Michigan philanthropy is leaning in to and leading through the COVID-19 crisis at remarkable speed and depth. Funders around the state have adapted their grantmaking, policies and procedures and leveraged new partnerships to meet the needs of communities through this pandemic. The commitment of Michigan philanthropy is indeed exceptional, not only in times of crisis, but beyond.

Many of you signed on to the pledge, which was spearheaded by the Ford Foundation, informed by conversations with the Trust-Based Philanthropy Project and in partnership with the Council on Foundations (COF), that calls on philanthropy to do even more, provide greater flexibility to grantees and find new ways to streamline and adjust grantmaking practices amid the COVID-19 crisis. 

And still, there are some in our global community of philanthropy who are calling on peers to do more not as a commitment or suggested practice but as a legal requirement. In a recent letter to lawmakers, a group is seeking legislation to double the mandated annual private foundation payout from 5% to 10% over the next three years and to mandate a 10% payout requirement for Donor Advised Funds (DAFs). 

CMF continues to be a strong proponent of maintaining the current 5% payout requirement. Our own Government Relations Goals make that clear. Many of our members are able to exceed this rate and do. For some, endowed philanthropy is not the vehicle they choose to express their philanthropy, while others are still working to discover what works best for them. 

The debate around increased payouts is an important one but it’s not new. With the growth of philanthropy and the market conditions leading to the growth of endowment values, there are periodic calls from inside and outside the sector for a re-examination of the 5% spending requirement. What is new is the overwhelming burden the pandemic is placing on all of society’s institutions and the many new gaps forming that philanthropy is being asked to fill. Some will argue that philanthropy has a moral responsibility to “sacrifice” more by radically increasing grantmaking in difficult times and shedding the traditional long view of patient capital. Others will note that philanthropy is a highly personal and individual right, born of the belief in philanthropic liberty and that the current IRS regulations are sufficient to serve as a guardrail against “parked wealth.” The debate wanders somewhere in between both poles with all of our tools engaged in the debate, including DAFs. These debates are now gaining momentum and exposure as dual challenges of a public health and economic crisis continue without a clear end in sight. 

This debate is good and the continual re-evaluation of the way our field operates is important to our future success and sustainability. At the same time, we do need to be cautious about how we call others into our deliberations and extremely judicious on the remedies we put forward. The quick push for legislation is probably the most concerning part of the recent call to increase the payout requirements. The debate between perpetuity philanthropy and “giving while living” or spend down foundations has been growing and amplified with the flexible funding pledge mentioned above.

However, the assumptions of creating wealth then giving back in later years is no longer necessarily the only way to engage in philanthropy. 

The Atlantic Philanthropies’ $8 billion investment over 34 years is a good example of this philosophy. There are foundations close to home that utilize a similar approach, including the Dyer Ives Foundation in Grand Rapids and the Ralph C. Wilson, Jr. Foundation which serves Southeast Michigan and Western New York.

Michigan is also home to some of the larger private endowed philanthropies with both local and global reach, including the W.K. Kellogg Foundation, Charles Stewart Mott Foundation and The Kresge Foundation. These foundations alone represent more than $619 million in annual grantmaking. In the case of each of these foundations, we can point to long-term strategies to impact the lives of our global citizens. These same foundations and their benefactors have worked their philanthropy through several different crises including the Great Depression and Great Recession. They have done so using many different tools at their disposal. 

They also adapted to the changes in regulation, especially the Tax Reform Act of 1969 that gave us the basic regulatory framework we have today, including the 5% mandatory payout for private foundations. What may be forgotten in the recent calls for increased regulations on ourselves to increase this payout is that the data shows that foundations can, and in many cases do exceed the 5% payout requirement. Most importantly, they have done so without a change in federal regulation.

CMF retained Cambridge Associates to evaluate the private foundation payout rate required by the federal government based on the real returns in 2000, 2004, 2013 and again in 2016 – covering a 42-year period. The average annualized return, adjusted for inflation, for the sample foundations for the period 1973-2015 was 5.28%, slightly above the IRS mandated payout rate of 5%. The data also suggested that foundations as a whole have been willing to spend in excess of the federally-funded mandated 5% during the time period, highlighting that many foundations consider the 5% legal required payout a minimum not maximum when establishing spending practices.

Foundations may choose to exceed their 5% minimum perhaps even through the current financial crisis. Some believe they can do so and maintain their future spending power. 

Jeff Williams, director of the Community Data and Research Lab (CDRL) at the Dorothy A. Johnson Center for Philanthropy, shared a review of S&P 500 and 10-year U.S. Treasury annual returns to help endowment stewards make their own decisions on the payout and understand the potential consequences. Williams provides the critical questions that nonprofit charities and foundations should consider before making the key decision to exceed the 5% payout rate. Considerations include organizational mission, risk comfort, willingness to constrain future flexibility and understanding of traditional market returns including those during and after the Great Recession. This data provides critical context about the choice around an increased payout.

It is about leaning in to have the choice. While perhaps the right decision for some, a mandatory 10% (or more) payout for private foundations and DAFs is a crude instrument to a highly sophisticated concern—the mission, method and duration of a philanthropic interest.