It took funding, and lots of it, to support the movements that led to the legalization of same-sex marriage, and the establishment and rapid growth of the Black Lives Matter movement. Without generous monetary fuel, those achievements might still be dreams. Progressive philanthropy provided much of that fuel through grantmaking, an amount invariably tied to and therefore determined by the annual percentage of money foundations draw from their endowments—spending rates. And yet the “norm” for spending rates is just five percent. 

The question of spending rates is at the heart of every foundation and should hold deep connections to mission alignment, values, and governance. But it doesn’t seem as if there is nearly enough discussion within philanthropic circles about those connections. This is something we should be talking about regularly—particularly within the leadership ranks of community foundations. 

For nearly 10 years, donors have increasingly called upon foundations like ours to move larger percentages of our endowments into program-related investing (loans program) and place-based grantmaking (grants targeting a single community, or a single issue or set of closely related issues in one geographic area). While it is true that we must look at the amount of resources we need in reserve to carry our work forward in the future, it’s also true that both program-related investing and place-based grantmaking bolster valuable community resources that build economic stability now. 

We need to ask: Which is more important for a social-change foundation? What is the right balance to preserve intergenerational equity, using our endowments to catalyze change today while preserving resources for future generations? 

I’ve witnessed a reluctance in public foundations to set spending policies above five percent, and I am worried that because of that reluctance, these critical resources are short-changing community needs and slowing the very social change they seek to advance—in effect, preserving problems for future generations. I also know first-hand that increasing a spending rate can have a very positive effect on beneficiaries and on a foundation itself. 

About 15 years ago, we at the Women’s Foundation of Minnesota started discussing and debating our spending-rate policy. We realized that to grow, we needed to invest more money on research so that we could develop a new grantmaking stream, and build our infrastructure and internal capacity. We increased our annual draw on our endowment from 5 percent to 6 percent and also authorized an additional board-authorized draw to finance our growth.

Those proved to be good decisions for us:

  • Our annual statewide grantmaking grew from $358,000 in 2000 to $1,610,411 in 2014.

  • Program-related investments went from zero in 2000 to $600,000 in 2014.

  • Our endowment grew from $6,478,803 (2000) to $18,619,446 (2014).

  • Despite two recessions (2006 and 2009), our 6 percent spending policy, and additional board-authorized draws, our corpus is at 116 percent of historic value.

  • Our investment in research resulted in a partnership with the University of Minnesota Humphrey School’s Center on Women & Public Policy to produce annual research on the status of women and girls in our state. This research drives our public policy work and was most notably instrumental in passing Minnesota’s landmark Women’s Economic Security Act of 2014.

  • Perhaps most impressively, our donors have cheered our investments and strategic decisions all along the way. They are inspired to invest even greater dollars in a foundation that is having impact, taking measured risks, and getting the maximum dollars out working in communities today. 

According to the Council on Foundations, a private foundation must meet the 5 percent payout requirement imposed by federal tax law even if distributions at that level would cause the endowment fund to lose value or not meet its target value. But under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), nonprofits and public-charity foundations enjoy more flexibility in endowment spending policies. Under UPMIFA, an institution may spend or accumulate as much of the endowment fund as it determines prudent, taking into account the intended duration of the fund, the fund's purposes, economic conditions, expected inflation, investment returns, other resources of the institution, and the investment policy.

We believe more foundations should take advantage of that flexibility if it serves their mission. Here are some questions that may help community foundations and their boards have productive conversations about their own spending rates:

  1. Do we judge ourselves successful by the dollars we are granting today or by the endowments we are building for tomorrow?

  2. How does our spending-rate policy link to our strategic plans?

  3. Do our finance and investment committees represent our values? How does our rate reflect our fundamental beliefs of wealth, trusts and endowments in general?

  4. How strong is our fundraising ability, and our ability to generate additional revenue through planned gifts? Have we adequately weighted variables including staff capacity, donor appetites, and the market? Do we have appropriate contingency plans?

  5. How does—or could—trend analysis and forecasting inform our strategy development and our decisions about spending?

  6. Can we commit to evaluating our spending rate annually and over a minimum of 5-10 years to determine averages?

Expect diverging views and encourage respectful, rich discourse among your board and finance committees to get to that final number. The best outcome will be a unique decision for each foundation, demonstrating its viewpoint on mission, values, and strategic assumptions. 

As a country, we’ve witnessed the extraordinary results of what increased grants and investments in our communities can spark. So let’s think exponentially! As community foundation leaders, we have the opportunity right now to ignite a revolution of collective resources into communities across the United States. When we do it, we’ll begin to see that better, more equitable world we envision—the one in which we all hope to live.