Benchmarking Foundation Administrative Expenses: Update on ...

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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>
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