Five percent. It’s a figure that rules the behaviors of so many foundations, and causes great frustration for nonprofits and those of us who follow the sector.
It’s the minimum percentage of assets that, since the 1969 tax reform act, foundations must distribute each year through grants and administrative expenses. And even against the backdrop of alarm and urgency since the 2016 election, and concerns about the existential threat of climate change, it’s also a number that often serves as both a floor and a ceiling for giving, year in, year out.
One foundation known for putting its money where its mouth is, however, is the Wallace Global Fund. It's taking a unique approach to blowing past 5 percent this year—putting all of 2017’s stock market gains toward grants in 2018. The additional $10 million will mean a 16 percent payout that will go toward the funder’s mission of social and environmental justice. That’s a substantial increase for the foundation, but it also shines a light on what other foundations could be doing with their own surging assets, if they would only choose to do so.
The decision follows a stock market windfall for WGF and will increase its grantmaking budget from $13.5 million to $23.5 million this year, according to the foundation. The move was also inspired by severe threats facing its main priorities and a desire to support “significant and timely interventions” across program areas. Current grant programs include climate change, voting rights, net neutrality and strengthening democracy.
“Our democracy in the United States and our climate worldwide are in crisis. These extraordinary times demand an extraordinary and immediate response,” Executive Director Ellen Dorsey told IP.
It’s not too surprising that such a move would come from the Wallace Global Fund. The progressive funder is known for its social movement-focused grantmaking, but also its leadership in the sector when it comes to how it uses its money. WGF typically pays out above the 5 percent minimum each year. It's not yet decided how spending levels will play out beyond 2018, Dorsey said.
The foundation has similarly been a leader when it comes to how funders align their investments with their missions, setting aside 10 percent of its own portfolio toward impact investing. It was also instrumental in the formation of the fossil fuel divestment movement, screening its own investments and backing grantees’ work on the campaign.
The fund joins a small number of foundations that have decided to up their rate of distribution in response to damage being done by the Trump administration (publicly, at least—it’s possible others are doing so on the down-low). The Nathan Cummings Foundation, for example, decided to increase 2017 and 2018 giving from its regular 5.75 percent to 6.75 percent. NCF also made news recently by pledging to align 100 percent of its nearly half-billion-dollar endowment with its mission.
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We’ve watched with great interest as foundations have grappled with how to respond to the Trump administration, simultaneously wanting to rise to a historic moment in which many of their goals are on the line, while not abandoning their carefully planned strategies. Ultimately, many foundations have made shifts in their giving since the election, including boosting work around democracy, journalism and vulnerable communities, and creating rapid-response funds. A survey last year of 162 foundation CEOs by the Center for Effective Philanthropy also found that more than 40 percent planned to step up efforts at collaboration and advocacy at the state and local levels.
We’ve referred to the approach most funders settled on as “status quo-plus.” But the “plus” part of that equation hasn’t often manifested in terms of unlocking greater proportions of foundation assets.
It’s been similarly frustrating to watch foundations respond to the time-urgent threat posed by climate change with the business-as-usual 5 percent going out the door. We’ve made direct pleas to major climate funders to dip into their endowments given the race against the clock to prevent catastrophic suffering, particularly among the world’s most vulnerable. (Read our full case here.) Leading funders like Hewlett have certainly made impressive commitments to climate change, and budgets can grow without raising the percentage of payout. But Hewlett has indicated no plans to draw any deeper than it is legally required to do from its endowment, which was $9 billion in 2016. How seriously can we really take the dire warnings on climate change issued by foundation leaders when, evidently, this threat is not profound enough to trump the greater imperative of institutional perpetuity?
So why don’t more grantmakers reach deeper into their war chests? To some extent, it’s likely a product of the sector’s tendency to be risk averse and slow to change. It’s just become the default setting, no matter who's sitting in the Oval Office, or how many cracks appear in the West Antarctic Ice Sheet. We've even mused in the past about whether the prospect of a cataclysmic asteroid strike would be enough to disrupt business as usual in the foundation world. (Probably not, we concluded.)
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Perhaps some foundations aren’t seeing the right opportunities that would move the needle as desired with much higher spending. More likely, they're making the decision that protecting their own perpetuity is simply more important than increasing funding for today's threats. In other words, they’re saving for a rainy day. In both cases, I’d say it’s time to look out the window.
The premise that digging any deeper into an endowment cuts into a foundation’s future stability is itself debatable, especially if this only done occasionally, in response to new and urgent challenges or significant market windfalls. While the goals of perpetuity versus spending down are typically juxtaposed as the only two choices, there are options in-between.
That’s a big reason why this move by Wallace Global is so compelling. For one, it publicizes how foundation wealth can accumulate, and just how good the market has been lately for endowments. By extension, it shows it is possible to look at the books in a given year, assess the needs of the moment as defined by the mission, and make a situational decision about how much money to move. It's not persuasive to imagine that, for many foundations, the amount of annual giving that best serves their mission in any given year just happens to be 5 percent, the bare minimum required by law. Yes, institutions have their own fiscal strategies, and they may not be willing to make a payout rate increase for every year, or to give away a big sum when times are good. But there's a need for more thinking outside the box.
Pulling back the lens, one of the biggest weaknesses of institutional philanthropy, as so many people have pointed out, is a frequent lack of urgency. That mentality should be the default in foundations that are collectively sitting on hundreds of billions of dollars in an era when millions of children still die of preventable diseases, climate change threatens civilization as we know it, and liberal democracies—including our own—feel more fragile than at any time in memory.
This is not a time for the holders of "society's risk capital" to be playing it safe—especially given the massive infusions of new wealth coming into philanthropy now and in coming decades. Back in the mid-20th century, when a cautious endowment model became the norm, big personal fortunes were few and far between, and carefully stewarding foundation wealth made a lot of sense. But today, more than 35 U.S. billionaires have assets greater than the Ford Foundation, many of whom have signed the Giving Pledge. Nearly 200 billionaires have assets greater than the Rockefeller Foundation. In just the past 10 years, multiple living donors have begun to give on a scale comparable to top legacy foundations. That influx is likely to accelerate going forward.
Grantmakers that diminish their endowments today, along with their future spending power, can rest assured that there's plenty more philanthropic wealth waiting in wings. While many foundations operate like long-distance runners, a better model right now would be the relay racer: Move forward as fast as you can, knowing that future funders will be there to take the baton when your strength is diminished.