The payout ratio that foundations should utilize is one of those debates that never die. Unfortunately, the debate seems to have two sides that believe 1) any payout rate above 5% for any period of time guarantees that a foundation will run out of money or 2) that foundations can just raise the payout rate to any level with no ramifications.
Actually, there is an interesting tension in the payout rate. There is a rule of thumb in money management that a pool of money can survive indefinitely if the annual payout rate is 5% or less. Financial analysis shows that the survivable payout rate might actually be lower than 5%. So therefore, by increasing their payout rate above the legally required 5%, foundations are increasing the chance they run out of money. This highlights a tension between helping people today vs. helping people tomorrow. At first glance, helping today seems better. But viewed in a societal context, this means we should elect to increase our own quality of life at the potential expense of our children and grandchildren.
Like many things in philanthropy, the appropriate payout rate should be driven by the impact strategy of the foundation. Not handed down as some sort of “best practice” that all foundations should follow.
One interesting story about a high payout rate, designed as part of an impact strategy is the Beldon Foundation.
From the foundation’s website:
The Beldon Fund was created by John Hunting in 1982 as a national foundation committed to promoting sound environmental policies. In 1998, Beldon received a major infusion of funds from the sale of Hunting’s stock in the Steelcase company. Hunting set the foundation on a new course by deciding to spend all its principal and earnings over the next ten years, with the goal of building a national consensus to achieve and sustain a healthy planet.
Beldon made its last grants in June 2008 and closes its doors the end of May 2009. Beldon’s archives will be preserved at the Indiana University-Purdue University Indianapolis University Library as part of its Philanthropy Collections and available for research in 2014. This website will remain live for the foreseeable future.
The limited time horizon for making a difference shaped decisions about staffing, administrative, investment, grant making, and evaluation strategies. Now that our last grants are out the door, we have taken some time to examine what we learned from this experience and to distill useful insights and lessons.
We developed this website to share these lessons, and other practical information, with philanthropists, philanthropic advisors, foundations, and nonprofit advocacy organizations.
The Beldon Foundation is admirably impact focused. In addition to preserving their archives as mentioned in the text above, they also are maintaining a website that is full of interesting lessons. This includes a 28-page report on the practical implications of spending down a foundation and independent evaluations of their programs’ impact.
Fascinating story. The Beldon Foundation should be applauded for executing a thoughtful and apparently impactful strategy and sharing the lessons they learned with the field.
Note: Mitch Nauffts of the PND blog highlighted the Beldon Foundation story a few days ago. You can find that post here.