Bedrosian kicks off semester with foundation spending debate

by Justine Dodgen

We kicked off the spring semester last week with a Price Governance Salon, a program that creates opportunities for students and faculty to engage with top researchers and exchange ideas. Visiting scholar Brian Galle, Professor of Law at Georgetown University, presented the findings of his paper called, “Pay It Forward? Law and the Problem of Restricted-Spending Philanthropy.” Co-sponsored by the Center on Philanthropy & Public Policy, Galle’s talk focused on how public policy can be used to encourage foundations to give out more funds each year.

When thinking about the challenges associated with foundation work, common examples might be how to meet fundraising goals or how to encourage donors to support unpopular causes. Galle’s research, on the other hand, brings up a rarely considered point- that once foundations receive donations, they can’t spend them all at once. These limitations come from the government, not just donors.

Currently, most foundations on the U.S. are limited to spending only 5 to 6 percent of their total endowments each year. Often, this happens because large gifts are established to be given out “in perpetuity.” Limiting the amount of a donor’s gift that is given out each year ensures that the fund can continue to exist far into the future, giving out grants little by little. Even when donors don’t ask explicitly for a perpetuity clause, state laws of perpetuity can apply to their gifts and enforce a cap on the annual spend out.

This might seem like a legal technicality- so why does it matter? Spending caps due to perpetuity laws are important because they can limit the potential benefit these funds have to society. Galle argues that the optimal level of spending for most foundations is 18 percent, more than triple some current rates. At this level, foundations can be doing substantially more for their communities’ while still maintaining the size of their endowment.

Higher spending would give foundations an opportunity to invest in projects that will have social returns that are higher than traditional investment returns, while also reducing overhead costs. This benefits society through early investment as well as by maximizing the value of a donor’s gift, which could depreciate over time when payouts are limited.

Government can encourage foundations to spend more of their endowments each year by increasing the cap on what foundations can pay out. Galle argues that this would be good social policy, due to the resulting benefits to society.

One of the hallmark aspects of the Governance Salon series is the faculty debatpublic-sector-social-impact-bonds-in-ontarioe and feedback on the presentation. Many Price faculty were in attendance, and in contrast to Galle’s focus on the social benefits of encouraging higher foundation giving, our faculty observed that limiting giving can also have its merits.

Bedrosian faculty affiliate Alex Graddy-Reed noted that increasing payouts may give foundations less room to innovate, since more time might then be focused on fundraising. While some foundations might be able to give out more money and still maintain the size of their endowment in the long run, a bad investment year or other factors might force staff to turn their attention to fundraising instead of programs in the short term.

Another faculty member questioned whether increasing payouts will necessarily lead to social benefits beyond economic ones; if you double the payout, are you doubling the impact?

Galle’s research brought up an interesting perspective on philanthropy andhow it can be seen through the lens of cost-benefit analysis and perhaps improved through new regulations. His research serves as an important reminder that policy ideas that seem beneficial in practice may not have the ideal effect once implemented.

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