Why Increasing Foundation Payout Requirements is the Wrong Approach

On July 19, the Institute for Policy Studies released the report “Gilded Giving 2022: How Wealth Inequality Distorts Philanthropy and Imperils Democracy.” Its recommendations include increasing the annual foundation payout requirement to 10% of assets. While IPS argues changes like this would “realign our charitable system to service the public interest,” in actuality, they threaten to harm private philanthropy and undermine the missions of foundations working to help those in need.

We’ve been here before. The Patriotic Millionaires suggested a similar mandate in 2020. Focused on social needs resulting from the onset of COVID-19 and the lockdowns that followed, the group pushed Congress to double from 5%  to 10%  the minimum share of assets foundations must distribute for each of the next three years. In my commentary published in The Chronicle of Philanthropy on that recommendation, I asked if it was “patriotic” to demand legislation that would certainly hamper – and perhaps destroy – the ability of philanthropy to respond effectively to the next major crisis by forcing foundations to spend more in the short term. 

Moreover, I wrote, “Family foundations seeking to engage in giving across generations, foundations serving rural areas where organized philanthropy is scarce, those focused on eradicating domestic or global poverty or on securing environmental sustainability – none of these can honor their missions by acting (and spending) only in the here and now.” 

Spurred perhaps by our current economic challenges or by a heat wave-induced focus on climate change, IPS has resurrected the 10% payout suggestion. I am happy to ask my 2020 question about destroying foundations’ ability to respond to crises again today. Charitable givers and their foundations represent a pantheon of values and priorities and employ a wide array of strategies and time frames to accomplish their goals. For foundations tackling intractable problems there are no quick fixes. And as several studies have shown – most recently, a 2016 Cambridge Associates study commissioned by the Council of Michigan Foundations – even “a 5% payout rate makes the goal of maintaining purchasing power in perpetuity challenging.”

At the same time, even in the absence of a mandate coercing foundations to spend at rates which would quickly deplete their assets, a new report from Rockefeller Philanthropy Advisors indicates a growing number of foundations are rejecting the perpetuity model. RPA’s survey of 150 foundations in 30 countries reveals “an upward trend in the popularity of time-limited giving. While only a small fraction of organizations founded prior to the 1990s considered a shift to a time-limited model, organizations established more recently have shown a growing interest in this approach by either switching to a time-limited horizon, considering switching or establishing as time-limited entities from the outset.”  

Individual choice – and the philanthropic freedom that makes such choice possible – are already producing a healthy diversity of time horizons, and therefore payout decisions, among foundations. Beyond what the law currently requires, such decisions should remain with those who bear responsibility for fulfilling the missions of their organizations rather than with those who would impose one-size-fits-all mandates.