What Nonprofits Need to Know about Foundation Payouts
By Rebecca Donham
Nonprofits dependent on foundation grants may feel that if they can get through 2009, the economy will get better along with foundation asset values and payouts. But in planning their annual budget, nonprofits need to understand how foundation payouts are calculated.
As most nonprofits know, private foundations are required by the IRS to pay out five percent of their assets during the year. The actual amount is based on the average market value of the foundations assets over the past 12 months. In order to ease the pain in down times, some foundations base their payout on 36 months, thereby smoothing out the effects of market fluctuations.
Which time period a foundation uses is up to them, and each approach has its pros and cons. But, regardless of which valuation method they choose, the timeframe is always lagging. This means that when foundation asset values rise, there will be a lag in the corresponding rise of payouts.
To illustrate, take the case of the XYZ Foundation, which has an October 1 September 30 fiscal year and uses a standard 12-month trailing average to calculate its payout. On September 30, 2008, the average market value of the foundations assets was $100 million and the payout for the new fiscal year was set at roughly $5 million. During the year, the foundations assets dipped due to market losses to an average value of $70 million, but the payout remains at $5 million.
On October 1, 2009, the new payout will be based on the new $70 million average, which equals $3.5 million: $1.5 million or 30% less than the previous year. Many foundations also have payout obligations that they are carrying forward from previous fiscal years, which could further lower the amount of new grants the foundation awards.
Foundations Are not Sitting Still
Fundraising provides some foundations with an option to increase assets, but that would only lead to more competition with nonprofits for limited dollars.
According to Grantmakers for Effective Organizations, many are increasing operating support and others are easing restrictions on current grants or making more multi-year grants. Also, belt tightening within the foundation world is occurring with many cutting administrative expenses in order to maintain grantmaking. The Robert Wood Johnson Foundation, for example, recently announced it is seeking to reduce its workforce by offering early retirement to 42% of its employees.
Some argue that private foundations should dip into principal, but doing so would reduce the endowment even more than it has already shrunk, further delaying the recovery of asset values. The Uniform Prudent Management of Institutional Funds Act (UPMIFA), recently signed into law in Massachusetts, allows some foundations to prudently spend endowed funds below their historical amounts. This could have a positive impact for grantees if the foundation has such funds.
Nonprofits that are developing develop next years budget should be realistic about the amount of funding that private foundations will contribute. Check foundations web sites to see if theyve published a statement about their giving, or call your program officer to see what they have to say about the outlook. The better nonprofits understand the funding landscape, the more they can develop realistic budgets and contingency scenarios.
The tides may be rising but the seas are still rough and it will be a while before its smooth sailing again.
Rebecca Donham is senior program officer at the MetroWest Community Health Care Foundation. She can be reached by email at email@example.com or by phone at 508- 879-7625.
Posted: July 2009