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Brother, Can You Spare a Grant?

February 03, 2009

(Tracy Kaufman is an occasional contributor to PhilanTopic. In August, she asked the question, What's so great about an MBA?)

In the late 1920s, unprecedented rates of job and income growth in the United States prompted Herbert Hoover to boast, "We shall soon with the help of God be within sight of the day when poverty will be banished from the nation." A few years later, with the country mired in an economic depression, Hoover was repudiated by the voters, losing his bid for reelection to Franklin Roosevelt by a huge margin.

The situation today is not as bad as the one faced by Americans during the 1930s. But let's not mince words: the economy's a mess and is likely to get worse before it gets better. In December, gross domestic product contracted at its sharpest rate since 1982, and the number of Americans collecting unemployment checks hasn't been this high since before the government began keeping records. Here in New York, I seem to pass a newly empty storefront almost every day. None of us can pick up a newspaper or turn on the TV without reading/hearing about another round of layoffs. It's depressing, and all the happy talk and positive thinking in the world won't fix it. What will fix it is action.

Which brings me to this: Foundations are sitting on billions of dollars worth of action.

Blogger Martin Kearns offered some interesting commentary on that score a few weeks ago. In a post titled "Time to Change the 5% Rule for Foundations! 10% or Bust," Kearns suggested that in times like these, foundations should be required to pay out at least 10 percent of their assets for up to five years, or double the current payout requirement.  Kearns writes:

The money in foundations is money that our society has set aside without taxation to improve our common good. The pool of funding is enormous. The payout from the pool of funding (is) can be regulated by the IRS. The IRS has a 5% rule that forces money out the door of these foundations. Our society and the nonprofit sector need the influx of that cash now. Government is going to up taxes on everyone to pay for the stimulus eventually. Today, without raising taxes, or impacting our deficits, the new administration could stimulate massive amount of activity by forcing the hands of these foundations....

He's got a point. Let's break it down, Keynesian style. According to Keynes, economic prosperity depends on spending and investment. Under normal economic circumstances, business investment and consumer spending is enough to keep the money flowing and the economic wheels turning. But when something comes along to gunk up the wheels, money flows tend to slow (and sometimes stop), and everyone suffers. Keynes says that while government interference should never permanently replace private investment, in tough times it is the job of government to step in and get money flowing again. As Robert Heilbroner, writing about the Great Depression, explains it in his classic The Worldly Philosophers: "[T]he catastrophe facing America and, indeed, the whole Western world, was only the consequence of a lack of sufficient investment on the part of business. And so the remedy was perfectly logical: if business was not able to expand, the government must take up the slack."

Keynes's idea seems to me eminently translatable to the philanthropic sector. After all, the government is rather low on cash these days. Foundations, meanwhile, are sitting on billions and billions of dollars in their endowments, and those billions are there for the explicit purpose of benefiting the public good. If anyone should be asked to open their wallets a little wider in tough times, shouldn't it be them?

Obviously, most foundations worry about protecting their endowments, and that's understandable; the majority of private foundations in this country want to be around to benefit society for many years to come. But as sensible as that option normally is, now is hardly the time to retrench or put foundation endowments under lock and key. With home prices continuing to fall, hundreds of thousand of people losing their jobs every month, and nonprofits struggling to keep up with the demand for emergency assistance, this seems like the foundation world's moment to step up to the plate. The question is, do foundations agree?

Kearns makes a bold statement in suggesting that the government require foundations to increase their payout rates. Is he off base? Should we rely on foundations to voluntarily increase their payout -- as some already are -- beyond the federally mandated minimum of 5 percent? Or are legislative measures needed to encourage foundations to give more in times likes these?

-- Tracy Kauffman

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Posted by The Nonprofiteer  |   February 03, 2009 at 05:43 PM

Amen, sister! Perhaps we should give foundations a year to cough up more bucks or face legislative imposition of a higher minimum--but now is definitely the time to spend the money.

Posted by Tracy Kaufman  |   February 06, 2009 at 01:50 PM

Thanks for your feedback! Allowing foundations a grace period does sound like an interesting idea, as it would give them the benefit of the doubt at least in the beginning. We're trusting foundations to be charitable (that IS what they're there for, after all), so perhaps it's best to impose regulations only if they prove that they can't be left to their own devices on this matter.

Posted by Matt  |   February 06, 2009 at 05:04 PM

Nice post, Tracy. However, the federal government isn't low on funds relative to the philanthropic sector. The assets of foundations are paltry in comparison to the trillions that flow through taxes.

In the past, I've sided with those who think the 5 percent floor should be increased, but in light of the incredible losses that most of us felt in 2008, I've begun to rethink the position. Between the worst economic performance in at least a generation and Bernie Madoff's (alleged) unconscionable actions, many foundations and charities will be hard-pressed to survive regardless of spending policies. I may end up agreeing with the idea to increase the percentage, but I don't know that the discussion is quite the same anymore.

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