If Not Now, When?

Frugality is baked in to the American mindset. "A penny saved is a penny earned," goes a saying whose history dates all the way back to 1737. We believe that we must hold on to our funds, in case we need them later. The same mindset has permeated the philanthropic world for a very long time, as well. The current law that requires a 5% minimum payout from private foundations dates back to 1969. There are a lot of charitable dollars out there, waiting to be used.

The pandemic jolted some of those funds from their slumber. According to Giving USA's 2021 report, foundations gave $88.55 billion in 2020, a 17% increase from the previous year. Which is good! But foundations still had more money at the end of 2020 than they did before the pandemic started. These distributions are coming from a pool of dollars totaling around $2 trillion. Private foundations currently have about $1.3 trillion in wealth, while other nonprofits held nearly $700 billion in 2017.

Concurrent bills in the House and Senate are now looking to ensure an increased rate of charitable expenditure in the future. The Senate's Accelerate Charitable Efforts (ACE) Act, introduced in June 2021, has received support from entities such as the Ford Foundation, the Hewlett Foundation, the Wallace Global Fund, the Kellogg Foundation, the California Association of Nonprofits, and the Minnesota Council of Nonprofits. The House bill, which was released in early February 2022, is mostly identical in substance.

The bills focus on some key incentives. First, the 5% payout requirement will be strengthened, excluding some non-grant costs that currently count toward the total expenditure. In addition, if a private foundation increases its payout to greater than 7%, it will receive an exemption from the excise tax.

The other main portion of the bills address donor-advised funds (DAFs). These funds have grown immensely over recent years, with DAF accounts totaling about $160 billion in 2020. The bill would require a minimum annual payout from DAFs. Also, for donors to receive the full upfront charitable tax deduction, the money must be spent within 15 years, with a sizable penalty for failing to adhere to the rule.

However, there will be exceptions for accounts established before the legislation, as well as for accounts under $1 million housed at community foundations.

The current 5% requirement allows funds that a foundation directs to DAFs to count toward their total disbursal, even if the funds aren't actually spent that year. The proposed bills will remove that loophole to ensure that the full 5% is spent instead of just shifted.

Opponents of the legislation include the Silicon Valley Community Foundation, the National Center for Family Philanthropy, the Philanthropy Roundtable, and the Jewish Federations of North America; these organizations feel that the changes would decrease giving from donors. The Council on Foundations has also opposed the legislation.

Different stakeholders in the charitable community often share similar values. A foundation with an interest in homelessness and a nonprofit providing services to help the unhoused both see an issue and want it addressed. But there seems to be a divide in ideology when it comes to those holding the money and those who want to use it.

There has been some blowback against this resistance to change. Alan Cantor, a consultant who works with nonprofits and a former vice president of the New Hampshire Charitable Foundation, said, "The Council unfortunately cares vastly more about the convenience and welfare of wealthy donors than they do about nonprofits and the people and causes in the community."

The money in a sizable portion of DAFs just sits there in any given year. And as the money sits in these accounts, it can ring up fees for the holding organizations. According to the Chronicle of Philanthropy, "A recent study from the Dorothy A. Johnson Center for Philanthropy at Grand Valley State University found that 35% of the donor-advised fund accounts at Michigan community foundations distributed no money" in 2020, and an additional 22% distributed less than 5% of their assets.

The current system is set up in a way where a massive contribution to a foundation or DAF right now may see only a mild outflow each year. We are foregoing improvements in the present to maintain an endowment for ages down the line, but none of us know what the future holds.

There is a psychological comfort in the idea of "leaving something for our children and grandchildren." But why wait to make the world a better place? Yes, the money from an endowment may still be there in the future, but we can also hope that positive changes we make now will also persist. Consider it not an endowment of money, but an endowment of a better world. 

Let's do a little thought experiment. Consider a foundation with a billion dollar endowment (which isn't nearly as rare as you might think) that earns a steady 5% investment return. Even if the foundation was required to make a 10% yearly disbursement, it would take 25 years to reduce its endowment by half and 50 years to reduce it to three-quarters of the original amount. A half century later, there is still a $250 million pile of money.

The concept of keeping an endowment at a steady or growing amount is at its base a pessimistic belief. The idea that we will need the same amount of charitable dollars in the future implies the maintenance of a status quo: we will need the same amount of money because we will have the same amount of problems.

We sit on the money because we say we want a better world for future generations. But the path to a better tomorrow starts today, and we have the resources to build it, if we choose to use them.