A Bipartisan Plan to Increase Foundation Payout Rate
A Bipartisan Plan to Increase Foundation Payout Rate
BY CRAIG KENNEDY
For many years, the centerpiece of philanthropic reform was increasing the "payout" rate from its current 5% of foundation assets. Reform efforts have shifted to more focus on what expenses can be counted as payout (see When does 5% not equal 5%?), and the stockpiling of philanthropic assets in donor-advised funds. When the former head of the Joyce Foundation and the German Marshall Fund (and one of the savviest guys we know) speaks on this topic, we listen.
Thank you to the Giving Review and Craig Kennedy for permission to reprint his article. (See a few additional notes at the end.)
Private foundations are making a lot of money. The assets of U.S. philanthropies currently stand at nearly $1.7 trillion—up 15 percent from 2023. Despite a substantial dip during the pandemic, grant makers’ average investment return from 2013 to 2023 was 7.1 percent, according to a new study by CommonFund and the Council on Foundations.
Many of the largest foundations are faring even better. The 990 tax data for 18 foundations with more than $2 billion in assets shows that almost all increased their inflation-adjusted assets during that same period. (See table of private foundations below.)
Given this bounty, I believe it’s time to stop simply talking about raising the foundation payout rate and start taking steps to actually do it. I propose increasing the rate from 5 percent to 6 or 7 percent — a modest change that would significantly expand giving to the nonprofit sector at a time when government dollars are being slashed.
Some foundations, including MacArthur, McKnight, Hewlett, Freedom Together, and others, have voluntarily upped their giving. But most have not. That’s why Congress should pass a law requiring them to do so.
Advocates on the left have long demanded a payout increase as well as other reforms, such as excluding foundation salaries and expenses from the payout calculation and mandating distribution requirements for donor-advised funds.
Opponents of a larger mandatory payout argue that the 5 percent rate allows foundations to do good while maintaining the inflation-adjusted value of their endowments for as long as they continue to operate. In truth, despite overall gains for the sector, the 990 tax data shows that over the past decade some foundations have struggled to maintain the real value of their assets after inflation, including the Knight, Ford, Mellon, and Packard foundations. Others have seen minimal growth in earnings. Kellogg even saw an earnings decline between 2013 and 2023 because its primary asset is stock in the struggling Kellogg company. (The Ford Foundation is a financial supporter of the Chronicle of Philanthropy.)
But this mixed result isn’t a reason to continue supporting a 5 percent payout rate. Instead, as critics of foundation asset management have noted, they should do a better job of investing.
Misplaced priorities
The priority of public policy shouldn’t be to ensure the perpetuity of foundations, but to increase giving. That goal can be accomplished by both raising the distribution requirement by a modest 1 or 2 percent and capping how much foundation program expenses can be applied to that payout. In 2024, foundations gave away about $109 billion. Given that most funders stick close to the minimum 5 percent payout rate, upping the rate to 6 percent could increase giving by almost $11 billion, enough to hire 181,000 employees based on a 2022 average salary of $68,394 for nonprofit employees. A 7 percent requirement could generate more than 360,000 new jobs.
The philanthropic trade associations generally oppose any changes to the status quo and will almost certainly come out in force against this idea. To support their argument, they will likely point out that recent efforts in Congress to increase taxes on private foundations failed because politicians understand that these institutions provide significant benefits to the public.
In reality, for many conservatives the goal of the proposed tax increase was to punish foundations that fund progressive causes. Support for anti-Israel groups on college campuses and the use of tax-exempt money for election-adjacent activities and lobbying for issues favored by the left made some Republicans question the value of foundations.
The bill’s sponsors, however, failed to take into account the number of philanthropies in red states that provide valued services to local residents and would have been harmed by the legislation. By contrast, a proposal to increase the amount of money those donors give to mainstream causes could have real political appeal if combined with some restrictions on how foundation money is used.
Requiring foundations to give away more would not be opposed by conservatives if that money flowed to food banks, childcare, disaster relief, and other less controversial projects. This is exactly the work the Council on Foundations cited as at risk during the debate on the foundation excise tax increase.
A common-ground approach
The left and right need to find common ground. That’s possible, but only if progressives are willing to accept a definition of charitable giving that does not include politically charged activities.
More than 50 years ago, a similar constellation of liberals who wanted foundations to give more money and conservatives who sought to curb the partisan activities of the Ford Foundation and other liberal donors produced the Tax Reform Act of 1969. It has served since then as the basic framework for the charitable sector.
It shouldn’t be too difficult to develop an acceptable plan for raising the required distribution rate and limiting the application of foundation expenses to meeting that requirement. There would also likely be broad agreement on addressing the abuses of donor-advised funds by mandating a giving requirement.
The tricky part is coming up with rules that would limit the ability of foundations to fund political and lobbying activities of nonprofits. A complicating factor is the Trump administration’s tacit support of challenges to the Johnson Amendment, which prohibits nonprofits from endorsing candidates. In June, the Internal Revenue Service said it would not enforce a legal settlement that prohibited churches from engaging in such activities.
Despite this challenge, smart lawyers and legislators should be able to find ways for drawing a sharper line between politics and charity. The promise of a substantial increase in giving from foundations and possibly DAFs, combined with stronger constraints on election-adjacent and lobbying activities, should motivate Congress and advocates from the left and right to find solutions that will last another 50 years.
If this prospect comes to fruition, it will also be a test for groups that have undertaken political activities with charitable money. There will no doubt be consternation and protests over the unwillingness of conservatives to simply up the flow of dollars without restriction. I hope that the value of a healthier and wealthier nonprofit sector overrides these potential partisan concerns.
Note from the Philanthropy Project
In a separate short Giving Review article, Craig predicted that in 2026, "Bipartisan voices will demand payout policy reform." He foresees a deal: liberal foundations agree to a higher payout rate in exchange for conservative foundations agreeing to stricter regulations keeping foundations and nonprofits out of "election-adjacent" activities. "Voices on the right and left want change. A few smart senators, such as Republican Charles Grassley of Iowa and Democrat Elizabeth Warren of Massachusetts, who have both criticized foundations for not spending enough, could make the difference if they are willing to reach across political lines and work to pass a policy that will benefit the charitable community."
We worry that there is no table where anyone is even proposing deals. Craig: how can we make this happen?
Craig Kennedy is a Fellow at the Giving Review, to which he brings his impressive and varied background in philanthropy and public policy. He was president of the German Marshall Fund and of the Joyce Foundation (where he started as a program officer), and he has advised many U.S. and international governments as a consultant and policy advisor.
