The Regulation of Disbursements from Non-Profit Endowments

By Patrick L. Warren

Several weeks back, I had a brief twitter discussion with Victor Fleischer about his proposal in a NY Times Op-Ed to require require universities with endowments in excess of $100 million to spend at least 8 percent of the endowment each year. That conversation has continued in the broader media, including a nice recent article in Slate by Jordan Weissmann. I enquired about whether a similar proposal had been tried in any context, and he pointed me to a paper by Brian Galle, forthcoming in the Wash U. Law Review, entitled "Pay It Forward?  Law and the Problem of Restricted-Spending Philanthropy", which I would like to commend to you attention and discuss briefly.

Galle's paper actually mostly deals with the opposite side of the endowment spending coin, so called ``restricted spending'' rules which cap a foundation manager's discretion to disburse the value of the endowment in a given year. For the most part, these rules are private arrangements made when setting up the foundation or attached to major donations, but "state organizational law imposes duties on managers to safeguard the wishes of a donor who wants to see their money last in `perpetuity,' and in more than a dozen states the law actually presumes that managers have failed that duty simply by spending more than seven percent or so of their organization’s assets in any year." Galle analyzes the economic justifications for such rules, theoretically, and then uses a database of thousands of charitable foundations over 2 decades from the IRS via the National Center on Charitable Statistics to evaluate the effect of various foundation-spending-related policies: federally manadated minimum-spending rules, federal taxes on net investment earnings, and state-mandated default spending caps on foundation expenditures. 

His key results are that raising minimum spending rules would have little effect on the long-term viability of foundations, while soft spending caps really do bind their disbursement. He draws these results together to conclude, essentially, that it is possible to encourage foundation spending without fearing signficant drops in longevity. Left unexplored, of course, is the ultimate question raised by Fleischer of whether encouraging disbursements actually improves progress on the foundation's mission. But Galle's paper has provided more and better facts that we can bring to the discussion of that question. You should check it out.