The Perpetuity Debate

Tuesday, April 29, 2014

By John Hoover, Senior Vice President, The Andrea and Charles Bronfman Philanthropies

PNY convened four foundations whose boards had considered the question of spending down. But by most accounts, this conversation skewed to an unbalanced degree toward the argument for perpetuity, and in so doing was a disservice to the philanthropic community and the issue in general.

The represented foundations included:

•   Edward W. Hazen Foundation, founded in 1925 continues in perpetuity spending approximately 5.4% of its assets in 2012 while earning 10.9%.

•   The Rockefeller Foundation, founded in 1913 continues in perpetuity spending approximately 4.9% of its assets in 2012 while earning 8.8%.

•   The Altman Foundation, founded in 1865 continues in perpetuity spending approximately 5.6% of its assets in 2012 while earning 10.5%..

Spending down is a healthy issue for donors and Boards to consider. But alongside the points covered by these foundations, there are significant points of clarification to consider:

Living Donor Effect

You state that the three professionals who represented foundations living in perpetuity largely agreed with their organizations’ decisions. As paid professionals, their Boards should expect no less of their loyalty. Employees, consultants, and paid advisors will inevitably vote for perpetuity as it serves their self-interest of job security, reduces risk, and gives them more influence as assets appreciate.

The one limited-life foundation represented on the panel is the only one with a living donor. The chronological life of a foundation is a fundamental and critical strategic decision that needs to be driven by donor intent. The risk of spending too much too soon is fraught with legal perils. Certainly it is the living donor that has the capacity, independence and responsibility to decide if a foundation has a limited or perpetual life.

Doing more good over the long haul than in the immediate

The three perpetual foundations conclude that they can do more good over the longer term than in the more immediate future. This leads me to believe that a desire to compound investments (a sum of income and expenses) takes higher priority than helping society (a sum of people and impact). ‘Doing good’ is a measure of impact. Impact is measured over time. If society continues to restrict support to our most vulnerable citizens, we guarantee that those people will continue to remain vulnerable.

For example, let’s look at polio and The Gates foundation, a limited life foundation. Bill and Melinda Gates, who are living donors, plan to spend all of their foundation assets. They have used impact to measure the rate at which projects are funded. In just 25 years, the number of new polio cases has decreased from 350,000 annually to less than 400 in 2013. That equates to approximately more than 7 million people who have avoided contracting polio. We’ll never know who avoided polio, but, nonetheless, they are not burdens on society and they have an opportunity to be productive, contributors to the GDP of their respective country.

The foundation didn’t limit itself to spending within the 5% rule. They looked at what needed to be done and worked on a way to address the challenge with a focus on time. In terms of long-haul impact, this time-focused approach does not bode well for building a large investment portfolio but it does provide a much greater economic value as the sum of 7 million productive people and their successive generations will inevitably dwarf any foundation’s net worth.

Quick Fix

Mr. McConnell’s statement that “spending down provides quick fix” is as disturbing as the attorney who continues to drag out court cases and charge exorbitant fees. He may be a winner to his fellow partners at his firm but he is not a winner to those that have to bear the cost of lengthy litigation. Explain the quick fix to the people affected by cancer or those without running water, electricity or safety. Is it better to keep the money on the books and allow generation after generation to suffer? One person’s quick fix is another person’s response.

Reckless is reckless, regardless of time

According to Mr. Meyers, The Rockefeller Foundation pulled back from helping recover from the ravages of WWII as the quickening pace of funding lead to “reckless” spending. Reckless spending will happen regardless of time. Thoughtful spending is a function of research, debate and planning. The implication that a limited life foundation leads to reckless grant making is misleading. Improper planning, poor communication and lack of governance lead to reckless grant making.

More to come

One foundation is one foundation. According to Giving USA, the Foundation Center and the IRS, philanthropic giving is again on the rise. In fact, since 1980, the number of active private foundations has increased 4% per year to more than 2.7 times — for each foundation that closes, there is at least another that is formed. Our global GDP is rising; the middle classes in the poorest countries are growing. The United States has more billionaires than at any point in its history. Foundations need not worry that they need to grow their assets for fear that no one else will take up noble causes. There are people that we don’t see yet and whose assets have not been counted on a tax return that will take the mantel and continue to help those in need.

John Hoover serves as Senior Vice President and Chief Financial Officer of The Andrea and Charles Bronfman Philanthropies. Prior to joining ACBP, Mr. Hoover was the Vice President of Finance and Administration for the Jewish Communal Fund, one of the nation’s largest public foundations. He has been an advisor to several Jewish service agencies, businesses, and family offices, as well as serving the government of New York City in the Bureau of Management Audit. Mr. Hoover has a Master’s in Business Administration and a Bachelor of Science in Accounting and Economics.