Understanding Foundations and Payout

By Miki C. Akimoto and Mary Phillips

Miki Akimoto
Everyone loves a good list, but simplifying complex information can be misleading, particularly when it comes to ranking the relative generosity of philanthropic foundations.

Recent articles in the Boston Business Journal (Dec. 4-10, 2009) and massnonprofit.org (Dec. 5, 2009) purport to report on the “Top Foundations” in the area and their relative rates of giving. Taking the BBJ list and massnonprofit.org report at face value may lead the reader to conclude that there are dramatic differences in giving rates among the reported foundations.

Unfortunately, a combination of data issues (data were drawn from multiple, non-comparable sources and across multiple years) and incomplete information obscured much of the true story of foundations’ giving and contributions to our community.

Associated Grant Makers, the regional association of grantmakers for Massachusetts and surrounding areas, strongly supports open communication and transparent reporting practices by foundations and other funders in our area. We believe that it is very important to understand foundations’ giving, given the critical roles these organizations play in supporting nonprofits and other community services, but it is equally important to understand what the reported “giving” in these two reports means and does not mean.

It is tempting to try to find a couple of key numbers from a list, create a ratio, and draw conclusions about how “generous” a foundation is compared to its peers. But foundations, like all charities, are regulated by the IRS and the 990s and 990-PFs (information returns from which most of the data in these articles are drawn) provide information in complex and often nuanced ways, which defy easy calculations or comparisons.

Key elements to understanding how much foundations actually give on an annual basis include:
  • Community foundations, such as The Boston Foundation give differently than private foundations and therefore their giving percentages are not comparable. Community foundations are comprised of both endowment and multiple donor-advised funds. The Boston Foundation’s website notes: The Foundation is made up of some 900 separate charitable funds established by donors either for the general benefit of the community or for special purposes. Any direct side-by-side comparison of community and private foundations will only make sense if you isolate the funds directly under a community foundation’s control (generally called discretionary grants) to compare with the private foundation’s grantmaking.

  • In addition to direct grants, some private foundations (such as the Hyams Foundation and Melville Charitable Trust) use a tool called a program related investment (PRI) which is the direct investment of part of that foundation’s endowment in a charitable or mission related enterprise. For example, several local foundations have made large PRIs to build affordable housing through the Home Funders Collaborative. Those PRI payments, often very large (not infrequently in the range of $1 million or more), are not reported in the “grants paid” portion of a foundation’s 990-PF but are reported in another section of the tax return and count toward a foundation’s pay-out or giving when paid.

  • Foundations have other direct charitable expenditures such as program expenses (which often take the form of technical assistance for grantees, for example) which are not included in the grants paid line on the foundations’ tax returns, but do provide direct benefit to grantees and communities.

  • Because of the way the data were collected by the Boston Business Journal, there was often a false relationship between the reported asset level and giving. Giving should be looked at in the context of the previous 12 months’ average endowment value rather than its current value. Further, because the BBJ was forced to rely on a combination of self-reported data and data drawn from central repositories such as the Foundation Center and Guidestar, there are dramatic variations on what time periods are being reported, with some foundations reported at pre-recession endowment and giving levels while some are post- and during-stock market drops.

  • As a recent article in the massnonprofit.org site pointed out, foundations frequently calculate their spending rates over a multi-year period. This has the benefit of “smoothing out” the impact of any sudden drops in asset levels. For more information, click here.
These are just a few small examples of the complexity of understanding how foundations’ giving should be considered. The foundations cited in the BBJ and massnonprofit.org articles are all meeting their legal obligations, and making important contributions to nonprofits and their communities. Mere numbers tell only one small part of the story, and when numbers are taken out of the context, they only distort that story.

Miki C. Akimoto is acting president and Mary Phillips is the board chair of Associated Grant Makers, the regional association of grant makers located or making grants in Massachusetts and surrounding areas, the mission of which is to support responsible and effective grant making.

Posted: December 2009