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The perpetual foundation model stimulates a larger amount of charitable giving than would otherwise occur. The first minimum payout requirement for private foundations, established by Congress in 1969, was higher than 5 percent. It was reduced to the current level in 1981 after careful study and public hearings produced evidence that the higher rate had dampened the creation of new foundations. Raising the minimum payout requirement and closing out the opportunity for perpetuity could well divert transfers that are now expected.
Permanent foundations are an important part of the social fabric of many communities around the country. Permanent foundations are admired in their communities for the work they do, regarded as performing essential tasks, valued for their independence, and seen as a part of the American tradition. In cities where permanent foundations survive beyond the lives of their benefactors and even the industries that generated their wealth, they can be especially important in later renewal and revitalization.
Rapid distribution of the assets of all perpetual independent foundations would produce a one-time surge in current revenues but a drought thereafter in nonprofit capital. Raising the required payout rate to 7 percent, for example, would generate approximately $4 billion in additional annual outlays from all foundations initially. Spread over many fields, that increment would be a minor addition to any sector: if 20 percent of the increase went to the health care sector, for example, it would amount to .06 percent of national health expenditures. The price paid for this short-term increase in philanthropy, amounting to a very modest increment in any sector, would be serious depletion of the ranks of value-added foundations over a 20-30 year period.
The country benefits from a decentralized voluntary sector that helps address the needs of a diverse society. Diversity in the foundation sector accounts in part for its adaptability and flexibility in responding to a wide variety of changing social needs. The 5 percent minimum payout requirement now in force assures that foundations do not become sterile warehouses of wealth, but allows a variety of choices regarding spending strategies and longevity.
In sum, there is a place for permanent, value-added foundations, just as there is for those that choose to spend down their assets over a relatively short period. Value-added foundations should be expected to have higher administrative expenses precisely because they employ professionals who are leaders in their fields, able to contribute directly to the work of grantees, carry out research, publish, and present reliable analysis in congressional testimony, scholarly publications, and other forums.
A far more important question is whether or not foundations are accountable and making a difference in society. All foundations — and especially those with perpetuity as an objective — should regularly and rigorously examine their activities and frankly assess whether their accomplishments justify their internal expenses.
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