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The upsides of spending down

By Farooq Sabri 22 June 2015

Five years on from starting The Billionaires Club, Bill Gates’s initiative to convince his super rich friends to embrace philanthropy already has 133 signatories. The commitment of these colossal sums will no doubt be significant for global giving, but the way these sums are spent will be even more important.

A favoured move among the richest philanthropists on both sides of the Atlantic is to endow a foundation with some of their wealth, and then organise their giving through this. At present, the vast majority of foundations here maintain the size of their endowment by granting only a small proportion each year (what are called ‘perpetual foundations’). The alternative approach—probably best championed by Gates himself—is to spend down endowments so that they have spent all their cash after a defined period. So how should the billionaires negotiate these alternatives?

An economist might well endorse the Gates model. After all, money today is worth more than it is tomorrow. From a charity’s perspective, cash spent now can start addressing problems for beneficiaries, something which can’t be achieved if the money is stuck in a bank. This is what charitable causes want, too: asked to choose between a donation today and one in twelve months time, US non-profits argued that a twelve month delay would need compensation with interest as high as 50%.

In addition, rising global income (and likely rising rates of philanthropy) mean there are fewer incentives to store up cash for later. If we expect that more resources will be around to address problems in generations to come, holding back donations makes very little sense if they could be used effectively now. Some experts argue that a major injection of cash can finally address some of the major health issues which will otherwise dog the world’s poorest for years to come. It’s hard to see how a perpetual foundation could enjoy the same impact.

There are practical difficulties, of course. Big flows of philanthropic money cause their own problems, and charities may find it difficult to manage giving cycles where lots of cash suddenly arrives and then leaves their accounts (a typical problem for charities wrestling with the scale of their organisation). And the end of funding can mean winding-down the programmes reliant on it—a funder will want to have a plan in place to make sure successful programmes don’t collapse once their funding is gone.

Similarly, the best foundations provide much more value than merely the programmes that they fund. How they choose to invest their endowments, promote their missions and share what they have learnt can be significant (although it could always be improved, as we’ve argued in the past). When a foundation has given away all its money, it loses capacity to push for social change in other ways.

Philanthropists would be wise to pause over some of these concerns. But with so few foundations in the UK committed to spending down their endowment, despite its benefits, it deserves wider consideration. Perpetual foundations may have good reasons to operate the way they do—from the personal motivations of their founders to the wish that their children have a charitable enterprise to inherit—but it is smart to at least weigh-up the social and economic case for working differently.