New Study Does Not Support Suspected Misuse of Family Foundation Funds
Family foundations have come under scrutiny on Capitol Hill in recent months as some policymakers have raised questions about whether these foundations are inappropriately allocating administrative funds to benefit family members of the original donor(s). As a response to these suspicions, one bill introduced in the Senate (S. 1981) includes a provision to prohibit family foundations from expensing the administrative costs of working family members — expenses that meet existing safeguards to prevent self-dealing and other misuse of foundation funds. With such proposals under consideration, the Philanthropy Roundtable asked me to study the expense ratios of private foundations to help shed light on the debate around whether further regulation is necessary. To investigate this, I compiled and analyzed data on private foundation spending to assess whether there were significant differences between the expense ratios of family versus nonfamily foundations.
Ultimately, the data in this study do not suggest widespread misuse of foundation funds by family foundations for administrative expenses.
The study, “Keeping it in the Family: Do Family Foundations Spend More on Overhead Expenses than Nonfamily Foundations,” examines the expense ratios for a group of 20 private family foundations and 20 private independent (nonfamily) foundations. This ratio measures a foundation’s expenditures for charitable administrative expenses (i.e. employee compensation, office space and supplies, conference and meeting expenses, etc.) relative to its total expenditures for directly carrying out a charitable purpose (otherwise known as “qualifying distributions,” which include grants plus charitable administrative expenses). This paints a picture of how much a given foundation spends on things like salaries, benefits and office space as a percentage of total charitable expenditures. This data, assessed across a wide group of family foundations and independent foundations, allows for a comparison to understand whether there is a significant difference in spending patterns between the two groups — and to either support or refute the notion of suspected abuse in spending practices among family foundations.
The data set used in this study is comprised of information independently collected from the publicly available 2018 Form 990-PFs of 40 private foundations: 20 family foundations and 20 independent foundations.
Classification as a family foundation versus an independent foundation is based on the composition of the board of trustees of each foundation in 2018, where a foundation is deemed a “family foundation” if the composition of its board meets or exceeds a 20% threshold of familial relation to the original donor(s). The investigation of familial relation between those board members and the original donor(s) is based on publicly available information from the foundation’s website, news articles and public biographies of the individuals.
The average administrative expense ratio among family foundations analyzed was 11%, whereas the average ratio among independent foundations analyzed was 15%. Thus, the family foundations analyzed in this study spent, on average, a smaller share of their total expenditures on administrative expenses compared to qualifying distributions than the independent foundations in this study.
The family foundation data set further illustrated a downward trend in the distribution of ratios — meaning more of these foundations had lower expense ratios. The ratios among independent foundations demonstrated no clear trend (see Figures 3 and 4 in the full report).
As with any study, it is important to understand the limitations of interpretation when drawing broad conclusions. However, this study was built with care to consider a representative sample of private foundations controlling for the most important external factors (i.e. atypical operating circumstances). As such, it is my assessment — based on this data — that suspected widespread abuse of family foundation spending on administrative expenses is misguided.
Serena Jezior, a philanthropy professional with expertise in foundations, is author of the study "Keeping it in the Family: Do Family Foundations Spend More on Overhead Expenses than Nonfamily Foundations.”