WHO'S AFRAID OF INCREASING PAYOUT? - WE SAY, GIVE MORE THAN FIVE
by Teresa Odendahl and Diane Feeney

reprinted from the Council on Foundations magazine, Foundation News and Commentary

Since mid-1998, the National Network of Grantmakers (NNG) has explored various options for raising the foundation payout rate above the minimum of 5 percent. We are now committed to working with our members to increase the payout in grants within our network. (The legally mandated 5 percent minimum payout currently includes grants as well as administrative expenses, program-related investments, amounts set aside for future charitable projects, and trustee fees.)

NNG is also calling upon our colleagues in philanthropy to voluntarily increase their payout rate to include "1 percent more for democracy" to support social and economic change. This could mean as much as a 20 percent increase in grants from our constituency.

A survey of NNG's membership found that 82.8 percent either agree or strongly agree with increasing payout above the current 5 percent. Eighty percent favor NNG taking a lead in initiating a campaign to increase payout. But, only a slight majority thinks that the leadership of their grantmaking organization supports raising the minimum payout.

Shortly after publication of a letter in the Feedback column in Foundation News & Commentary (January/February 1999) calling for an inquiry into increasing payout, we began hearing disturbing accounts of foundation officials pressuring NNG members and grantees. What is it about the mere discussion of the payout issue that so threatens the leadership of larger foundations?

	FACTS & FIGURES In 1998, Al Gore and his family gave away 7% of their taxable income to charity, amounting to $15,197. George W. Bush and family gave 2% of their much larger income to charity, totaling $334,000. More Facts & Figures

And, why is 5 percent considered an almost magic number? The Peterson Commission, which has been credited with the inclusion of payout in the 1969 Tax Reform Act, actually called for a rate of 6 to 8 percent. The commission report said, "The annual total return of a wide variety of balanced investment funds over the previous ten years was about 9 to 10 percent. Allowing for an annual rate of inflation of 2 to 3 percent, we felt that a payout of 6 to 8 percent would permit a reasonably managed foundation to maintain its size in real dollars."

Let's all take a deep breath and have a productive discussion about the alternatives to the payout status quo. This might begin as a dialogue about spreadsheets and financial forecasts and percentage points, but it should also be a dialogue about the responsibilities of philanthropy in a civil society, our greater vision for building a better world, and how to share the bounty of economic growth with those in greatest need.

Values versus Investments
NNG was formed nearly 20 years ago out of concern about the role of philanthropy in addressing problems such as environmental degradation, discrimination, poverty, war, and other economic and social ills in the United States and around the world. NNG members are involved in funding groups working for social and economic justice. Our 400-person association includes staff and trustees from grantmaking institutions, as well as individual donors.

We believe that a fully functioning democracy depends on an involved and empowered citizenry sharing in the responsibilities and benefits of society. Unfortunately, a recent study by the Center on Budget and Policy Priorities in Washington, D.C., showed that despite the historic increase in our nation's wealth, the gap between rich and poor in the United States is the widest in history-and growing steadily. Behind this disturbing statistic are even more troubling stories of millions of individuals and families struggling daily with unemployment and underemployment, lack of health insurance, substandard or nonexistent housing, poor education, malnutrition and other problems that flourish in the shadows of the soaring Dow.

The philanthropic community can, and should, provide a more vigorous response. With certain notable exceptions, foundations are not rising to the occasion. Although foundation endowments have continued to grow, their giving has not kept pace. According to the latest Foundation Center figures, foundation assets grew from $74 billion in 1984 to $268 billion in 1996, yet the annual percentage devoted to grantmaking had shrunk from an average of 6.81 percent in 1984 to 5.17 percent in 1996. Further examination of these statistics shows that a generally higher rate of giving by smaller and mid-size foundations has compensated for the payout rates of the largest funders, which tend to give out less than 5 percent in grants.

One Percent More
It is clear that too many private foundations have adopted the legally mandated minimum payout rate of 5 percent of assets as a de facto maximum, even during times of significant asset growth. A huge, and mostly invisible, element of the philanthropic field revolves around investment banking, rather than grantmaking.

This funding strategy fails both the grantee constituencies we serve and democracy in general. The primary work of foundations is grantmaking. Economist Michael Rothschild, dean of the Woodrow Wilson School of Public Policy at Princeton University, believes most foundations have been far too conservative. He says, "The basic notion of endowments is to preserve the corpus. Foundations paying only 5 percent over the recent period of extraordinary real returns should have grown immensely. It is blindingly clear that if the purpose of foundations is to do more than increase their corpus, they should be sharing some of this largesse."

We commend the many institutions with which our members are affiliated that already pay out 6 percent or more annually. The Jessie Smith Noyes Foundation, for example, has paid out more than 7.3 percent of net investment assets for the last three years and is committed to continuing this practice. In 1997, they paid out 7.8 percent, of which 6.4 percent was in grants only.

Funders that do not currently pay out at least 5 percent in grants can have a dramatic impact by committing to "1 percent more for democracy." For instance, if a foundation with an asset level of $100 million has a total payout rate of 5 percent ($5 million distributed), and $4 million of this is in grants, increasing the grants payout rate to 5 percent means $1 million more where it is needed most-in poor and disenfranchised communities.

Although NNG is currently undertaking an initiative to increase payout among our own members, if all the foundations tracked by the Foundation Center were to follow suit, given 1996 data, at least $2.5 billion more dollars would be injected into the part of society left behind by the largest peacetime economic expansion in American history.

Rather than inspiring fear, payout should be an issue that foundations and grantmaking public charity CEOs and boards of trustees revisit regularly. It's certainly not going to go away. The Ways and Means Committee of the U.S. House of Representatives is currently investigating whether or not grantmaking public charities, particularly those that administer donor advised funds, should be required to make a minimum payout as well.

NNG has begun its Payout Initiative with our membership pledging to increase their grantmaking. We also plan to form a larger collaborative of philanthropic and other nonprofit associations to promote increased payout. In the process, we will see that we can be both socially and financially responsible as a community of philanthropists.

Teresa Odendahl, Ph.D., is codirector of the National Network Grantmakers in San Diego. She is the author of Charity Begins at Home and numerous other publications. Diane Feeney is a trustee of the French American Charitable Trust (FACT), a family foundation that supports community-based organizationsin the United States and France. She lives in San Francisco and works as a full-time staff member on the foundation's programs. She is chair of NNG's Payout Committee.