Benchmarking Foundation Administrative Expenses: Update on ...

KEY FINDINGSOperating Characteristicsand Expense Patterns,2007 to 2009Independent foundations’characteristics strongly influence theircharitable administrative expenses.Even among the largest foundations,differences in giving levels, assets,operational styles, geographic reach, andprograms vary dramatically and producevery different expense patterns. While somefoundations in this study reported expensesin the millions in 2007–2009, one out ofeight of these large grantmakers reportedno expenses as part of their qualifyingdistributions in that period. One out ofthree had no paid staff (Figure 1). Thesefoundations were likely functioning withvolunteer labor and/or operating costs wereabsorbed by the donor or the donor’sfamily business.Employment of staff is the single mostimportant factor affecting expenselevels, followed by staff size.Paying staff significantly raisesadministrative costs, and expense levelsrise consistently with the number of staff(Figure 2). Staff size, which varies greatlyeven among foundations with similar givinglevels, depends on a foundation’s mission,roles, and scope of activities. In general, thefoundations that tend to give the most havethe largest staffs. But smaller foundationswith complex programs often have aboveaveragestaff size relative to their giving.<strong>Foundation</strong>s that employed staffhad median expense ratios of nearly8 percent, on average, comparedwith less than 1 percent for thosewithout staff.Just 35 percent of staffed foundationshad a ratio below 5 percent, while93 percent of unstaffed foundations werein this range (Figure 3). At the other endof the spectrum, close to 3 percent of largeindependent staffed foundations (21) hadratios greater than 30 percent. 3International grantmaking, directcharitable activities, and grants-toindividualsprograms are stronglyassociated with higher expense ratios.<strong>Foundation</strong>s that engaged regularly inthese practices between 2007 and 2009had median expense-to-qualifyingdistribution ratios that were almost or atleast twice as high as those that did not.These activities may have higher fixedcosts, require more employees, or incurgreater regulatory burdens. Besides thesestaff- and resource-intensive activities,other practices that substantially boosted afoundation’s administrative expense levelswere operating as a health-conversionfoundation (see below), making programrelatedinvestments, and/or maintaininga web site (a proxy for a broadercommunications effort).<strong>Foundation</strong>s with high charitableadministrative expense ratios oftenmix grantmaking and direct charitableactivities (DCAs).While making grants is the primaryfunction of most foundations, one outof five of the large staffed independentfoundations studied regularly engagedin DCAs (Figure 4). These ranged fromconducting health policy research toproviding technical assistance to nonprofitsto operating conference centers or museums.In fact, although they make grants, someindependent foundations seem to functionmuch like operating foundations andhave among the highest expense ratios. 4As foundations increasingly take on nongrantmakingcharitable activities, 5 it iscritical that studies of finances account forthese program costs.Figure 2: Charitable <strong>Administrative</strong> <strong>Expenses</strong> as a Share of Qualifying Distributions,2007, 2008, and 2009: Staff Size (Staffed Independent <strong>Foundation</strong>s)Year2007200820093%3%3%6%6%7%11%10%10%10%7 11%2007–0910%6%3%13%14%> 50 staff15–50 staff7–14 staff4–6 staff2–3 staff1 staff0% 5% 10% 15% 20%13%13%Median PercentageSource: The <strong>Foundation</strong> Center, 2012: The <strong>Foundation</strong> Finances Database (2007–2009). Sample includes 1,171 foundations that rankedamong the approximately 1,900 largest foundations by giving in 2007, 2008, and 2009 for which data were available for all years; qualifyingfoundations gave at least $2 million each year. Of the 1,171 foundations sampled, on average 777 reported having paid staff.15%14%15%16%17%17%Sampling InformationThis study focuses only on largeindependent foundations. The sampleincludes 1,171 foundations that rankedconsistently among the approximately1,900 largest independent and familyfoundations by giving in 2007, 2008,and 2009 and for which IRS Form990-PF was available publicly for allyears. These foundations each gaveat least $2 million in each studyyear. While foundations in the studyrepresented just 2 percent of allindependent foundations in 2007,they accounted for 67 percent of allindependent foundation giving in thatyear and 70 percent of all independentfoundation assets. Aggregate financialdata for these 1,171 foundations,including assets, giving, qualifyingdistributions, charitable expenses,and program-related compensation,are available at foundationcenter.org/gainknowledge/research/benchmarking/2 © 2012 The <strong>Foundation</strong> Center—<strong>Benchmarking</strong> <strong>Foundation</strong> <strong>Administrative</strong> <strong>Expenses</strong>

Figure 5: Charitable <strong>Administrative</strong> <strong>Expenses</strong> as a Share of Qualifying Distributions,2007–2009: Health Conversion <strong>Foundation</strong>s (Staffed Independent <strong>Foundation</strong>s)Giving RangeLess than$5 million$5 millionor moreAllHealth ConversionNon-Health Conversionn=14 18.9%n=319 8.1%n=16 16.6%n=428 7.2%n=30 17.8%n=747 7.7%0% 5% 10% 15% 20%Median PercentageSource: The <strong>Foundation</strong> Center, 2012: The <strong>Foundation</strong> Finances Database (2007–2009). Sample includes 1,171 foundations that rankedamong the approximately 1,900 largest foundations by giving in 2007, 2008, and 2009 for which data were available for all years; qualifyingfoundations gave at least $2 million each year. Of the 1,171 foundations sampled, on average 777 reported having paid staff.Family <strong>Foundation</strong>s’ Lifespan Decisions and Spending LevelsIn general, knowledge is scarce about the lifespan intentions of independentfoundations. However, based on responses to a 2008 <strong>Foundation</strong> Center survey offamily foundations, 175 staffed foundations in this study were coded as limited-life(24), perpetual (95), or undecided (56). 1 For the limited life foundations, the decisionto spend down was associated with lower median expense levels than those of allfamily foundations in the study. The few limited-life foundations had a4 percent median expense ratio, compared with an 8 percent ratio for foundationsthat planned to exist in perpetuity or were undecided. The lower ratios of somespend-down foundations correlate with their non-endowed (pass-through) status. Buteven the largest endowed foundations had very low ratios. Since these foundationshave formally opted to spend out their assets, they presumably had greater flexibilitythan perpetual foundations after the stock market crash to maintain or increasegiving. They were also less likely to add costly infrastructure.1The subset of 175 family foundations for which lifespan intentions were known represented 40 percentof the 441 family foundations in this study. Of the 24 limited-life foundations in the sample, 15 had2007–2009 giving of $10 million or greater, on average. For information about the survey findings, downloadPerpetuity or Limited Lifespan: How Do Family <strong>Foundation</strong>s Decide? (foundationcenter.org/gainknowledge)figure 6: Charitable <strong>Administrative</strong> <strong>Expenses</strong> as a Share of Qualifying Distributions,2007–2009: Family versus Non-Family (Staffed Independent <strong>Foundation</strong>s)Giving Range$50 millionor more$10 million to$50 million$5 million to$10 million$3 million to$5 millionLess than$3 millionn=23n=27n=118n=81n=111n=84n=124n=97n=65n=47Family4.2%Non-FamilyAll n=4416.1%n=33610.2%0% 2% 4% 6% 8% 10% 12%Median PercentageSource: The <strong>Foundation</strong> Center, 2012: The <strong>Foundation</strong> Finances Database (2007–2009). Sample includes 1,171 foundations that rankedamong the approximately 1,900 largest foundations by giving in 2007, 2008, and 2009 for which data were available for all years; qualifyingfoundations gave at least $2 million each year. Of the 1,171 foundations sampled, on average 777 reported having paid staff.5.4%6.3%7.1%7.0%10.2%10.1%9.9%11.3%11.1%Between 2007 and 2009, there wasrelatively little year-to-year change inthe factors that drive expense ratios.Although the three-year average evens outsome marked increases in expense levelsin 2008 or 2009, the underlying patternsremain consistent. The characteristics thatinfluence expenses were the same in eachindividual year and their impact on expenselevels was also very similar.historical trends andstudy implicationsChanges in the economy affect assetand giving levels of foundations andthus the relationship of their expensesto qualifying distributions, but spendingpatterns tend to even out over time.Independent foundations are very sensitiveto stock market trends since their mandatedpayout levels are based on their net assets.After growing robustly through 2007, 8foundation endowments fell victim tothe 2008 financial meltdown (Figure 7).Since giving and payout are driven by assetvaluation in the preceding year (or overa few years), a majority of foundationsreduced their 2009 giving after holdingsteady or increasing giving in 2008.<strong>Administrative</strong> expenses increased by doubledigits in this period, perhaps reflecting adelayed adjustment to five years of solidgrowth in foundation portfolios. 9 Whenexpense levels increase faster than giving, theexpense portion of qualifying distributionsincreases. Between 2007 and 2009, theyearly median expense ratio for staffedfoundations rose slightly. But averaged overthree years, the median ratio for this period,was the same as for 2004–2006 (nearly8 percent).The factors that drive expense levelsof independent foundations were thesame in 2007 to 2009 as they werein earlier periods.For foundations of comparable size, eachof the operating characteristics that had ameasurable effect on expense levels in 2001to 2003 and 2004 to 2006 had a consistentinfluence on expense patterns in this period,even if the median ratios were sometimesa little higher or lower. Thus, the effect ofdifferences in large foundations’ operatingcharacteristics on their spending patternshas now been documented over threeconsecutive but distinct economic periods4 © 2012 The <strong>Foundation</strong> Center—<strong>Benchmarking</strong> <strong>Foundation</strong> <strong>Administrative</strong> <strong>Expenses</strong>

with strikingly similar results. These findingsconfirm the importance of a multi-yearapproach in studying foundation finances.Only a multi-year analysis, repeated overregular intervals and in varying economicenvironments, evens out annual fluctuationsin foundation resources and expendituresthereby providing a more accurate andmeaningful interpretation of foundationspending practices.<strong>Foundation</strong> oversight and regulationwould benefit from deeperunderstanding of the diversity offoundations’ missions and activities.<strong>Foundation</strong>s’ programmatic and strategicchoices affect expenses. Assessing data overtime reveals the typical expense patternsand the extent of outliers. One-size-fits-alllimitations on charitable administrativeexpense levels or target ratios of expensesto-qualifyingdistributions would likely haveunintended consequences for foundationsand the people they serve.components of largeindependent foundations’charitable administrativeexpensesCompensation is by far the biggestcomponent of expenses.Compensation accounted for 46 percentof all charitable administrative expensedollars of the largest independentfoundations between 2007 and 2009(Figure 8). In addition to employee salariesand remuneration of officers and boardmembers, “charitable” compensationincludes pension plans and other benefits.However, it excludes investment-relatedsalaries and expenses.After compensation, the other mainexpense categories by share ofdollars are “other expenses” and “otherprofessional fees.”Between 2007 and 2009, nearly19 percent of large independentfoundations’ expenditures went to eachof the categories “other expenses” and“other professional fees.” In general, otherprofessional fees refers to consulting servicesassociated with grants administration,accounting, evaluation, etc., while otherexpenses is a residual category for expensesthat do not fit into one of the major lineitems on Form 990-PF. But because thesecategories are vaguely defined and are oftenused as catchalls, it is not clear whetherfoundations are using the same line items onForm 990-PF to report the same expenses(see below).The year-to-year distribution of majorexpense items for large independentfoundations is mainly consistent butpatterns have shifted over time.Between 2007 and 2009, compensation’sshare of expenses stayed about even, whileshares of “other expenses” and “otherprofessional fees” increased slightly. Whenthese major items are compared over time,however, a few changes stand out. Notably,between 2004–2006 and 2007–2009,the share of expenses for “other professionalfees” increased from 14 percent to19 percent, while the share for“compensation” decreased from 50 percentto 46 percent. It appears that somefoundations, especially the largest ones, areincreasingly using consultants to managetheir programs. 10Percent ChangeFigure 7: Change in Aggregate Finances for the LargestIndependent <strong>Foundation</strong>s, 2007, 2008, and 200925%20%15%10%5%0% -23.8%-5%-10%-15%-20%-25%2007–082008–092007–096.3%Total Assets-19.0%7.6%-6.0% 1.1% 17.6%Total GivingCharitable<strong>Administrative</strong><strong>Expenses</strong> 1CharitableCompensation 1Source: The <strong>Foundation</strong> Center, 2012: The <strong>Foundation</strong> Finances Database (2007–2009). Sample includes1,171 foundations that ranked among the approximately 1,900 largest foundations by giving in 2007,2008, and 2009 for which data were available for all years; qualifying foundations gave at least $2 millioneach year. The data are not adjusted for inflation.1Charitable administrative expenses and compensation are costs related to the foundation’s charitablemission only; they exclude investment-related expenses.5.0%23.5%15.8%4.5%21.1%Figure 8: Components of Charitable <strong>Administrative</strong> <strong>Expenses</strong>for the Largest Independent <strong>Foundation</strong>s, 2007–2009Compensation46%Other <strong>Expenses</strong>19%Taxes1%Accounting Fees1% Interest1%<strong>Foundation</strong>s with Charitable <strong>Administrative</strong> <strong>Expenses</strong>Printing and PublicationsLegal Fees 1%2%Travel, Conferences, and Meetings5%Occupancy6%Other Professional Fees19%Source: The <strong>Foundation</strong> Center, 2012; The <strong>Foundation</strong> Finances Database (2007–2009). Includes 1,029of the 1,171 foundations sampled that reported charitable administrative expenses. These are costsrelated to a foundation’s charitable mission and exclude investment-related expenses. The data are basedon a three-year average for 2007 through 2009. One hundred and forty-two large foundations did nothave any charitable administrative expenses.5 © 2012 The <strong>Foundation</strong> Center—<strong>Benchmarking</strong> <strong>Foundation</strong> <strong>Administrative</strong> <strong>Expenses</strong>77.0%

Changes in Form 990-PF are neededto improve reporting of foundationadministrative expenses and promotegreater transparency.IRS Form 990-PF—this study’s maindata source—has not kept up with thechanging activities and costs incurredby private foundations in areas suchas communications, technology, andevaluation. Nor does it adequately capturefoundations’ growing involvement in directcharitable activities. 11 Among the expensecategories in the form, “other professionalfees” and “other expenses” are especially inneed of revision. As noted above, these lineitems have become catchalls that obscurea significant and increasing amount ofoperating expenditures.<strong>Foundation</strong> Finances and the Economic Crisis: A Different PerspectiveFigure 7 maps aggregate changes in levels of giving, assets,and program-related expenses between 2007 and 2009 for the1,171 large independent foundations in this study but does notcapture the extreme differences in how individual foundationsfared. Figure A provides this view for the 1,171 foundations inthe study by showing the distribution of all foundations by rangeof increase or decrease. For example, even though overall givingby these foundations stayed about even in this period, nearlythree out of five sampled foundations reduced their giving. Andeven though the overall charitable administrative expenses ofthe 1,028 foundations that reported expenses increased byalmost 24 percent, nearly one in three of those foundations infact reduced their spending. 1 Finally, among the 759 foundationsthat reported charitable (program-related) compensation, nearlyone in three reduced their spending for this purpose. 21These findings on changes in the expense levels of the largest independentfoundations align broadly with the results of a 2009 <strong>Foundation</strong> Center survey offoundation practices, although this study’s sample is far larger than the surveysample. Of the 429 independent foundation survey respondents, 62 percent hadreduced their operating expenses since the beginning of the economic crisis.Among the ways that they had reduced expenses, the most common were toreduce staff travel and/or limit attendance at conferences, freeze or reduce staffsalaries, and reduce staff training opportunities. The complete results of thesurvey are included in <strong>Foundation</strong>s’ Year-end Outlook for Giving and the Sector(published in November 2009), available at foundationcenter.org/focus/economy.2Another 412 large independent foundations in the 2007–2009 study paid out nocompensation in any year.Figure A: Changes in Finances of the Largest Independent <strong>Foundation</strong>s by Range of Change, 2007–2009AssetsTotal Giving834 134 66 8232 23404 126 165 144 113 219-20% or greater-20% to -10%-10% to 0%0% to 10%10% to 20%20% or greaterCharitable <strong>Administrative</strong> <strong>Expenses</strong>187 73 114 211 137 306Program Related Compensation88 38 82 198 129 2240 200 400 600 800 1,000 1,200Source: The <strong>Foundation</strong> Center, 2012: The <strong>Foundation</strong> Finances Database (2007–2009). Sample includes 1,171 foundations that ranked among the approximately 1,900 largest foundations by giving in 2007,2008, and 2009 for which data were available for all years; qualifying foundations gave at least $2 million each year. Giving level is based on a three-year average for 2007 through 2009.6 © 2012 The <strong>Foundation</strong> Center—<strong>Benchmarking</strong> <strong>Foundation</strong> <strong>Administrative</strong> <strong>Expenses</strong>

endnotes1Loren Renz, <strong>Benchmarking</strong> <strong>Foundation</strong> <strong>Administrative</strong><strong>Expenses</strong>: How Operating Characteristics AffectSpending (New York, N.Y.: The <strong>Foundation</strong> Center,2011). This study examined 2004–2006 spendingpatterns for 1,026 foundations that consistentlyranked among the approximately 1,500 largestindependent and family foundations by giving amountand for which Form 990-PF was publicly available forall years.2Elizabeth T. Boris, Loren Renz, et al., What Drives<strong>Foundation</strong> <strong>Expenses</strong> and Compensation? Resultsof a Three-Year Study (Washington, D.C. The UrbanInstitute, the <strong>Foundation</strong> Center, and PhilanthropicResearch, Inc., 2006). This study examined2001–2003 spending and compensation patternsfor the largest 10,000 independent, corporate, andcommunity foundations, ranked by amount of grantspaid in 2001.3Between 2004 and 2006, 35 percent of the largestaffed independent foundations studied had expenseto-qualifyingdistribution ratios of less than 5 percent,on average, while 88 percent of foundations with nopaid staff were in this range. At the high end,2.2 percent of staffed foundations had expense ratiosover 30 percent (compared with 2.7 percent for2007–2009).4Between 2007 and 2009, three of the fourfoundations with expense-to-qualifying distributionratios consistently above 50 percent and eight of the14 foundations with ratios consistently above30 percent engaged in direct charitable activities.5The proportion of large staffed independentfoundations that engaged in direct charitable activitieson a regular basis increased from 18 percent in the2004–2006 study to 20 percent in the 2007–2009study. By year, the number of foundations that madeDCAs increased from 138 (2007) to 155 (2008) to160 (2009).6Between 2007 and 2009, health conversionfoundations represented four of the 14 large staffedindependent foundations with expense-to-qualifyingdistribution ratios above 30 percent each year.7Nearly two out of five health conversion foundationsstudied engaged in direct charitable activities,compared with about one out of five non-conversionfoundations.8Between 2006 and 2007, asset values of a matchedset of 1,151 independent foundations included inthis study increased 15 percent. Between 2004 and2006, total assets of the 1,026 large independentfoundations in the 2004–2006 study of expensesincreased 15 percent.9While the direction of assets and giving tends to trackthe economy, changes in administrative expensepatterns generally follow a longer time horizon. Plans toexpand institutional infrastructure—especially staff sizeand program commitments—cannot be easily reversedas assets fluctuate from year to year. This may help toexplain why expenses of studied foundations increasedby 24 percent between 2007 and 2009, while theirasset values fell by 19 percent and their giving levelsbarely increased. As Figure 7 shows, most of theincrease in expenses occurred between 2007 and2008, whereas the crash in the stock market came inlate 2008.10From 2007–2009, foundations with at least$500 million in assets allocated 22 percent of theirexpenses for other professional fees, on average,up from 16 percent from 2004–2006. Conversely,they allocated 45 percent of 2007–2009 expensesfor compensation, down from 49 percent in2004–2006. “Other professional fees” was thefastest growing expense category of the largestendowed foundations.11For a summary of recommended changes toForm 990-PF, see page 6 of <strong>Benchmarking</strong> <strong>Foundation</strong><strong>Administrative</strong> <strong>Expenses</strong> (published in 2011) atfoundationcenter.org/gainknowledge.Source for all data: The <strong>Foundation</strong> Center79 Fifth Avenue u New York, NY 10003foundationcenter.org u (212) 620-4230For more information, contact Reina Mukai at the <strong>Foundation</strong> Center, at (212) 807-2485,or via e-mail at rkm@foundationcenter.org.7 © 2012 The <strong>Foundation</strong> Center—<strong>Benchmarking</strong> <strong>Foundation</strong> <strong>Administrative</strong> <strong>Expenses</strong>