[Host]: Welcome back to the Truist Nonprofit Insights Podcast Series! Thanks for joining us today. Foundations and Endowments play a vital role in the philanthropic community, but they often face challenging spending decisions that can impact their long-term goals. Quanda Allen, Senior Vice President and Specialty Wealth Segment Leader for Truist Wealth, shares her insights on how Foundations can create a spending strategy that balances over distribution with long-term financial needs. It starts with a three-step approach to avoid chronic over distribution.
[Quanda Allen]: The first is to be strategic. You have to evaluate current spending with an eye towards conservatism. The second is to be flexible. Clearly future needs cannot always be determined, so foundations need to maintain flexibility to spend at higher rates in the future to address a particular need. And finally, be intentional. Foundations want to insure that all stakeholders are clear about their mission so that you can use charitable assets to meet that mission in an intentional way.
I have one example in particular. I work with a foundation in Atlanta that is very strategic about their charitable distributions; in fact, they will only distribute after their taxes are completed and they have the required minimum distribution from their accountant. On a quarterly basis, they meet with their CTA to review investment returns. Their goal is to insure that they're only paying one percent excess tax as opposed to two percent in excess taxes, and the way that they're able to determine that figure is by carefully monitoring their distributions throughout the course of the year.
[Host]: Being intentional with spending can sometimes mean choosing to over distribute. Allen says there are many scenarios where foundations may feel it's worthwhile to spend beyond the five percent required by the IRS.
[Allen]: There are four primary reasons why this decision is made. The first is to increase funding for a cause or organization when other sources diminish. We saw this happening in 2009 after the 2008 economic crisis. A lot of private foundations rallied to the cause and made significant over distributions to meet the needs of charitable organizations. The second reason is to provide long-standing support of specific programs, organizations, or to address their mission. The third reason is to engage in multiyear commitments and where we typically see multiyear commitments are on capital projects. And finally, there are situations where private foundations deplete assets using spend down provisions. And what do I mean by that? For example, I used to manage a trust with a 21-year sunset provision and the trustees decided to make several multiyear grants to commit 80 percent of the funds so that they could oversee the program's progress over time.
[Host]: While over distribution can affect a foundation's portfolio in the long-term, Allen says the choice to over distribute can be a sound one, so long as the foundation keeps the big picture in mind.
[Allen]: You have to know that the loss performance is an opportunity cost of over distribution. Once the funds are distributed, they're gone from the foundations account. They're not a part of the investment pool and the private foundation may or may not be able to recoup that lost investment. The second is that fluctuating market conditions make adjusting to offset any negative effects very, very difficult because you don't know what the next year is gonna bring. So, as long as you keep those two very important aspects in mind, making the decision to over distribute is a choice that trustees have.
[Host]: Occasional over distribution can serve their foundation's interests, but Allen says chronic over distribution can have a negative impact.
[Allen]: The first is diminish ending asset value over time, so just by spending two percent more on an annual basis over a 30-year period, a foundation could deplete its assets down to nearly 45 percent of the original value and that is a significant impact. The second is that over time the diminished asset value leads to lower spending levels. So, sure, in the early years, a higher spending rate allows for greater spending and greater impact in the community, but over a 30-year period you would indeed be spending less with a seven percent distribution versus a five percent distribution in that final year because your overall assets have indeed diminished.
[Host]: When it comes to managing spending for a foundation or endowment, being clear about the institution's strategy and its values can help guide decisions.
[Allen]: There are really three things that we think that organizations can do. The first is to set a clear distribution policy. Outline the parameters for when the foundation will indeed consider over distribution and really model how that's going to impact future giving. The second thing that private foundations can do is leverage your investment adviser's tools to really look at the long-term effects of a variety of spending scenarios. And finally, reduce multiyear commitments. This is one of the tools in a private foundations toolbox that is relatively easy to do. Because you can't predict what the next year will bring, reducing multiyear commitments really helps a private foundation to focus on their current year's distribution so that ultimately they could meet their mission long into the future.
[Host]: We hope that you enjoyed today’s podcast.
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This podcast was brought to you by the Truist Foundations and Endowments Specialty Practice, which has more than a century of experience working with not-for-profit organizations delivering comprehensive investment advisory, administration, planned giving, and trust and fiduciary services to over 700 not-for-profit organizations.