The Ford Foundation and four others plan to substantially increase their spending, a splurge financed in part by issuing debt.
The week after the U.S. economy shut down in March, Darren Walker, the president of the Ford Foundation, fielded a stream of phone calls from the heads of dozens of organizations that Ford supports. Many were panicked. One was in tears.
“There was a sense of desperation and panic from these usually self-assured leaders,” Mr. Walker said. “There’s never been such an existential challenge to the future of the nonprofit sector.”
In 2019, the Ford Foundation handed out $520 million in grants. Mr. Walker quickly realized that was not going to be anywhere near enough in this crisis-engulfed year.
His solution: Borrow money, spend it quickly and inspire others to follow Ford’s lead.
The Ford Foundation plans to announce on Thursday that it will borrow $1 billion so that it can substantially increase the amount of money it distributes. To raise the money, the foundation — one of the country’s most well-known and oldest charitable organizations — is preparing to issue a combination of 30- and 50-year bonds, a financial maneuver common among governments and companies but extremely rare among nonprofit groups.
Four other leading charitable foundations will pledge on Thursday that they will join with Ford and increase their giving by at least $725 million.
The decision by the five influential foundations — major sponsors of social justice organizations, museums and the arts and environmental causes — could shatter the charitable world’s deeply entrenched tradition of fiscal restraint during periods of economic hardship.
That conservatism has provoked anger that foundations, which benefit from generous federal tax breaks, are hoarding billions of dollars during a national emergency, more interested in safeguarding their endowments than in helping those in need.
The Ford Foundation, which has a $13.7 billion endowment, plans to distribute the newly raised money over the next two years, effectively increasing the percentage of its endowment that it pays out annually to about 10 percent from nearly 6 percent.
The four other foundations are among America’s most storied: the John D. and Catherine T. MacArthur Foundation; the W.K. Kellogg Foundation; the Andrew W. Mellon Foundation; and the Doris Duke Charitable Foundation. The MacArthur and Doris Duke foundations plan to issue bonds. Mellon and Kellogg are still working out their financing plans.
Major charitable foundations traditionally spend a little more than 5 percent of their assets in a given year — the minimum required under federal law for the tax-exempt organizations. The less they distribute, the larger their endowments grow and the higher their odds of surviving in perpetuity.
The Ford-led plan provides a workaround. By using borrowed money, foundations would go into debt but wouldn’t erode their endowments. Foundations have issued bonds in the past to finance projects like building new headquarters, but bankers said it was virtually unheard-of for them to borrow money that they planned to distribute.
“For most foundations, the idea of taking on debt is outside of normative thinking,” Mr. Walker wrote in a letter last month to Ford’s board. “Covid-19 has created unprecedented challenges that require foundations to consider ideas — even radical ones that would have never been considered in the past.”
“This is unprecedented for us, but these are unprecedented times,” said John Palfrey, president of the MacArthur Foundation, which will start with a $125 million bond offering and then assess whether more is needed.
With 300 years of experience between them and fortunes forged in insurance and tobacco, automobiles and banking, the five foundations carry the cachet of America’s unofficial aristocracy. They are closely watched trend setters in the philanthropic community.
There are more than 100,000 private foundations in the United States, and they are together sitting on endowments worth nearly $1 trillion, according to Candid, a group that tracks nonprofit groups and foundations. Some — including the Bill and Melinda Gates Foundation — already pay out a substantial chunk of their endowments every year. But many more hover near the legal floor, on average distributing roughly 7 percent of their funds annually.
An increasingly vocal network of charitable figures, lawmakers and others wants to pry that piggy bank open. The Patriotic Millionaires — a group of about 200 wealthy individuals, including the Disney heiress Abigail Disney, that pushes for higher taxes on the rich — and the left-leaning Institute for Policy Studies have been pressing Congress to force foundations to double their required payout to 10 percent of their assets for the next three years.
That would generate about $200 billion in additional payouts, the Institute for Policy Studies estimated.
“I’ve been appalled for years how many foundations treat the 5 percent federal floor as a ceiling and refuse to spend a penny more than they are required to,” said Scott Wallace of the Wallace Global Fund, whose family foundation plans to give away one-fifth of its $120 million endowment this year.
“If in our hour of greatest need, America’s greatest crisis in generations, philanthropies are planning to spend less, then they need a big kick in the butt,” added Mr. Wallace, a grandson of the progressive Henry A. Wallace, who was President Franklin D. Roosevelt’s vice president from 1941 to 1945. “Only Congress can deliver that kick.”
Mr. Walker said he had approached six more leading foundations about joining Ford but was rebuffed. Some were adamant they would not increase their spending rates. A few said they might, but weren’t ready to make a public pledge.
The reluctance to spend big in a crisis reflects in part foundations’ desire to preserve their endowments in perpetuity. Because those endowments tend to be invested, the amount they distribute typically declines during recessions and stock market downturns — precisely when their money is needed most.
The Carnegie Corporation was among those that declined to pledge to spend more. The Rockefeller Brothers Fund was another. Stephen Heintz, its president, said its spending would go up this year but that its board had not yet decided by how much.
Larry Kramer, president of the William and Flora Hewlett Foundation, said in March that the $9.7 billion foundation would not increase its spending because doing so “would require selling devalued assets from an already diminished endowment, thus locking in losses permanently, to the certain detriment of future grantees and the communities they will serve.”
Since then, financial markets have almost entirely rebounded from their March lows. Vidya Krishnamurthy, a spokeswoman for the foundation, said it was “reassessing how best to meet immediate and future needs of our grantees, amid the current crises and changing market conditions.”
Thousands of nonprofit organizations — from community theaters to food pantries to small rural hospitals — are fighting for their survival. A study released this week by the Center for Effective Philanthropy found that 90 percent of nonprofit groups surveyed had to cancel or postpone fund-raising events and 81 percent had to reduce programs or services. At the same time, more than half said that demand for their services had increased.
Many of those groups rely on foundations as a major source of funding.
“Frankly, the house is on fire right now, and if they don’t save the nonprofits, they’re going to have to rebuild the entire sector,” said Chitra Hanstad, executive director of World Relief Seattle, which provides services to refugees, asylum seekers and others. Its funds running low, the group is planning a round of layoffs.
The Ford Foundation was started in 1936 with a grant of $25,000 from Edsel Ford, a son of the Ford Motor founder Henry Ford. In recent years, it has devoted itself to attacking economic and racial inequality, financing groups like Campaign Zero, which seeks to end police brutality, and Color of Change, which works to help black communities.
Mr. Walker said he realized in March that this was the moment to borrow money. He was listening to a speech by the Federal Reserve chair, Jerome H. Powell, who said he was slashing interest rates. “It occurred to me that the cost of borrowing for highly rated institutions would have to be very low,” Mr. Walker said. The foundation’s board approved the plan.
Ford is betting that it can earn a higher return on its endowment assets than it will pay in interest on the bonds, allowing it over time to repay the borrowed money without reducing the size of the endowment.
To keep the plan private, Ford code-named it Project Wanda. It was a reference to a striking 2015 portrait of an African-American woman, Wanda Crichlow, that hangs in the foundation’s lobby.
The Ford Foundation debt will be marketed as “social bonds” whose proceeds will be earmarked for grants that advance environmental, social and corporate governance goals, according to Wells Fargo, which is selling the bonds for the foundation. That means they can be bought by funds focused on socially responsible investments.
Mr. Walker hoped Ford’s clout in the charitable world would lead other foundations to take similar actions. In March, he began reaching out to the leaders of large foundations to enlist their support. “My message was that it’s not defensible to pay out only 5 percent,” Mr. Walker said.
When he called Mr. Palfrey of the MacArthur Foundation in Chicago, the foundation was already looking to tap the bond market for money that could be used to increase donations. But Mr. Palfrey described Ford’s plan as “wind in our sails.”
The Doris Duke Charitable Foundation, named after the tobacco and energy heiress, is the smallest of the five organizations taking part in the plan. It has an endowment of just under $2 billion and usually distributes about $110 million a year. This summer, the foundation plans to issue $100 million worth of 30-year bonds, and it will distribute those funds by 2022, said the foundation’s president, Ed Henry.
“The downside of that is, of course, that it creates an obligation for the foundation for the next 30 years,” Mr. Henry said. “Basically, we’re taking out a mortgage.”
The Andrew W. Mellon Foundation will increase its giving this year to $500 million from $300 million, or about 8 percent of its total assets, said Elizabeth Alexander, the foundation’s president.
The W.K. Kellogg Foundation, which usually distributes about $300 million a year, is pledging to increase grants by a total of up to $300 million over the next two years.
“We have to increase our payout and we have to go big,” said La June Montgomery Tabron, the Kellogg president and chief executive. “Let’s come together and set an example for how, no matter where your portfolio is in this moment, you can still increase your payout.”