GOT MORE? GIVE MORE
by Rob McKay

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

Let's not lose sight of a few basic facts that can help foundations make informed and exemplary decisions about their rates of spending.

At the McKay Foundation, we fear that the din of dueling studies over the 5 percent minimum payout rule established by Congress for foundations is drowning out some fundamental facts about philanthropy and its role in contemporary American society.

The first study, published in October 1999 by the National Network of Grantmakers (NNG), showed how foundations can pay out as much as 8 percent without endangering their assets. NNG has now launched a national campaign calling for foundations to give out just "1% More for Democracy," in grants only-a proposal that has sparked enormous debate not about the principles of philanthropy, but percentages of investment return.

Subsequently, the Council on Foundations commissioned a third edition of its Spending Policies and Investment Planning for Foundations by DeMarche Associates, and concluded that despite the record returns on investments over the past two decades, "the 5 percent requirement is [still] a prudent benchmark" for giving. The National Committee for Responsive Philanthropy has announced intentions to launch a national campaign calling for an increase in payout to 6 percent in grants only. And Goldman Sachs Asset Management has weighed in with a warning to foundation clients to "Just Say 'No' to 6 percent spending," or, heaven forbid, run the risk of reducing their principal.

	FACTS & FIGURES Rock n' roll band Smashing Pumpkins have donated $419,000 to the Hale House, a home for abandoned babies in Harlem. Charitable causes in 13 other cities on their tour for their 1998 album Adore have also benefited from the band's benevolence - they gave all proceeds to charity. More Facts & Figures

As members of both NNG and the Council, the McKay Foundation has a stake in this debate. Our biggest concern is that no one lose sight of a few basic facts that we believe can help foundations make informed and exemplary decisions about their rate of spending consistent with their higher purpose as philanthropists. Here's the way I see it:

There is more money in philanthropy today than ever before. A lot more. The most recent edition of the Council's DeMarche study recalled its conclusion in 1995 that, foundations entered the 1990s in better financial condition than they had been in for many years." Since 1995, the Standard & Poor's 500 Index increased by more than 20 percent per year, with the large cap return "the best four-year return since 1950," DeMarche notes.

NNG's study, conducted by Professor Perry Mehrling, chairman of the economics department at Columbia University's Barnard College, shows that foundation assets now approach $400 billion-almost a threefold increase since 1981 when the 5 percent minimum payout rate was established. Contrary to expectations, the goal of increasing foundation assets has been met not only by reinvestment of earnings on existing assets, but almost entirely by new foundation creation and gifts into existing foundations-84.5 percent of the increase, according to Mehrling. (The DeMarche study does not take this massive source of revenue into account in its study of foundation grantmaking capacity.)

The results have been dramatic for foundations large and small. Robert Wood Johnson Foundation's asset base grew more than $1 billion, or 16.2 percent, in 1997 alone. C.S. Mott Foundation has seen its assets grow 176 percent-from $838 million to $2.3 billion-in the past ten years. The Ford Foundation's portfolio has grown 15.3 percent over the past three years.

There is more need for philanthropy than ever before. The rising tide of the U.S. economy clearly is lifting more yachts than dinghies. New figures from the Congressional Budget Office reveal that the gap between rich and poor in this country is the widest in history, having doubled since 1977. Despite record returns of the Dow and other markets, a report by the U.S. Conference of Mayors shows that homelessness is rising at its fastest pace in five years. The same study shows that the percentage of homeless families with children has jumped one-quarter since 1985. Nationally, almost 14 percent of Americans - and nearly 21 percent of children - live in poverty.

Government cutbacks, corporate downsizing and consolidation, welfare reform and other factors have put added pressure on middle- and low-income people, even as foundation assets swell. Philanthropy's minimum giving rate of 5 percent cannot be characterized as "stepping up to the plate" to meet these growing needs.

Philanthropy can do more to meet that need. With gales of economic change swirling around us, it is mystifying why so much of the philanthropy world is attempting to proceed as if nothing is happening. The Washington Post reported that although foundations had $56 billion more to work with in 1998 than 1997, "they stuck close to the minimum required payout" of 5 percent. The Mehrling study shows that foundation payout actually declined from 8 percent in 1981 to below 5 percent in 1997- during a period described by most observers as flush for foundations.

The DeMarche study concludes that a hypothetical foundation could have paid out as much as 6.5 percent over the past 20 years and still seen its portfolio grow 23.9 percent. Nevertheless, DeMarche discourages foundations from doing just that, falling back on its familiar counterintuitive conclusion that "lower initial spending results in higher aggregate spending over time" (again, without addressing the dramatic impact new giving has had).

The McKay Foundation's focus is on building the community of grantees while being financially responsible. We support organizing, advocacy, and the efforts of communities who organize on their own behalf to create a more just society. We employ community strategies to work for equality, economic development and empowerment. Our giving includes addressing the struggle of the homeless, environmental degradation and women's rights.

McKay works closely with its investment managers not only so that we are financially responsible, but so that our values shine through the numbers. Consequently, the mission of our foundation is reflected both in the quality of our giving and in the fact that our foundation has averaged a 17 percent payout rate. As one of 35,000 family-led foundations existing today, we continue to grow-even with a payout rate 3.5 times the required amount.

NNG's "1% More for Democracy" campaign, which calls for 1 percent in grants to go toward resolving hunger, homelessness, poverty, inequality and other social needs, seems a more rational benchmark than holding to the status quo. It also seems an effective way to keep Congress from eventually mandating a higher payout rate and taking away our choice of doing so.

Ultimately, foundation directors should consult not only DeMarche Associates, Goldman Sachs Assets Management and other investment houses when determining their payout, but program directors, grantees-and their own hearts. The purpose of philanthropy, after all, is to make grants that will enhance our lives now and build a better world, not simply increase our asset base for hypothetical battles in the future. We can fight today's battles and tomorrow's, but only by giving our maximum, not our minimum, effort.