Spending Down Ever Larger Foundations. Repeatedly
Updated: Jun 15, 2022
Foundations fund great charities by giving them grants. For charities, these grants represent a significant source of funds. Foundations select which charities to fund and for how much and how long, for the best use of grant money.
However, not enough money is available from all sources to operate charities at the level required to meet current needs. In 2018 Imagine Canada[i] forecasted a growing funding shortage (aka “social deficit”) that would be about $25 billion over the coming decade.
In response, the eleven thousand foundations in Canada have been urged to give charities more each year [ii]. Foundations are legally required to grant a minimum disbursement (the “DQ” or Disbursement Quota) as set by the Canada Revenue Agency. The DQ will rise for most foundations in 2023 from three and one-half to five percent of investment values not used for charitable purposes. This should bring some (but not enough) new operating dollars to address annual charitable expenses. Charities would like the foundations to spend more, but how much more is possible?
This blog determines a theoretical maximum constant spend amount for all foundations in aggregate each year. This maximum would draw from all invested funds on hand, plus annual receipts, plus annual income from investments. At the end of spend-down, essentially all monies have been spent.
Of course, even if charities were to receive this maximum constant amount over the paydown period, the question is what happens after the party is over? I propose that resupplying the foundations is a viable answer, but finding a periodic new donation of $90 B is a lot to ask.
This blog will further determine what resources need to be prearranged to resupply funds to foundations and even permit growth. I examine some fundraising targets, along with timelines to begin such a resupply regime.
How much do foundations currently spend and receive each year?
Spending: In 2018 foundations held $91.9B and disbursed $7B which is a 7.6% spend per year (Note this is already much larger than the current minimum of 3.5% set by the DQ, and yet is not enough).[iii]
Receipts: From Blumberg[iv], we learn in 2019 when donations totalled $19.6 B, that $4.7 B (24.0%) went to the top foundations. We'll assume that as the annual income from donors. We also will use an assumption of 6% net returns on investment, which will be an absolute dollar amount that dwindles down each year as invested amounts diminish with every payout.
We'll use these admittedly broad assumptions to set the stage while recommending deeper investigation and verification of all assumptions. What follows is the back of the envelope, fifty thousand foot level calculations.
How much could be spent at maximum disbursement?
We assume that a significant increase in spending is ideal, and thus choose to spend down the money over a period of 14 years. This period corresponds with the replenishing period discussed below, a period that typically allows investments, assuming 6% net returns, to more than double.
If spending is evenly spread over 14 years, at 6% net returns, and foundations receive $4.7B each year in donations, the $91.9 B could be spent down at the maximum rate of $17 B per year before being depleted.
The net annual increase would be an extremely welcome $9.4 B / year more ($17 B less 7.6 B) or 143 % higher than today. This effectively increases the spending to 18.4% (from $17 B / $91.9 B) versus today's 7.6%.
Resupplying and replenishing the foundations
Ideally, a new $91.9 B magically appears on the scene on the last day of the paydown. To do this magic, we turn to the use of long-term compounding as we discuss so often in this blog, under the name of a Ben's Way investment fund. Such a fund grows money outside the tax confines of charities and promises to repeatedly deliver growth on the funds to charities.
Let’s see how that might look. If foundations spent $17 B per year they would spend down the base by Year 14. Meanwhile, some amount of Ben’s Way investment money (an amount we need to determine) could be earning the same 6% over those fourteen years to replace the $90 B. We can calculate that investment amount because we know every 14 years at 6% money invested increases by a two times multiple. Thus $90 B divided by two equals $45 B - the amount to invest in a Ben's Way replenishing fund on the day spend-down begins.
Gathering up a sum of $45 B would be a big effort. But if we are going to that much trouble to raise significant money to replenish foundations, shouldn’t we think bigger?
One bigger thought might be to have foundations deliver more each year. Of course, we'd need even more Ben's Way funds to start. If for example, we want the annual spending to increase by $2 B every 14 years (rising then $2 B over $17 B per year or 11.7%) we effectively need to grow the replenishing fund by $15 B. Thus if the goal is that $90B gets spent down but is replenished by $105 B, then the next spend down can be $17 plus $2 B or $19 B.
Similarly, if the next replenishment is upped by $15 B to $120 B, the spend is $22 B. At $135 B the spend is $24 B and so on it can go every 14 years. I submit this continuously growing spending is much more attractive, but what investment would this require?
We know that to continually replenish the $90 B without a growth factor requires the original $45 B. A further amount is needed to enable the growth portion on a continuous basis. As well we need to know what portion of the invested Ben's Way fund to payout to the foundations each time.
This is a dual unknown maths problem, the amount needed and the portion to be doled to the foundations. Using iteration I have calculated that an original seed fund of $125 B that doubles to $250 B could then give 42% equalling $105B after 14 years. The remaining 58% of the $250 B ($145 B) doubles in 14 years to $290 B, which then gives 42% or $122 B which is just slightly bigger than the $120 B targets.
Thus, instead of a seed fund of $45 B, we need $125 B, after which every 14 years 42% will replenish the foundations in ever-growing amounts. This $125 B is less than three times larger than the $45 B, so is worthy of consideration.
How to raise the $45 B, or the $125 B?
I offer the calculations for three timeframes to save up for either $45 B or the $125 B, over 50 years, 100 years, and 150 years from now. Clearly the longer you are willing to wait, the smaller the seed money needed to begin the Ben's Way investment fund. In fact, the calculations indicate just that:
To explain the above table look for example at the first column, 50 years. If $390 M were gathered for 15 years, the total would reach $6 B in year fifteen, which in turn could grow without further contributions for 35 more years at 6% to become $45 B by year 50. Similarly $1.1 B gathered for 15 years would amass to $16 B which in turn could grow to $125 B by year 50. The same calculations apply for the 100 and 157 years columns.
How much could be raised?
Depending on the will of many to consider funding such a program, the $488 one-hundred-year approach might be the most desirable as the amount of $488 M is considerably smaller than the $16 B and the time frame far shorter than waiting the 157 years. However, if $16B could be raised quickly, the time to ever-growing foundation funds is not that long at all.
You may have noticed I make no mention of an ongoing annual donation of $4.7 B after the spend down. That money would likely continue and could permit larger numbers than stated above a possibility.
In addition, it is useful to consider what proportion of that annual donation we need to save to achieve the financial independence of Canada's foundations. These annual savings from the above table as portions of annual receipts would range from the largest 23.4% ($1.1 B/ $4.7B) to the smallest 0.04% ($2M/$4.7B). In the middle saving up $100M (2.1% of annual receipts) for five years could see all of Canada's foundations financially independent and growing after just one hundred years.
The bottom line is that funding a growing foundation base is possible but requires significant resources and time. The benefit however is achievable and certainly would be worthwhile!
[i] Canada's Emerging Social Deficit | Imagine Canada [ii] For example, the Give5.ca campaign asked foundations to pledge to give at least 5% of funding in 2020 when the DQ was only 3.5% of invested assets. Charity Intelligence estimates that a 5% commitment from all foundations would add $700 million in funding to charities. Ref: Microsoft Word - GIVE5.docx (secureservercdn.net) [iii] Canadian Foundation Facts - Philanthropic Foundations Canada (pfc.ca) [iv] Which-Canadian-charities-issued-the-most-official-donation-receipts-2019.pdf (canadiancharitylaw.ca)
Photo by Rahul Pabolu on Unsplash