The Foundation Payout Puzzle
28 Pages Posted: 9 Mar 2005
One of the few regulations that all private foundations in the United States face is the requirement that they spend in grants and administrative expenses at least 5 percent of the value of their endowment. This number remains less a product of economic reasoning than three decades old political bargaining. The decision about how much to pay out in grants is a critical one because, across the entire foundation field, every one percent increase in the annual payout rate of all foundations translates into approximately $4 billion in new grant funds for the nonprofit sector. Given the stakes that are at issue, foundations must give serious thought to the question of how much should be given away today and how much should be saved for the future. Pulling at foundations as they deliberate over this complex issue are compelling arguments for a higher payout rate and a strong case for a low payout rate. This paper lays out the arguments on both sides of the payout debate. We then draw on a new dataset on foundation financial management to examine how a group of large and influential foundations has resolved the payout decision over the past two and half decades. After finding a remarkable convergence in foundation payout behavior, we explore several possible explanations for this behavior. We conclude by exploring policy alternatives to the long-standing 5 percent minimum payout rule and why a revisiting of this thirty-year old public policy is in order.
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