The United States government’s Paycheck Protection Program (PPP) was designed as a forgivable loan program aimed at enabling small businesses to keep their workers employed during the COVID-19 crisis. However, small businesses weren’t the only ones to benefit from this program. It was recently revealed that around 120 private foundations had received support through the PPP, many of which had ties to affluent individuals. Among them was the Walt Disney Family Foundation ($146,700), the Robert Mapplethorpe Foundation ($103,200), and the Letters Foundation, founded by Warren Buffett and his sister Doris ($268,800). All told, over $7.5 million in federal relief funding made its way into the coffers of these foundations. As employers, these foundations were eligible to receive federal support. But many observers have questioned the reasoning—if not the ethics—involved in seeking government help when these organizations possess vast fortunes.
Several grantmakers cited the sharp economic downturn in the early days of the crisis as their motivation for applying for PPP funds. As markets tumbled, many foundations were reluctant to sell stocks at a loss in order to cover their expenses. The Letters Foundation, funded in large part by Doris Buffett’s Berkshire Hathaway stocks, noted that "during the market upheaval brought on by the pandemic, those stocks lost considerable value." However, even at its lowest point in 2020, a single share of Berkshire Hathaway stock was valued at $239,440.
This explanation reflects a primary aim of most philanthropic institutions—to ensure that the foundation exists in perpetuity. This is usually achieved by fiercely protecting the foundation’s nest egg, or endowment. Legally, foundations are only obligated to disburse around 5% of the value of their endowments annually, or about the average rate of return in the stock market. So, in a normal year, they can expect to give away their earnings without having to tap into their principal. However, during times of market upheaval, when share prices are plummeting, that 5% disbursement may disrupt the delicate balance that promises the foundation eternal life. Ironically, it is also during these times of economic turmoil that the need for grants is greatest.
In light of the devastation wrought by the pandemic, there have been calls to increase the payout rate in order to help struggling nonprofits, who have seen demand for their services surge and income drop. One such call was issued by a coalition represented by the Wallace Global Fund, Patriotic Millionaires, and the Institute for Policy Studies, which penned a memo to Joe Biden’s transition team urging them to increase the foundation payout rate from 5% to 10% over the next three years as part of the next coronavirus relief package. The memo stated, “U.S. private foundations and donor-advised funds at public foundations are currently sitting on $1.2 trillion in charitable assets. Yet current tax law requires private foundations to distribute a mere five percent of those assets each year, while donor-advised funds have no such minimum requirement.” By bumping up the payout rate to 10% for both, the coalition estimates that $200 billion in additional funds would be awarded to nonprofits over the next three years, with no profound threat to foundation longevity, as they could then reduce the rate back to 5% after the three-year period.
Another proponent of higher payout rates is the newly launched Initiative to Accelerate Charitable Giving, a coalition that includes the Ford Foundation, the Hewlett Foundation, the W.K. Kellogg Foundation, and other prominent grantmakers and philanthropists. Citing the fact that “America’s charities are in a state of crisis” as they seek to address the pandemic and calls for racial justice, the Initiative aims to boost charitable giving and make it more accountable through tax law reform. Among the proposed reforms, the Initiative seeks to close loopholes surrounding the 5% payout rule, incentivize private foundations to donate 7% or more of their assets a year, and promote the creation of time-limited foundations which can exist for only up to 25 years.
It is that last proposal that raises an interesting question: Is it better for foundations to exist in perpetuity, benefiting multiple generations, or to be established as time-limited in order to amplify their impact in the here and now?
Even before the pandemic hit, the idea of time-limited foundations was gaining in popularity. The report Strategic Time Horizons: A Global Snapshot of Foundation Approaches reveals that, of the foundations created in the 2010s, 44% were established as time-limited, compared to just 16% of those established in the 2000s. In addition, nearly a third of foundations surveyed reported that they were either actively looking into switching from a perpetual entity to a time-limited one (8%) or that they had debated such a switch but decided against it (20%).
What accounts for the growing popularity of time-limited foundations? Top reasons cited by the report include the founders’ desire to expedite charitable donations, to see an impact in their lifetime, and to amplify their impact by limiting their focus. Founders also voiced concerns about whether future generations would be dedicated to philanthropic activities and whether the foundation’s activities would continue to reflect the founder’s intent into the future.
There also seems to be a correlation between a foundation’s mission and their decision to become time-limited. Of limited-life respondents, over 50% reported environment/conservation as their biggest program area. It may be that foundations working on time-sensitive issues that demand immediate attention, such as climate change, are more likely to be time-limited. For example, the Brainerd Foundation, which operated from 1995 to 2020 in the Pacific Northwest, offered the following reflections on its decision to sunset. “We recognized that the ecological challenges our funding region and the planet faced were urgent, and so we made the decision to spend out our endowment. We believed our dollars could have a greater impact if we didn't hold back.”
However, arguments can also be made against tapping into foundation endowments. In response to recent calls to increase payout rates, the Council on Foundations (COF) noted that the philanthropic sector had already voluntarily mobilized vast resources to address COVID-19, and that raising the payout rate would constrain foundations in the future. Interestingly, they also pointed out that, despite the fact that there is no annual payout requirement for donor-advised funds, the aggregate payout rate for these funds is usually over 20%.
The COF stated, “Increasing the payout requirement for private foundations and creating a new mandate for donor-advised funds would unnecessarily limit philanthropy’s ability to respond to future crises and would have a deleterious effect on foundation assets and longer-term donations. If similar proposals had been adopted following the tragedy of September 11, 2001, or the Great Recession of 2008, philanthropy would now have fewer resources and a significantly reduced ability to respond to COVID-19.” They went on to assert that if the payout rate was permanently raised to 10 percent, it would cause large numbers of foundations to close shop prematurely, thus arguing in favor of the value of perpetual foundations. To illustrate the benefits of the in-perpetuity model, the COF cited the example of the Jessie Ball duPont Fund, which was established with $40 million in 1970, and which now gives away that same amount every three to four years thanks to an endowment that has grown in value to $267 million.
Another proponent of the in-perpetuity foundation model is Joel L. Fleishman, author of Putting Wealth to Work: Philanthropy for Today or Investing for Tomorrow?. He argues that the benefits of the perpetual model far outweigh those of “giving while living” philanthropy and time-limited foundations which spend down their endowment over a specified number of years. Fleishman writes, “[W]hile I admire the quest of wealthy individuals to put their money to work in trying to solve pressing social problems during their lifetimes, I have great concern about the likelihood that spending even the vast wealth they promise to deploy over a comparatively short period of time can achieve their ambition for impact on the scale to which they aspire.”
He points out that one of the ways in which perpetual foundations help to solve complex social problems is by doing so over time, testing out innovative approaches to see which ones work and which do not. He notes that “experience, discernment, and a willingness to persevere and learn all depend on a time frame unrushed by some fast-approaching day of reckoning.” He goes on to ask, “If the goal is to expend all of one’s charitable wealth in a few years or decades and then depart the field, is there time enough to master philanthropy’s subtler and slower arts?” Fleishman also raises the concern that time-limited philanthropy might lead to a focus on funding “big bets” rather than nurturing a healthy nonprofit sector capable of solving intractable problems.
In the Strategic Time Horizons report, representatives of foundations that considered switching to time-limited but ultimately remained perpetual shared similar sentiments. One respondent wrote, “While today’s problems may seem dire, tomorrow’s are likely worse. Our structure and process allow us to provide more than just grants. If we spend down the funds, we no longer exist.” Another reflected that the in-perpetuity model “means we can take a long view of our grantmaking and accept that complex situations take time and resources to resolve.”
So, which is foundation model is preferable: time-limited or in-perpetuity? Is it better to dip into a foundation’s endowment during times of acute need or save those resources to benefit future generations? Ultimately, there may be no easy answers to these questions. Even those with strong views on the issue may find themselves confronted with uncomfortable realities. Andrew Carnegie famously wrote in his 1889 essay, “The Gospel of Wealth,” “The man who dies thus rich dies disgraced.” As Fleishman points out in his book, despite being a vocal proponent of “giving while living,” Carnegie nonetheless struggled to give away his own fortune during his lifetime. After establishing institutions such as Carnegie Hall, the Carnegie Libraries, and what was to become Carnegie-Mellon University, towards the end of his life he created an in-perpetuity foundation, the Carnegie Corporation of New York, so that “even after I pass away the [wealth] that came to me to administer as a sacred trust for the good of my fellow men is to continue to benefit humanity for generations untold.”