To spend out, or not to spend out, that is the question for foundations. Or, at least, that should be the question. While we at the Institute for Philanthropy are not advocates of one answer or the other, we believe it is beneficial for foundations to have this debate.

Currently, there are very few foundations in the US and the UK that choose to spend down their endowments within a fixed time frame, as opposed to maintaining them in perpetuity. In the US, it is of course mandatory for foundations to pay out 5 percent of their endowments each year, and in the UK there has been much advocacy—so far resisted by the nation’s lawmakers—for the introduction of a similar requirement.

What this implies is that, in both jurisdictions, there is a keen sense that there should be an onus on foundations to make grants—that there should be an impetus towards social change. Indeed, there are times when the rapid and strategic deployment of private capital is the best way to address a pressing social problem. As Gara LaMarche, president and CEO of The Atlantic Philanthropies (which plans to spend down by 2016) has observed: “You can make a more concentrated effort with substantial wealth to (address) problems if you’re not hoarding your resources.” For our part, we consider that, when deciding whether to spend out, foundation staff should ask themselves three questions:

1. Is the way the organization uses its resources truly aligned with the pursuit of its philanthropic mission?

Buzz Schmidt, the founder of Guidestar International, has argued that not enough donors are objectively asking themselves whether a perpetual corpus is the most effective means of achieving its aims. He has warned against philanthropists falling back on tried and tested models that sometimes lack innovation, and has instead called for an informed discussion on foundation structures that allows exploration and innovation to take place.

2. Should the foundation make a shift to a higher impact grantmaking strategy?

3. Would spending out, or increasing payout, make it easier for the foundation to make that shift?

In the UK, the Joseph Rowntree Charitable Trust considered that it would spend out their endowment if there were an imminent threat of nuclear conflict. Its view was that the gravity of such a situation would call for highly responsive funding. In a less extreme scenario, the Gates Foundation increased its payout commitment two years ago to 7 percent, in recognition of the particular urgency of their work. This move was particularly timely, in that it coincided with the economic downturn—a time when many NGOs were feeling the financial pinch like never before. 

Whether or not foundations choose to spend out, this internal debate reminds them of their uniquely independent position. They are capable of taking risks that some other funders, especially those that distribute public funds, cannot consider. So then, to spend out, or not to spend out? At the Institute, we encourage foundations to ask themselves this tough question from time to time so that they retain that vitality of approach that is necessary for effective giving.