Larry Kramer is correct that reasonable people can disagree about the right spending level for a foundation. I say that knowing Kramer himself to be a reasonable person—and with gratitude that the foundation he leads has been one of the largest and most consistent supporters, over many years, of the Center for Effective Philanthropy (CEP), the organization I run.
But I also believe that, to maximize their effectiveness, foundations should spend more than they planned—and more than the legally mandated minimum—in this period of unparalleled crisis. Moreover, it won’t be nearly as challenging to do so as many had feared months ago, owing to the strong market returns that have buoyed foundation endowments.
We all know that nonprofits—which foundations depend on to pursue shared goals—are facing unprecedented challenges. Already in May of 2020, when CEP surveyed its nationally representative grantee panel, 80 percent of nonprofits said they had or were planning to tap reserves; more than 60 percent had or planned to reduce staff wages, benefits, or hours; and 49 percent had or were planning to lay off or furlough staff.
Small community-based organizations serving those hardest hit by COVID-19 and its concomitant economic impacts (disproportionately Black, Latino, and Native American people) are facing the greatest difficulty. They often face brutal twin realities of increased demand for their services and simultaneously decreased revenue.
The current crises aren’t just revealing inequities: they’re exacerbating them in ways that could last generations. Foundations, by virtue of their long time-horizons, have the opportunity to be a counter-cyclical force—and the great news is that many have. While donations from everyday givers and fee-for-service revenue have declined, foundation support has emerged as the most stable revenue stream for nonprofits.
Many foundations have chosen a different path than the William and Flora Hewlett Foundation and stepped-up giving levels. Foundations are compelled to act by the stark inequities they see as well as the compounding effects of inaction. As David Salem and I have argued, compounding is a factor in a social impact context as well as a financial one. If existing gaps are allowed to widen even further, it only becomes more expensive over time to bridge them. “It will take more money to re-start if we’re not here,” Chitra Hanstad, executive director of World Relief Seattle, explained. “Think about how much cheaper it is to retain good staff than it is to bring on new ones. It’s the same for organizations.”
Interestingly, Kramer’s rationale for not spending more than was initially budgeted for 2020 seems to have evolved. In a late March message posted on the Hewlett Foundation blog, he explained the foundation’s decision to maintain spending levels in 2020 largely in terms of wanting to avoid “locking in losses permanently."
But, as I write this in late 2020, the S&P 500 Index is up more than 14 percent year-to-date, the Consumer Price Index is extremely low, and foundations are saving on staff costs, ranging from reduced travel to no catered lunches. This would suggest the Hewlett Foundation could have stepped up giving in 2020 from current levels and still maintained or even increased its endowment! Indeed, this crisis is perhaps unique—and certainly very different from the Great Recession—because the equity markets have performed well.
It is inarguable that a foundation that spends more now will have less later than it would if it spent less. No one questions that, despite Kramer’s intimations about my math skills. But the responsibility of a foundation managing for the long haul is, at most, to maintain roughly equivalent purchasing power over time, not to grow assets as much as possible.
Kramer, however, now seems to be arguing that even the 5 percent payout level is too high, threatening foundations’ ability to preserve capital. This is wrong. Although it’s possible to cherry-pick specific recent and historical timeframes in which annualized returns are relatively low, the fact is that since 1950 the annualized return on the S&P 500 (assuming dividends were re-invested) has been 11.3 percent; 7.6 percent if you adjust for inflation. Since 1980 the numbers are even stronger: 11.7 percent annualized returns; 8.5 percent if you adjust for inflation.
This is why we can all point to legacy foundations with endowments that are much larger in inflation-adjusted dollars than they were decades ago or at their inception. Put that together with the new foundations created every day and we have more than $1.2 trillion in foundation assets in the United States today, according to Candid. In 1960, that number was under $12 billion – or $106 billion in today’s dollars.
So it’s hardly surprising that we’d see impassioned pleas to foundations to do as much as possible in this time given the suffering of so many. Although Kramer laments the tone of the debate, I think it’s healthy—even if it gets a little rough and tumble.
Kramer suggests that “some, perhaps many” of those arguing for increased spending during this crisis are using its occasion as an “expedient device to push their more basic conviction that foundations should be required to spend down.” But that’s not true of me nor most (maybe even all) of my colleagues who together joined in early April in calling for increased foundation spending—including the heads of organizations which count among their members hundreds of perpetual foundations.
I don’t support efforts to legislate higher payout requirements for foundations. Long time-horizon foundations such as the Hewlett Foundation play a vital role in our society that is unlike any other institution—contributing, in their best moments, to significant societal progress and drawing on relationships and reservoirs of experience and knowledge. I am, have been, and will continue to be a defender of perpetual foundations. Further, Kramer is right that more multi-year general support and healthier reserves are crucial to strengthening nonprofits; my colleagues and I have been making that case for years.
But this is also a time when more resources are desperately needed. Could it really be true that the legally mandated minimum just happens to be precisely the right giving level in a time of both unparalleled crisis and strong endowment returns? I don’t think so.
I doubt many among us will look back in two or three decades and wish we had done less during a time that, contrary to what Kramer suggests, is no ordinary “downturn.” I am merely—and respectfully—suggesting foundations step up spending levels in a meaningful way during this finite period of crisis.
This, to me, seems reasonable.
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