Whether foundations should exist in perpetuity or spend down their assets has long been a hot button issue in philanthropy. Indeed, there are a few better ways to cause foundation trade groups to flip out than to muse aloud about forcing funders to spend down by raising the 5 percent payout requirement, as I did recently.
In the long run, though, it’s not clear how much the law really matters. Why? Because the perpetuity model is becoming less popular, and more philanthropists believe in deploying resources faster. Quite apart from the most well known proponent of “giving while living,” Chuck Feeney, various other mega-donors have embraced spend down—starting with Bill and Melinda Gates, who’ve stipulated that their foundation will close its doors within twenty years after the last of them has died. Howard Buffett has said that his foundation will cease operations by 2045, by which time he estimates it will have spent at least $8 billion of his dad’s money. The Sandler Foundation is another sizeable operation that plans eventually to go out of business, while the Donald W. Reynolds Foundation is set to close in 2017; it’s given away nearly $2 billion since 1995.
Meanwhile, some of the new tech donors coming on the scene plan to give away all their riches while they’re still alive. That includes the Facebook billionaire Dustin Moskovitz, and also Sean Parker, who recently declared in a Wall Street Journal essay that spending down is a key tenet of what he calls “hacker philanthropy.” In some circles, perpetuity is being rebranded as decidedly old school.
Now come the news that the Ralph C. Wilson Foundation plans to give away all its assets, which stand at $1.2 billion, within the next 20 years.
Don’t feel bad if you’ve never heard of this outfit. It just became big recently, after the death of Ralph Wilson, who was the founder of the Buffalo Bills franchise. (Before the huge cash infusion from Wilson’s estate, the foundation had less than $5 million in assets.) And it wasn’t until this week that the foundation released a mission statement, explaining what it would do with all the money Wilson left to charity.
Grants will mainly go to Buffalo and Detroit, which is great news for those struggling cities. But equally good news is the foundation’s 20-year plan for distributing its assets, along with the investment income that accrues. That time frame was dictated by Wilson, who, during his life, didn’t talk much about his giving in public, but as it turns out, was firmly in the spend-down camp.
There’s not much detail on why Wilson wanted the foundation that bears his name to close up shop in 20 years. But it was probably for the usual reasons, starting with the basic one: Why save money for a rainy day when it’s pouring like hell outside right now?
The plights of both Detroit and Buffalo are a case in point. Both of these cities have high rates of poverty and unemployment, yet also seem to have a good shot at renewal, with a lot of energy coalescing right now to boost these urban centers. Under a perpetuity model, following the 5 percent payout rule, the Wilson Foundation might only be able to give around $50 million a year to help the two cities turn the corner at a pivotal moment. With the freedom of a spend-down model, it can front-load big investments on a much bigger level.
Of course, any venture investor gets the logic of putting up major resources up front, to make things happen. If you’re a VC sitting on a fat fund, you don’t limit your freedom in building up the companies in your portfolio with a strict payout limit (“Sorry, Uber, we’ve hit our 5 percent payout cap for the year.”). Yet this is basically what most legacy foundations are doing. Instead of spending whatever it takes to achieve major breakthroughs today, their model dictates aiming low decade after decade.
Now, an obvious difference here is that venture investors can get big returns from big bets, ending up with more money overall—while a place like the Ford Foundation would eventually just go out of business, no matter how smart its bets.
Really, though, what would be so bad about that?
In earlier eras, you can see why the perpetuity model was so compelling. In a less wealthy time, with fewer vast fortunes in existence, philanthropic resources felt decidedly finite. Now, though, new billionaires are minted every year, trillions of dollars in assets are set to flow in intergenerational wealth transfers, and dozens of new foundations larger than the Rockefeller Foundation will likely be created in coming years. In our second Gilded Age, it just doesn’t make sense to husband philanthropic resources as if it’s still 1969.
Meanwhile, we have a lot more knowledge about the importance of prevention and early intervention as a way to improve society—particularly when it comes to health and education. If ever there were a time to throw payout requirements to the wind, it’s right now.
Clearly, Ralph C. Wilson got all that.
To be sure, the perpetuity model is still dominant among existing foundations. A 2009 study by the Foundation Center found that only 12 percent percent of family foundations definitely planned to limit their lifespans. But that study is six years old, and it also found that many foundations were undecided about whether to establish a sunset date. As well, the study found that foundations established after 1980 were more likely to have a spend-down plan and that those “with a living founder are three times more likely to expect to spend down than those whose founder is deceased, and they are almost twice as likely to be undecided.”
Based on those findings, and all the new living donors coming onto the scene, there’s a decent chance that many of the big new foundations that set up shop in years to come will do so with a sunset plan. That would be a good thing.