Big foundations pay out 5 percent or more of assets

Most large endowed independent foundations in the U.S. are paying out in grants or overhead at or above 5 percent of their net investment assets, the minimum required by law, a new report says.

Among more than 1,000 of the biggest U.S. independent foundations, 46 percent paid out in grants and overhead 5 percent to 5.9 percent of their net investment assets, on average, in the years 2007 to 2009, while nearly one in five had payout rates at or above  10 percent, says Understanding and Benchmarking Foundation Payout, a report from The Foundation Center.

Still, few operating characteristics beyond endowment size were associated with consistently higher or lower payout rate practices, and variation was modest, the report says, and payout rates in general tended to decrease as endowment size increased.

Employment of staff is the single biggest factor affecting expenses levels at big independent foundations, followed by staff size, says Benchmarking Foundation Administrative Expenses, a second report from The Foundation Center.

Another big factor affecting payout rates are big swings in the economy and capital markets that affect the value of foundations’ net investment assets, The Foundation Center says.

“While the very top grantmakers tend to pay out close to the 5 percent minimum, there is surprising variation in payout levels of larger foundations overall, and annual rates are affected by drastic changes in the stock market,” Loren Renz, author of the reports and vice president emeritus for research at The Foundation Center, says in a statement.

Patterns of charitable administrative expenses vary dramatically and are shaped foundations’ giving levels, assets, operational styles, geographic reach, and programs, the reports say.

Paying staff, for example, significantly raises administrative costs, and expenses levels rise consistently with the number of staff, the reports say.

Staff size, in turn, depends on a foundation’s mission, roles and scope of activities, they say.

Foundations that tend to give the most have the biggest staffs, although smaller foundations with complex programs often have staff size that are above average relative to their giving.

Foundations that employed staff had median expense ratios — charitable administrative expenses as a share of charitable distributions — of nearly 8 percent, on average, compared to less than 1 percent for those without staff.

International grantmaking, direct charitable activities, and programs that provide grants to individuals are strongly associated with higher expenses rations, the reports says.

Health legacy foundations, or those created through health-care mergers, tend to have higher administrative expense levels, particularly for smaller foundations.

Family foundations, which represent most staffed foundations, had a median expense ratio of 6 percent, compared to 10 percent for foundations with little or no family involvement, probably because family members help hold down staff-related costs by providing administration and other assistance, the reports say.

Independent foundations are highly sensitive to stock market trends because their mandated payout levels are based on their net assets, the reports say.

Because  giving and payout are driven by assets valuation in the preceding year or over a few years, they say, most foundations reduced their 2009 giving after holding steady or increasing giving in 2008, the year the capital markets collapses.

Administrative expenses grew by double digits in that period, possibly reflecting a “delayed adjustment to five years of solid growth in foundation portfolios,” the reports say. “When expense levels increase faster than giving, the expense portion of qualifying distributions increases.”

The reports also say the annual Form 990-PF  that private foundations file with the IRS “has not kept up with the changing activities and costs incurred by private foundations in areas such as communications, technology and evaluation,” and does not “adequately capture foundations’ growing involvement in direct charitable activities.”

Among expense categories in the form, “other professional fees” and “other expenses” are especially in need of revision, they say.

Those line items, they say, “have become catchalls that obscure a significant and increasing amount of operating expenditures.”

Todd Cohen


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