Policy Brief: Foundation Payout and the COVID-19 Crisis

Introduction

Since the first confirmed U.S. case of COVID-19 in January 2020 in Washington state, the pandemic has created an unprecedented public health and economic emergency across the United States. With its disproportionate impact in communities of color, the crisis also has laid bare the devastating racial disparities that are endemic across American society.

In response, philanthropy has joined with nonprofits, government, and business to provide urgently needed support for individuals and communities that have been adversely affected by the virus and the economic impact on commercial activity, travel, and more. From special response funds to targeted grants, philanthropy has provided billions of dollars in new support to help people and communities cope.

Amid this crisis, some have proposed that the federal government change U.S. tax law to increase the private foundation payout requirement. Currently, foundations are required to distribute an amount roughly equal to 5 percent of their investment assets annually for charitable purposes. One proposal would double the payout rate to 10 percent for three years. The proposal also recommends a new minimum payout rate of 10 percent for donor-advised funds (DAFs), the charitable giving vehicles created by community foundations and other entities to manage donations by individuals, families, and organizations.

The Council on Foundations strongly supports the efforts of our members, as well as other foundations and donors, to increase giving in this time of crisis. Indeed, the Council has joined with other philanthropic organizations to encourage philanthropy to boost giving and increase flexibility. However, the Council stands in opposition to this proposal because:

• Philanthropy is already responding to COVID-19 in unprecedented ways.
• Doubling the payout rate would significantly reduce philanthropy’s ability to respond to future crises.
• New, one-size-fits-all mandates ignore the role of perpetual endowments in assuring long-term resources for ongoing needs.
• These requirements may conflict with state laws intended to protect original donor intent.

The Council’s Position

Philanthropy plays a unique role in American society, helping to advance the greater good by strengthening communities, supporting innovative problem-solving approaches, and acting quickly when crises and disasters occur. In 2019, according to the annual Giving USA survey, foundation giving reached a record high of more than $75.69 billion, helping to support a nonprofit sector that employs approximately 10 percent of the U.S. workforce. Giving USA noted that foundation giving had grown in nine of the last 10 years. Meanwhile, according to the latest data from the National Philanthropic Trust, grants from DAFs reached a new high of $23.42 billion in 2018, and the aggregate grant payout rate for DAFs regularly exceeds 20 percent.

The Council is opposed to a federally mandated increase in payout for the following reasons:

Philanthropy already is responding to COVID-19 in unprecedented ways.

Since COVID-19 began its devastating course, foundations of all types and sizes have responded. Philanthropy has stepped up to provide new resources and increased flexibility to those organizations and communities most impacted and on the frontlines.

As of May 2020, the philanthropic response to COVID-19 in the United States totaled more than $6 billion. As of June, more than 500 community foundations across all 50 states received more than $880 million of newly-mobilized COVID-19 response funds, and made grants of nearly $460 million. In addition, more than 750 philanthropic organizations have signed a pledge committing to increasing flexibility by loosening restrictions on current and future grants.

Below are just a few examples of how specific foundations have answered the call:

• The Ford Foundation recently announced that it will take the unprecedented step of borrowing $1 billion to support nonprofits that are struggling to respond to the COVID-19 crisis. In the wake of Ford’s announcement, several other leading foundations announced plans to increase their giving. 
• The Kate B. Reynolds Charitable Trust announced $1.5 million in flexible funding for COVID-19 response efforts in North Carolina, including a grant of $500,000 to the COVID-19 Response Fund for Forsyth County and a $1 million grant to the North Carolina Healthcare Association Foundation for medical supplies, personal protective equipment, test kits, and telehealth solutions.
• The Seattle Foundation created the COVID-19 Response Fund in cooperation with King County, the City of Seattle, and a range of corporate and philanthropic partners. In its first round of grants, the new fund provided $10 million to 128 nonprofits navigating the immediate economic and health impacts of the pandemic.
• The eBay Foundation announced it was increasing its grantmaking to $15 million in support of COVID-19 relief efforts worldwide, a threefold increase in grantmaking compared to 2019. Among the grantees benefiting from the foundation’s COVID-19 response: small business development nonprofits; humanitarian and medical organizations; and emergency assistance funds in the U.S. and abroad.
• Similarly, stories abound about increased giving from donor-advised funds in response to the COVID-19 crisis.

A June 2020 study by the Center for Effective Philanthropy found that 31 percent of nonprofits reported that their grants from foundations increased in the months after the COVID-19 crisis hit the United States. Funding from foundations was notably more reliable during the pandemic than revenue from other sources, including individual donors and earned income, according to the survey. 

Doubling the payout rate would jeopardize philanthropy’s response to future crises.

Doubling the payout requirement for private foundations and creating a new mandate for donor-advised funds would unnecessarily limit philanthropy’s ability to respond to future crises. If similar proposals had been adopted following the tragedy of September 11, 2001, or the Great Recession of 2008, philanthropy would now have fewer resources and a significantly reduced ability to respond to COVID-19.

There is no question that requiring increased foundation payouts would have a deleterious effect on foundation assets and longer-term donations. Numerous studies have affirmed that the 5 percent payout rate mandated by U.S. law since the 1980s is an accurate reflection of the historic return on assets earned by foundations.

• A 2016 report from the Council of Michigan Foundations found that a sample of 48 foundations in the state earned an average 5.28 percent annualized return, adjusted for inflation, in the 42-year period from 1973 to 2015.
• A 2016 Council on Foundations-Commonfund study based on data from 203 foundations found that trailing 10-year returns averaged 4.7 percent for private foundations and 4.6 percent for community foundations. 

Given these historic endowment returns, it is clear that doubling the mandated payout rate to 10 percent would require most private foundations to start spending down their assets, meaning they would have fewer resources to support future giving. At the end of three years, for example, a 10 percent payout would turn $100 million in assets into $66 million, assuming a 10 percent drop in the stock market now and a flat stock market over the next three years. The result would be a drop in giving to communities from $5 million before the mandate to $3.3 million after – a 34 percent decrease (assuming a 5 percent payout before and after the mandate). A new minimum payout for donor advised funds could have a similar effect on their assets and distributions going forward.

It is hard to know how long the United States and the world will be working to resolve the devastating health and economic impacts of the COVID-19 crisis. Meanwhile, other current and looming crises continue to call out for attention—and action—by philanthropy and other sectors, including racial injustice, climate change and a lack of equal educational opportunity. Even though many foundations are voluntarily deciding to boost donations in response to COVID-19, requiring all foundations to substantially increase their payout rate would jeopardize the field’s long-term impact on a wide range of urgent issues facing the U.S. and the world.

In addition, a 10 percent payout requirement for donor advised funds likely would create new administrative burdens for smaller community foundations managing these funds. 

New, one-size-fits-all mandates ignore the role of perpetual endowments in assuring long-term resources for ongoing needs.

Throughout the history of philanthropy, government has left it to donors to choose whether the resources they set aside for charitable and community purposes should be used for short-term or long-term needs and priorities. If such a proposal were adopted for three years, long-term assets and endowments would decline, harming the ability of foundations and donors to address future crises, as noted above. If a 10 percent payout for private foundations was to become permanent, such a proposal would amount to a government mandate for countless foundations across the country to shut their doors and stop their charitable giving long before they ever intended.

Many private foundations are established by their donors to exist in “perpetuity,” with grantmaking supported by the annual return on assets used to create the foundation, plus any appreciation in those assets over time. Similarly, community foundations have been established across the country to have enduring impact on issues and problems that arise in their communities. The reason that long term philanthropic assets are helpful to local communities is demonstrated in a powerful 2016 letter-to-the-editor in the Chronicle of Philanthropy by Sherry Magill, who was then the president of the Jessie Ball duPont Fund. She shared how the foundation’s embrace of perpetuity had enabled it to have an outsized impact. From an original gift of $40 million in 1970, the fund’s trustees had granted $375 million to an array of nonprofits in the Jacksonville, Florida area. “Our current endowment value is $267 million,” Magill wrote. “We give away $40 million every three to four years. Not once, but repeatedly.”

In response to this, some may argue that new philanthropic wealth will arise to replace the old if current foundations dwindle.  However, many regions of the country do not have growing wealth – think of many parts of the industrial Midwest versus regions of the country with a booming tech sector. If philanthropic dollars are spent down, in many regions there would be no new wealth coming along behind it to replace the old. Many of these same points argue against a one-size-fits-all approach to establishing new minimum payout requirements for donor advised funds. By their very nature, DAFs established with community foundations offer a greater level of flexibility and choice in grantmaking than other fund types. In consultation with a donor advisor, a community foundation should be able to make decisions regarding how and over what period to make grants from a donor advised fund to address community needs.

These requirements would conflict with state laws written to protect donor intent.

The Uniform Prudent Management of Institutional Funds Act (UPMIFA) has been passed by 49 states to protect and maintain the perpetual nature of nonprofit endowments. Under the law, private foundations that fail to invest endowment assets prudently or spend assets excessively could be at risk for disregarding original donor intent with respect to perpetuity.

In many states, UPMIFA includes a provision stating that spending in excess of 7 percent of the fair market value of a foundation or charity endowment is “presumptively imprudent.” If the federal government were to impose a new higher payout requirement on foundations, it could run afoul of these state laws.

Conclusion

In the United States and around the world, families, businesses, and communities are facing unprecedented needs because of the COVID-19 pandemic. Working alongside nonprofits, government and business, philanthropy has stepped up as never before to help meet those needs and support healing and recovery. As the federal government continues to consider how best to respond to this crisis, the Council on Foundations stands as a ready partner. With billions in COVID-19 related giving to date, philanthropy remains committed to supporting communities across the country to meet the challenges of today and tomorrow.

For more information on philanthropy’s response to the COVID-19 crisis, go to the Council's COVID-19 Resource Hub.