The following is excerpted from a 2012 Annual Meeting session entitled “Preserving Donor Intent Through Sunsetting” where Frances Ostrower discussed her research on sunsetting foundations. For the full audio of this session or to check out other sessions from the 2012 Annual Meeting, visit our resource page.
As one man who plans to limit the life of his foundation told me, he’s “not super-conventional.” And his decision to put a termination date on his foundation’s life wasn’t a conventional one. It is still the case that the vast majority of foundations plan to go on in perpetuity.
A strong sunsetting plan is one in which donors and trustees clarify their thinking in each of the elements involved.
We have estimated from various surveys, including one I headed up at the Urban Institute, that about 8 to 12 percent are planning to spend down. What I want to talk to you about today is what it can look like to make that unconventional choice. Why would donors or trustees—sometimes it is the trustees who decide to close the foundation—decide to sunset and what are the major issues that donors, trustees, and staff can fund when they have decided to go this route?
When I talk about designing or implementing a sunset plan, though, I want to be very clear that I’m not just talking about closing down: I’m talking about approaching sunsetting as a distinctive philanthropic strategy that can offer certain benefits, particularly to small and mid-sized foundations.
My comments are based on my research from four case studies I conducted, in which I interviewed the donors, the trustees, staff, and the grantees—a voice we hadn’t heard from too much. I also collected various archival records, and I supplement these four cases with interviews with trustees and staff of another 25 sunsetting foundations. The four foundations that I’m going to focus on are Mary Flagler Cary Charitable Trust, the Beldon Fund, the Jacobs Family Foundation, and the Pear Foundation. You may not have heard of the Pear Foundation, which in this case is a pseudonym since they did not wish to be identified. Cary and Beldon already sunset during the period of the study. Jacob is planning to sunset around 2030, and Pear was planning to sunset in about seven years. In three of the cases, it was the donor that made the decision, but in the case of the Pear Foundation it was the children who made this decision.
I did not choose these foundations because they were typical, but because each of them took a deliberate approach to sunsetting. These foundations integrated sunsetting early on into what they were going to do, and though they’re not typical, they’re very well suited to illustrate how sunsetting can be used as a philanthropic strategy.
What are the major decisions that donors, trustees, and staff are going to face when they think about sunsetting? I group these into five major categories. The first is motivation. Do you want to sunset? Why are you sunsetting? And the reason you’re doing it is going to determine how you may want to go about quite a few other things. Second is framework. How are you going to sunset? Third, consider the timing of the termination. Fourth, sustainability: Do you care about a legacy afterwards? And finally, closing the foundation: consider the actual process of shutting it down.
A strong sunsetting plan is going to be one in which donors and trustees clarify their thinking in each of these five elements, and do it in a way that the different elements are aligned with one another and with the foundation’s fundamental rationale for sunsetting. So it’s not a matter of choosing to do it this way and not that way. It’s a matter of knowing how you’re going to handle these elements and making sure they’re consistent with your fundamental values.
Motivation: Why do you want to sunset?
Let’s start with motivation. I think it has been very clear that a concern with the matter of donor intent is a pervasive reason for deciding to terminate. As a Pear Foundation trustee said, “We see foundations stripped as they get farther away from the creator. To avoid that, we decided to spend out.” Some owners opt to sunset because they want to be personally involved in their giving. This was very important to John Hunting founder of the Beldon Fund—the only one of the four foundations where there was a living donor.
Sunsetting can offer smaller foundations opportunity for greater impact, leadership, and visibility.
Another important factor is that many donors and trustees dislike the institutionalization and bureaucracy that they associate with perpetual foundations. Donors, trustees, and staff of sunsetting foundations look at foundations as vehicles. They are not invested in creating independent organizational identities for themselves. To the contrary, they worry that perpetual foundations become too interested in their own survival, even at the cost of mission.
Another rationale for sunsetting cited by donors and trustees is that it offered these comparatively small and mid-sized foundations an opportunity for greater impact, leadership, and visibility because they could give so much more money away than if they were trying to go on in perpetuity. For instance, a Beldon Fund staff member said, “We were spending at the rate of a much larger organization and thus had the influence of a larger foundation—so you can play with the big boys.” A Jacobs Foundation staff member said the ability to “use 100 percent of what we have to build community changed.” That opened up the door to an incredible amount of capacity for a small foundation.
Some donors and trustees choose sunsetting because they feel they don’t have other options. For instance, they may have no children, or their children may not share their interests. There are many reasons. John Hunting ties his decision to his focus on the environment, where he also believed that the urgency of the problem called for him to spend funds sooner rather than later.
Framework: How are you going to sunset?
So we’ve talked about motivation, and you’ve decided you’re going to sunset. What framework are you going to use? Spending down, I would say, is probably the approach that is most familiar. The Beldon Fund, for instance, tries to spend at annual levels that would bring the foundation as close as possible to zeroing out by their termination date.
Cary, however, took a very different approach. The Cary Trust spent more than 5 percent, but its strategy was to preserve principal and distribute its principal as endowments at the end of its life. The Jacobs Family Foundation chose yet another strategy. Since Jacobs is engaged in comprehensive community development in the Diamond neighborhoods of San Diego, it’s going to sunset by creating social and economic enterprises that are going to be transferred over to community ownership.
“Knowing you have one lifetime to make a difference, makes you think profoundly about what you want to leave behind.”
Given sunsetting frameworks are going to be more or less appropriate depending on why the foundation is sunsetting and what its philanthropic purposes are. For instance, endowing grantees can be a key strategy, but it can’t be a key strategy if the donor is philosophically opposed to endowments of all types. Notwithstanding the differences among these foundations, all four of these foundations’ sunsetting strategies share certain attributes. One was a very high level of focus, or as one trustee put it, “The prospect of a hanging does concentrate the mind.” A second commonality was long-term funding for a common set of grantee end purposes. And the third was a high level of focus on donor intent.
A Jacobs Foundation staff member explained, “Just by virtue of thinking about sunsetting and knowing you have one lifetime to make a difference, it makes you think profoundly about what you want to leave behind.” A Cary trustee said, “If you don’t have the discipline of a date-certain for closing, you have in mind a set of long-term operations of the foundation and you’re not thinking of a date at which you have to account for results. It’s a discipline to think in terms of things you can complete by a certain date. It’s a big psychological difference.” Foundations that go on in perpetuity don’t have that.
As a Beldon staff member pointed out, “With only 10 years to go, we didn’t have the luxury of saying, ‘Okay, the states program: one of their programs isn’t working. We’ll do oceans.’” What Beldon did do was commission external evaluation to help assess programs and make mid-course corrections as they went along to strengthen work within their focus areas. So ironically, these sunsetting foundations proved to be unusually long-term grant makers, and many grantees, in fact, contrasted the kind of long-term support they were getting from these foundations with the changing interest of some perpetual foundations they were familiar with. As one Cary Trust grantee said, “Sometimes foundations will be on this program one year, another emphasis next year.” Cary never lost its focus because it knew it had that date certain.
Timing: When will you terminate the foundation?
How long are you going to live before you close the foundation? And the termination date, I found can be roughly set up in two different ways. First, the foundation can set an absolute time: we’re going to close in 10 years, 15 years, 20 years, etc. Another approach is to set an outside date by which the foundation has to terminate, but it can go out sooner.
Some sunsetting foundations decide to continue functioning without committing to any end-point, and that certainly may be appropriate and satisfying for some. This approach, however, rules out a major benefit of sunsetting—that sense of focus, discipline and urgency that did come by working towards an established end-point.
Setting a termination date can give a sense of focus, discipline, and urgency.
There were several considerations that factored into deciding how long, though, the sunset should go on. One is how long can the foundation continue without running that risk of twisting away from the donors intentions and values, how long is it going to take to accomplish what the foundation wants to do, how large is the foundation in its assets, and how much flexibility is the donor prepared to leave if they’re not going to be there when the foundation sunsets?
The answers to these questions may point to rather different time frames, and donors and trustees may need to make some compromises. For instance, Mary Flagler Cary reportedly didn’t want strangers handling her funds, and she initially planned a shorter life span to accomplish that. But an advisor convinced her that she wasn’t actually leaving enough time to achieve her purposes. In the end she set an outside date of 50 years, and the trust actually closed before that time. Beldon’s donor wanted to be personally involved in his giving, and that influenced his decision to close in 10 years. Some people involved in the foundation felt that a longer period would have been helpful for the foundation and what it was doing, but they also felt it was his decision as the donor to make.
Foundations also need to think about and give attention to the alignment between their finances and the time line that they set for themselves. For instance, given Beldon’s goal of zeroing out in 10 years, investment strategy, financial planning, and long-term budgeting became a major focus. They outlined different spend-down scenarios based on different rates of growth, staff would annually review projected and annual expenditures and returns, and then come back and adjust their financial plans accordingly. In later years, these projections were conducted even more frequently. One staff member recalls, “Day to day, year to year, to the end we thought and planned. Everything resolved around our investments. It made the investment people crazy.” This is what they had to do, though.
But a few years before both Beldon and Cary closed, they started moving out all of their remaining investments from equities into cash in preparation, and this actually had a very happy consequence that they could not have foreseen. Both were out of the market prior to the 2008 decline. You can’t predict that.
Sustainability: How do you leave a legacy?
Sunsetting foundations, very interestingly, may not be invested in their own organizational longevity, but they care very much about sustaining their work and values. Since they’re going to be gone, those foundations have to look outside themselves to others to carry on the legacy. A strategy used by all of the foundations in this study was to identify grantees whose work they believed in and to invest heavily in their organizational health and sustainability. They stuck with the same grantees over long periods of time, and gave general operating support and technical assistance to build their capacity. A Beldon trustee recalled how very deliberate Beldon was about not just making program-related grants to advance a strategy but also to build the capacity and assist with the development capabilities of the grantees. “We understood we were going out of business and needed these organizations to be able to thrive after we were gone. And the grantees repeatedly commented on how unusual it was to have this kind of sustained operating support.”
Sunsetting foundations have to look outside themselves to others to carry on the legacy.
They also repeatedly characterized their relations with these foundations as unusually respectful, open, and partnership-like. I propose that sunsetting, when it is combined with specific philanthropic purpose, can undermine conventional grantee-grantor power relationships in favor of a more partnership-oriented approach that promotes greater grantee independence. One Cary Trust grantee said that knowing the foundation would terminate created “an urgency on our part and theirs to really set that program apart, and set it up for the future without the Cary Trust.”
Another strategy for sustainability is to enlist other foundations as partners in the hopes they will sustain the work. Beldon, for instance, tried to enlist other foundations. There is a risk here, however, that foundations may not do that over the long term. For instance, one foundation executive said her institution’s giving was influenced by Beldon, but she also said that following the recession they cut that program.
Shutting down: What should be considered in the closing process?
There are numerous issues related to closing a foundation. Some are strategic and some are very mundane, but they are all important. For example, one has to deal with communicating to grantees as closure comes about when the foundation will close and what they can expect.
Beldon and Cary, the two foundations that closed before the study ended, did this about three years beforehand, and grantees kept saying how important and helpful this was. It’s also beneficial for the foundations because they want these grantees to be able to make a good transition. In fact, many grantees contrasted the clarity they received from these sunsets with the abrupt way that some perpetual foundations had ended their funding.
A strategic approach to sunsetting not only helps foundations to close, it can also help them to make the most of their lives.
Another set of issues concerned staff: attracting, retaining, and terminating staff. The complexity of this really depends on size and age of the staff. The Pear Foundation had minimal staff who all wanted to retire anyway so it wasn’t an issue. But Beldon had staff that needed to find other jobs. They had a work plan for their final two years, made some use of consultants as people were transitioning out, and gave people professional development.
In closing, there is clearly more than one way for a foundation to sunset. Foundations have options and, by considering these carefully, they can choose the approach that best aligns with their goals and derives the maximum benefits, the terms they have to offer for them.
It’s also worth noting that what constitutes a strategic plan for sunsetting may have relevance for perpetual foundations. Perpetual foundations, especially those with multiple programs, might want to think about considering some of their individual programs as miniature sunsets that have a distinct beginning, middle, and end, and craft sunset plans for them. As one executive director said, “Even if you don’t have a sunset, I recommend thinking like you do.” Even if you plan to go on in the future, setting up fast, flexible decision making focused on exit strategy and sustainability in a way people really no longer need you. This approach helps us think about how people develop the power to solve their own problems. A strategic approach to sunsetting not only helps foundations to close, it can also help them to make the most of their lives.