Foundation Hoarding Backfires; Billions Lost

By hoarding and not paying out a bigger share of their assets in grants, foundations have cost the charitable world of billions of dollars now likely lost forever because of the plunge in the value of their endowments.

Givers gave those funds to foundations to support charitable causes.

But the law does not require foundations to pay out more than 5 percent of their assets a year.

So rather than use more of their assets to support causes for which givers gave them in the first place, most foundations hoard them, although big foundations have been willing to invest millions of dollars to fight moves to require they pay out more.

Instead of giving more each year and truly honoring their givers’ intent, most foundations sit on their assets, betting the investment of those funds will earn returns big enough to cover their required payout and also build their endowments so they can operate forever.

The sad irony is that while foundations hoard so they can go on forever, their hoarding has resulted in the loss of billions of dollars that now likely will never go to charity.

In 2006, the last year for which data are available from the Foundation Center, the assets of nearly 72,500 U.S. foundations totaled $614.7 billion.

Those foundations, in contrast, made grants totaling only $39 billion.

And in 2008, with the capital markets in flames, the assets at 127 foundations responding to a survey by the Council on Foundations lost 28 percent of their value.

Those assets totaled $16.9 billion at the end of 2008, down from $23.4 billion a year earlier.

To put that decline in perspective, the value the endowments of all foundations lost in just one year represents the total grants they might have made over multiple years at their current payout rate.

Instead of hoarding, foundations should have invested more in the charitable marketplace.

Those dollars could have helped house the homeless, feed the hungry, protect women from domestic violence, keep children safe from neglect, preserve the air we breathe and the water we drink, and enrich our communities by engaging more people in civic and cultural activities.

Now those billions are gone. And those problems just get worse.

Still, rather than acknowledge their greed and poor judgment, foundations remain in denial.

What is more, shaken by the hemorrhaging economy, a growing number of foundations are delaying or reducing their grantmaking.

Foundations just do not get it.

Compounding the missed opportunities their miserly annual payout represents, foundations continue to play only a passive role in overseeing their investments.

What they should do is exercise greater scrutiny of their investment managers, track their investments to see if they are in sync with their missions, and push companies in which they invest to be better corporate citizens.

Sadly, foundations are not alone in blowing the opportunity to expand the pool of resources invested in charitable causes.

Nonprofits also are to blame because they rely too heavily on foundation grants and ignore the main source of charitable dollars.

While foundations account for only 12.6 percent of charitable giving in the U.S., nonprofits invest a disproportionate amount of time and effort in seeking foundation grants.

Living individuals, in contrast, account for 75 percent of all giving, with another 13 percent of giving provided by individuals through bequests and family foundations, according to Giving USA 2008.

Yet many nonprofits are not comfortable asking individuals for money, or simply are not prepared to ask, and instead focus on foundations, feeding those institutions’ inflated sense of power and influence.

It is time for foundations and nonprofits to face reality.

Foundations are the stewards, not the creators of wealth, and their job is to make sure the donated wealth they oversee is invested in the charitable causes it was given to support.

Members of foundation boards have a fiduciary responsibility to exercise discretion in overseeing assets given to their foundations.

And at a time of unprecedented economic crisis, those boards should be using their discretion to spend more of those assets, not save it for a hypothetical rainy day.

That day is now.

So instead of continuing to withhold from charities the assets they oversee, foundations should invest a bigger share of their assets in nonprofits that show they can make effective use of those funds in addressing increasingly urgent complex social and global problems.

And instead of begging for scraps or tailoring their programs simply to pander to what they believe foundations will fund, nonprofits should ask foundations for the resources they truly need to fund their current operations, build their organizational capacity and better serve their clients.

Nonprofits also need to kick their addiction to foundation grants and instead invest the time and effort needed to better engage individual donors.

The economic crisis and the human suffering it is causing should be spurring foundations and nonprofits to remake the charitable marketplace and replace bad habits with market-driven strategies and services.

Todd Cohen, a veteran news reporter and editor, is editor and publisher of Philanthropy Journal, an online newspaper published by the A.J. Fletcher Foundation in Raleigh, N.C. Cohen has taught nonprofit reporting and media relations at the University of North Carolina at Chapel Hill and at Duke University, and regularly speaks on the topics of nonprofit media relations and trends in the charitable world.

Read more stories by Todd Cohen.