PND (4/25/2000) -- New Study Advocates Retaining Current Foundation Payout Rate

A private foundation payout rate higher than 5 percent would erode foundations' ability to sustain their grantmaking capacity over the long term, finds a new study conducted by Cambridge Associates Inc., a Boston-based investment and financial consulting firm.

The study was commissioned by the Council of Michigan Foundations (CMF) to examine the question of what level of foundation giving can be sustained without depleting the real value of a foundation's assets over the long term.

"A key factor in the operating style of a foundation is donor intent, including how long a donor wants his or her foundation to exist," noted Robert Collier, president of CMF. "Most donors establish foundations for the long term, and the critical investment policy question then becomes one of what level of giving can be sustained without depleting the real, or inflation-adjusted, value of the fund over this long-term period."

The new study examines the impact of the current IRS minimum 5 percent distribution rule using three sets of data: the 1973-1997 tax returns of a group of 33 Michigan foundations with diversified investment portfolios; an indexed portfolio invested 65 percent in the S&P 500 Index and 35 percent in the Lehman Brothers Government/Corporate Index from 1969 through 1998; and a statistical probability study of future returns using the same hypothetical portfolio.

All three analyses concluded that a payout rate in excess of 5 percent would lead to the depletion of a foundation's grantmaking capacity in constant dollars, unless the grantmaker began to liquidate assets.

"The analysis of long-term historical returns, and the simulation of future returns are valuable information in determining an appropriate payout rate," said Bruce Myers of Cambridge Associates, noting that current assumptions about future market performance may be too generous. "After that most rewarding 20 years for investors in U.S. history, even those long-term 'equilibrium' expectations may be overly optimistic for periods of less than 30 years, especially if the current low rate of inflation increases in the coming years."

"Higher Payout Rate Threatens Foundation Sustainability." Council of Michigan Foundations News Release 4/2000.

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