Some Foundations Are Electing To Spend It All Now

Some Foundations Are Electing
To Spend It All Now, Close Shop

By DAVID BANK
Staff Reporter of THE WALL STREET JOURNAL

With the stock-market slump taking a bite out of charitable endowments, many foundations are cutting back spending to preserve assets. But to a growing number of philanthropists, a different approach makes more sense: Spend it all and close up shop.

These donors say they simply enjoy the personal involvement of "giving while living" and figure future problems can be tackled by future philanthropists. Applying business practices to their giving, they are analyzing the "time value" of their money and concluding that a dollar spent now can be worth more than one, or even two, spent later. They argue there is plenty of money on hand to accelerate spending on today's critical problems. They also say that despite the recent downturn in the stock market, long-term economic growth will generate plenty more to deal with tomorrow's issues.

One such donor is Charles F. Feeney, the reclusive millionaire who co-founded the Duty Free Shoppers Group Ltd. chain of airport stores. Earlier this year, Mr. Feeney pushed his foundation, the Atlantic Philanthropies, to adopt a plan to exhaust its $4 billion endowment over 15 years or so. Now 70 years old, Mr. Feeney told his board that the prospect of going out of business would focus the foundation on bold problem-solving rather than self-perpetuation.

The foundation, which approved about $100 million in grants in 1995, will now give away roughly $400 million each year. That puts the Atlantic Philanthropies, which until last year made nearly all of its grants anonymously, in the top ranks of private givers. (Mr. Feeney himself attracted attention in 1994, when he became one of the biggest American financial backers of Sinn Fein, the political wing of the Irish Republican Army.) As part of its recent deliberations, the board decided to concentrate on three areas: the aging population, disadvantaged youth and global public health.

"Organizations as they get older get sclerotic. You can see it in most longstanding foundations," says Harvey Dale, the first president of the Atlantic Philanthropies and now director of the National Center on Philanthropy and the Law at New York University. "It's a passion of Chuck Feeney's and mine that that not happen. We said, 'Let's have fun while we're still alive.' "

Bucking Tradition

Atlantic is among a small group of charities that are bucking the prevailing approach of established foundations, which have traditionally sought to sustain their endowments and their grant-making forever. A federal tax-code change in 1981 relieved foundations of the obligation to distribute at least as much as they earned on their assets each year. Since then, overall foundation "payout" rates have drifted down to near the legal minimum of 5% of assets.

In the same period, according to the Foundation Center in New York, foundation assets have greatly increased, from $47.6 billion in 1981 to $486.1 billion in 2000, the most recent year for which full information is available. Last year, foundations paid out about $29 billion in grants.

Most long-established foundations -- such as the Rockefeller Foundation, the John D. and Catherine T. MacArthur Foundation and the Pew Charitable Trusts -- continue to manage their endowments for perpetuity. Some of them, such as the Ford Foundation and the David and Lucile Packard Foundation, have increased their payout rates this year to cushion the impact of their stock-market losses on their grant-making. But foundation executives and their trade organization, the Council on Foundations, have resisted any permanent increase in the payout rate. They argue that instructions from donors obligate some foundations to maintain their endowments in perpetuity.

Permanent endowments have also allowed some institutions to recruit experienced staffs and provide technical assistance and strategic leadership to nonprofit groups. "I'm sure the problems of the future are going to be just as urgent as the problems of today," says Adele Simmons, former president of the $4.4 billion MacArthur Foundation in Chicago.

Permanent Legacy

To many donors, a permanent endowment represents a permanent legacy. "As I go talk to living donors, I can't offend their desire for immortality," says Mark Kramer, managing director of the Foundation Strategy Group, a philanthropy consultancy in Boston. "That's one reason for starting a foundation. But it makes it hard to move the field forward."

During the boom years of the 1990s, many nonprofit advocates argued that foundations should share more of their stock-market winnings by distributing more than the 5% minimum. Many foundation executives responded that the extraordinary returns and endowment growth of the late 1990s couldn't last. The stock-market decline has indeed beaten up the portfolios of many individual foundations -- though a surge in the creation of new foundations has sustained the overall total of charitable assets. Excluding corporate foundations, independent foundations last year paid out about 5.5% of their prior year's assets, according to the Foundation Center.

The stock market's slump only strengthens the case for accelerated spending, says Paul Jansen, director of consultant McKinsey & Co.'s Institute on the Nonprofit Sector, in San Francisco. By almost any estimate, he argues, the long-run financial returns on foundation investments are lower than the expected returns on the "social" investments they might make in the form of grants. Such social returns include families lifted from poverty and children spared disease through vaccination.

Weighing social and financial returns, Mr. Jansen says, forces foundations to confront a provocative question: "Would we all have been better off if you had given that money out last year and had it deliver benefits, than we are now, with your having lost 15% to 30% of it in the stock-market decline?"

In making his calculations, Mr. Jansen used a standard business analysis of the time value of money. Just as financial returns need to be more heavily discounted the further in the future they are likely to occur, so must social returns that are delayed by conservative spending policies. Factoring in a typical discount rate, Mr. Jansen found that a $100 million endowment of a foundation that paid out only 5%, or $5 million, a year in grants really had a "net present value" of just $50 million or so.

"There's a tremendous cost to society of this behavior," Mr. Jansen says. "The tax deduction has been received. The money is there. The commitment is there. The question is, when do we convert the dollars into social goods? Our answer is, just do it -- sooner."

With nearly $500 billion in U.S. foundation endowments, an increase in the payout rate of two percentage points would make an additional $10 billion or so available each year. To understand what such a figure might mean, consider that United Nations Secretary-General Kofi Annan has suggested that $10 billion a year is the amount needed to reverse the global AIDS epidemic. U.S. foundations contributed about $312 million to domestic and international AIDS efforts in 2000, according to Funders Concerned About Aids, in New York.

To philanthropists such as Richard Goldman, 82, the way to provide more is to dispense with the goal of maintaining perpetual endowments altogether. "I don't think anything should be in perpetuity, certainly not foundations," says Mr. Goldman, a retired insurance executive and president of the $430 million Richard and Rhoda Goldman Fund in San Francisco. "I think there's too much money accumulating in foundations that should be put to use. The needs are out there, so give it away."

Rewarding 'Heroes'

The Goldman fund focuses on environment, population, social services and Jewish affairs. An affiliated fund each year awards a $125,000 prize to an environmental "hero" from each continent. Mr. Goldman says some opportunities can't wait, such as parcels of land that can be saved from development. Other investments, such as education for young girls in the developing world, offer such high "returns" that they are hard to pass up, he says. In addition, he says, economic downturns create greater social needs and put organizations trying to meet them under greater pressure, making increased spending even more important.

The Goldman foundation's assets increased dramatically after the 1996 death of Rhoda Goldman, a Levi Strauss & Co. heiress. As Mr. Goldman became more involved in the foundation, he concluded there were both unmet needs and unspent money. Two years ago, the fund raised its annual grant-making budget to about 10% of assets, with an option to go even higher, and adopted a plan to cease operations within 10 years of Mr. Goldman's death. This year, the funds will make grants of about $50 million.

"I thought, 'I don't want to take it with me, so let's up the giving,' " Mr. Goldman says. "It's not like other people aren't going to give into the future."

The spend-it-all approach has some precedent. In 1913, Julius Rosenwald, chairman of Sears, Roebuck and Co., declared, "Permanent endowment tends to lessen the amount available for immediate needs, and our immediate needs are too plain and too urgent to allow us to do the work of future generations."

In the first half of the century, Mr. Rosenwald's fund gave away the equivalent of more than $700 million in today's dollars, placing Mr. Rosenwald alongside Andrew Carnegie and John D. Rockefeller as one of the great early philanthropists, says Waldemar A. Nielsen, a historian of philanthropy. Yet Mr. Rosenwald is scarcely remembered, in part because he ordered that the fund spend itself out of existence within 25 years of his death, which came in 1932. (The trustees beat the deadline by a decade.)

Among many other projects, Mr. Rosenwald contributed to the construction of nearly 5,400 schools for black children in the South. In the years following World War I, an estimated 60% of American blacks who had completed primary school had been educated in Rosenwald schools, according to Mr. Nielsen's history.

Mr. Rosenwald has attracted a steady, if small, following. In the 1970s, Nelson Rockefeller, the former vice president and grandson of John D. Rockefeller, pressed his siblings to spend down the endowment of the Rockefeller Brothers Fund, which is separate from the larger Rockefeller Foundation. After a lively debate, a compromise was reached: Half of the assets were quickly disbursed in a dozen large gifts; the remainder, now totaling about $650 million, is managed as a perpetual endowment.

In the 1980s, the Aaron Diamond Foundation adopted a 10-year "sunset clause" to maximize the impact of the $150 million bequest left by Mr. Diamond, a New York real estate developer who died in 1984. Between 1986 and 1996, the fund, headed by Mr. Diamond's widow, Irene, distributed an average of $22 million a year, rather than the $7 million to $8 million a year that would have been available if the foundation had sought to perpetuate itself.

The foundation's biggest achievement was the establishment of the Aaron Diamond AIDS Research Center, the largest private AIDS research facility in the U.S. The foundation provided more than $35 million and recruited Dr. David Ho, then a relatively unknown research scientist, who in turn attracted additional city and federal funds. Dr. Ho is credited with crucial work on the breakthrough drug cocktails that have extended the lives of millions of AIDS patients.

"The idea was to take advantage of a 10-year period, find things where we could make a major impact and stick with them," says Vincent McGee, who served as executive director. "Why create some kind of a big bureaucracy and not spend as much?"

Some donors have had second thoughts about putting themselves out of business by spending down their entire fortunes. Financier George Soros had long planned to exhaust his resources and close his Open Society Network by 2010. Mr. Soros announced over the summer that he was cutting back funding for his foundations in the Balkans and other parts of Eastern Europe, in Russia and for some programs in the U.S., while preserving some of his funds for use beyond 2010. His chief goal is to advocate policies to make economic globalization more inclusive and equitable.

Other donors point to forecasts that a lot of new money will flow for future causes. As wealth passes from one generation to the next, estates valued at more than $41 trillion will be transferred over the next 50 years, estimates Paul Schervish, director of the Social Welfare Research Institute at Boston College. Of that $41 trillion, perhaps $6 trillion will go to charity, adding about $120 billion a year to total charitable giving, he says. And that's Mr. Schervish's most conservative estimate. "The outlook for transfers from estates to charity continues to be rosy," he says. "The long-term upside is not threatened by this current slowdown."

One indicator of the potential for future philanthropy is the fact that the world's largest private funder barely existed five years ago. The $23.8 billion portfolio of the Bill and Melinda Gates Foundation is managed as a perpetual endowment. But even with its traditional payout rate, the foundation has become the first private giver to distribute more than $1 billion a year.

Mr. Gates, the 47-year-old co-founder and chairman of Microsoft Corp., has said he began giving away his wealth much earlier than he had originally planned. At this year's World Economic Forum, he said he realized, "I don't want to wait until I'm in my 60s to address things, particularly things that are epidemic, like AIDS, where if you catch it early the interventions are very dramatic."

In a speech at the United Nations this year, Mr. Gates cited predictions from the International Crisis Group in Washington that without aggressive action, 100 million people will have been infected with HIV, the virus that causes AIDS, by 2005. (Other studies predict a similar number by 2010.) Each month shaved from the delivery of an AIDS vaccine, he said, will save nearly 500,000 people from HIV infection.

"Disease won't wait," he said. Mr. Gates and his wife have resolved that as soon as a vaccine is ready, their foundation will help fund its global distribution -- even if it means spending down the foundation's asset base.