The decision by several major foundations to take on debt to finance an additional $1.7 billion in grants is a milestone moment in big philanthropy, but it is unlikely that a large number of foundations will follow the practice, experts say.
The Ford, MacArthur, Mellon, and Kellogg foundations, and the Doris Duke Charitable Foundation together announced on Thursday they planned sharpincreases in their payouts in response to the pandemic. Mellon, for instance, plans to make $300 million in grants this year, up from its original $200 million grant budget. Ford plans a $1 billion bond offering that will allow it to increase its grants well above the $520 million it distributed in 2019. Duke and MacArthur joined Ford in issuing debt to finance larger payouts.
The foundations are placing a bet that their endowment returns will be generous enough to cover both debt expenses and the growing cost of grants, while maintaining their assets long into the future.
John Palfrey, president of the MacArthur Foundation, said low interest rates that will last the lifetime of the bonds made the decision more palatable than liquidating assets during a period of market turbulence.
“There’s no free lunch, and there’s a point at which we will have to pay this back,” he said about the foundation’s $125 million bond offering during a conference call with reporters.
Ford’s leader, Darren Walker, said he was confident other large grant makers will increase grant budgets, but such announcements from major philanthropies have been scarce.
The Rockefeller Foundation said in a statement that its preferred approach to grant making is to combine gifts from a variety of sources to make a big impact on a problem.
“We aggregate capital to scale impact, which is a different way of expanding our spend,” wrote Ashley Chang, a Rockefeller spokeswoman, in an email. “We are planning to spend over the 5 percent, but we thus far are not going to issue debt to do that,” she said, referring to the federal mandate that foundations distribute at least 5 percent of their assets each year.
Vartan Gregorian, president of the Carnegie Corporation of New York, said in a statement that Carnegie was not prepared to fund its grants through leveraged financing.
“Our goal is to continue supporting our philanthropic mission in perpetuity, and therefore we are committed to preserving the endowment,” he wrote. “Should we reassess and determine that the needs of our grantees are not being met, we would consider making a different decision. At the moment, we do not plan to change our 5.5 percent payout.”
In March, as the nation began to shut down in response to the coronavirus and the stock markets shed trillions of dollars in value, Larry Kramer, president of the Hewlett Foundation, wrote that the foundation was committed to maintaining its current grant making budget this year but that further declines in the stock market could lead to budget cuts. Since then, the market has made up for some of its losses, but the nation’s economic outlook remains uncertain and the demands placed on nonprofits are high.
“Given changing conditions, we are reassessing what is the most appropriate action for current and future needs of our grantees,” said Vidya Krishnamurthy, a Hewlett spokeswoman. (The Hewlett Foundation is a financial supporter of the Chronicle of Philanthropy.)
The group’s major bump in payout comes as philanthropy advocates and some foundation leaders have placed pressure on their peers to give more, even if it means placing the longevity of their endowments in jeopardy. In April, nine philanthropy organizations pushed for grant makers to voluntarily increase payout. Then, in May, a group of 515 foundation leaders and philanthropists wrote to members of Congress to press for a mandatory payout increase. They requested a three-year requirement that foundations distribute 10 percent of their assets each year, double the current 5 percent mandate.
Using debt to cover the increased payout could be “politically useful” for foundations in future payout debates, according to Brian Galle, a professor at Georgetown Law School. If Congress takes up legislation to increase the required distribution, grant makers could make the argument that the terms of the bond offerings could limit their ability to make more grants.
“The board will say we can’t do that because we’ve got these bonds and they have covenants that say if we paid out more than 6 percent, then we’re in default,” he said.
Galle said he didn’t have any knowledge about the terms of the foundations’ bond offerings, but “it would be bad lawyering for the bond counsel not to insert some language in there that assures them the organization will be around for the life of the bond.”
Chuck Collins, director of the Charity Reform Initiative at the Institute for Policy Studies, believes a temporary increase in the payout requirement is gathering steam. Collins, who along with the Wallace Global Fund and a group of wealthy donors called Patriotic Millionaires, is part of the push for such emergency legislation, pointed to a survey of 1,000 people his group sponsored that showed 75 percent of Americans supported a temporary higher payout.
“Hopefully we’ll see foundations getting out in front of that and voluntarily doing it. But it’s not a substitute for having that three-year mandate “
The Ford Foundation’s Walker said discussions on the payout increase began well before the letter was sent to Congress.
“We all are not motivated by a fear of policy,” Walker said. “We’re motivated by the need that exists in our community.”
Added Palfrey: “It’s not a mechanism that is meant to avoid anything. It’s a mechanism to enable much more grant making.”
The decision to finance the additional payouts with debt reflects the extent to which foundations have increasingly turned to alternative investing vehicles such as hedge funds, says Daniel Hemel, a professor at the University of Chicago Law School.
“It may just be that they didn’t have enough cash on hand or easy-to-liquidate securities in order to meet their payout ambitions,” he said.
Hemel said it is unlikely smaller foundations would take on debt to finance additional payouts because they would likely not have the same access to the bond market and would likely get a less favorable interest rate than a large grant maker.
He’s not in favor of a higher payout requirement but he said that taking on new risks by adding debt could be a wise decision if current needs are urgent.
“Is there anything particularly noble about moving from a 5 percent payout rate to 10 percent outright? I don’t think so, but there is something noble about funding grantees today if you think that they are doing better work than the grantees who will come to you in the future.”
