Private foundations may count some of their administrative expenses toward their required 5% payout rate. This makes sense, as there are certainly costs that foundations incur in the course of grantmaking, such as researching grantees and administering grants. Some argue that family foundations should be prohibited from counting their legitimate administrative expenses for the family members helping to run a foundation.
The Philanthropy Roundtable knows first-hand the crucial work accomplished by family foundations. Yet critics supporting the set of proposals called the Initiative to Accelerate Charitable Giving argue for a rule change to ensure, “Private foundations cannot meet their payout obligations by paying salaries or travel expenses of foundation family members.”
In response to these criticisms, we examined prior research and ran a simple analysis to determine if there is evidence that family foundations generally claim higher expenses relative to grantmaking than foundations run by nonfamily staff. The short answer is no. There is no evidence to suggest any sort of systemic abuse by family foundations that would justify this proposal.
An Urban Institute study examined what factors drive administrative and operating expenses by analyzing expense and compensation data from the 10,000 largest foundations. The authors found that family foundations tend to have a smaller percentage of administrative expenses relative to their total qualifying distributions than nonfamily foundations. They conclude, “family involvement is one of the few characteristics that notably reduces the charitable administrative expense–to–qualifying distribution ratio for staffed foundations.”
In the spirit of the far-more rigorous Urban Institute study, we compared the administrative expense ratios for a smaller set of foundations on either side of the policy debate: those foundations supporting the Initiative and several of the largest family foundations. The Philanthropy Roundtable policy brief here shows the results: there is little difference between expense ratios for private foundations run by family or by nonfamily staff. The foundations publicly supporting the Initiative had an average expense ratio of about 10%. The family foundations’ average expense ratio came in around 9%. Policymakers need not act based on anecdotal criticisms; the data are clear.
Read the Roundtable’s policy brief: No Evidence Family Foundations Claim Higher Expenses.