complexion by increasing the 5% payout ratio by law and forcing the hand of wary foundations. Such a move could turn down the temperature while still allowing foundations to exist forever. But what Congress can’t do is answer the question if existing forever should even be foundations’ default status.
A nuanced debate
When funders were being asked to ramp up grantmaking in the early days of the pandemic, former Hewlett Foundation president Larry Kramer published an open letter saying the foundation “will avoid allocating additional funds, which would require selling devalued assets from an already diminished endowment, thus locking in losses permanently, to the certain detriment of future grantees and the communities they will serve.”
As the leader of a foundation committed to ensuring its perpetuity, Kramer’s position made sense. But those opposed to perpetuity who believe the foundations should give more now might object to this thinking, and for several good reasons.
If, say, a foundation supporting direct service organizations were to spend down in 20 years, the increased funding would provide immediate assistance to individuals in need now — such as those struggling with mental illness, addiction and housing or food insecurity — potentially reducing problems in the future.
Large sunsetting grants can also set up underfunded organizations for the long term. One of the most salient takeaways I’ve had from my ongoing conversations with leaders at spend-down foundations came from Annie Ulevitch, the executive director at the San Francisco-based Hellman Foundation. “What happens if we put a larger amount of money into the community over a shorter time-frame?’” she said. “The foundation may be spending down, but the dollars aren’t going away. They live somewhere else and get put to a different purpose.”
For instance, those dollars could live in nonprofit organizations’ endowments instead. As my colleague Martha Ramirez has noted, this approach has been an underleveraged tool to help organizations led by or serving communities of color build long term sustainability, and could create a stabilizing funding stream for an array of different sorts of organizations.
For many nonprofit leaders, being trusted to forge their own destiny with large sunsetting grants is preferable to putting out fires with a slow drip of smaller annual grants in perpetuity. It’s also no coincidence that sunsetting foundations are disbursing torrents of unrestricted support enabling nonprofit leaders to address areas of greatest need — and in so doing, embracing some of the principles of trust-based grantmaking.
Every leader I’ve spoken with who presided over a sunsetting foundation — and I’ve spoken with more than a half-dozen — has said that while grantees were initially anxious about the spend-down, they appreciated being trusted with truly substantial funding that allowed them to plan for the long term. This takeaway comports with research from the Center for Effective Philanthropy, which found that over 60% of MacKenzie Scott’s grant recipients have used her groundbreakingly large and unrestricted gifts to “build long-term sustainability.” And it further chips away at the paternalistic idea that foundation leaders must figuratively hold an organization’s hand until the end of time.
Related Inside Philanthropy Resources:
For Subscribers Only
Fast-forward to 2094
Spend-down proponents also argue that tomorrow’s rich people can solve tomorrow’s problems — assuming, of course, society hasn’t already dissolved into a climate- or AI-induced dystopia that funders could have helped to mitigate, had they ramped up funding earlier in the 21st century.
Compare the Chronicle of Philanthropy’s top 50 donors in 2000 versus 2023 and you’ll find that only one donor, Bill Gates, made both lists. Or to put it another way, the internet era minted 49 new mega-givers over the following two decades. Between 2010 and 2020, the number of billionaires on Forbes’ annual list nearly tripled. A million new millionaires were created in 2022 alone. Looking ahead, research from McKinsey suggests that annual global wealth creation from generative AI is projected to be about $7 trillion, with almost $2 trillion of it expected to go to the U.S.
Markets and real estate go up. Capital accumulates. The rich get richer and pour money into foundations and DAFs. New funding sources are coming online all the time.
A perpetual foundation can be a vital source of support for organizations 50 or 100 years from now, but again, this advantage glosses over how foundations can set up organizations for long-term sustainability by giving large unrestricted grants and copious amounts of capacity-building support so today’s leaders can raise money from 22nd century funders and even the occasional benevolent trillionaire.
Perpetuity also absolves trustees from having those hard conversations about doing more to ameliorate suffering in the here and how. This may sound like a harsh take, but the numbers tell a corroborating story. As I previously reported, FoundationMark Founder and President John Seitz crunched Form 990 data from the 40 largest U.S. foundations by total assets and determined that 17 of the 36 for which information was available for the last five years failed to hit an average 5% payout during that time frame.
Context matters
I don’t mean to be casually waving away the benefits of perpetuity. Among the many trenchant arguments made by its proponents, I’m especially sympathetic to how perpetual foundations can, over time, stand up nonprofit ecosystems traditionally underserved by philanthropy.
I appreciate how perpetual foundations’ subject matter expertise complements policy-driven efforts in the public sector and how their amassed wealth plugs funding gaps when government tightens the purse strings. And I recognize the tremendous value provided by funders of science and medical research channeling their support to new discoveries and cures.
But when I turn to the numbers, the heart overrides the head. Seitz found that the combined noncharitable-use-assets — that is, the pile of assets from which they must take the 5% disbursement — of the 40 largest foundations in his data set totaled $328 billion.
That’s over a third of a trillion dollars sitting in the endowments of only 40 (admittedly large) foundations that could be put to use today. At a time of unprecedented need and existential challenges, the number strikes me as 328 billion missed opportunities.
Nor does this number exist in a vacuum. Forty-eight years after Congress set the 5% payout rule, the philanthropic sector is grappling with tepid giving from affluent households, an exodus of middle-income donors, widespread public support for legislation that unlocks more foundation grant dollars, a growing body of research suggesting organizations can be trusted to handle abnormally large gifts and the recognition that inherited wealth exacerbates wealth inequality.
Add it all up, and I can’t shake the fear that trustees’ commitment to perpetuity is becoming increasingly untethered from what the current moment requires. A diverse array of emboldened opponents of forever foundations will continue to make their opinions abundantly clear. Perpetuity’s defenders need to make a more compelling counter-argument for maintaining the status quo forever.
