A Catchy, Popular, Attractive, and Bad Idea

[This post was co-published in The Chronicle of Philanthropy on August 9, 2016.]

The charitable world has been buzzing recently about a new idea from the Minneapolis Foundation: The Pay It Forward Forever Fund, a uniquely structured effort to build a community endowment. Many people see the Pay It Forward Forever Fund as innovative and far-sighted, but it strikes me as precisely the wrong sort of initiative. Its founders miss the point about how philanthropy should work, and they misunderstand the needs of society and the appropriate role of a charitable endowment.

Before I share my concerns with the Pay It Forward Forever Fund, let me explain how it’s supposed to work. According to The Chronicle of Philanthropy, one hundred donors will each give $25,000, or a total of $2.5 million, to the Minneapolis Foundation, a major community foundation. The foundation will invest those funds for fifty years, without making any distributions. In fifty years, or around 2066, 80% of the fund (which the foundation estimates will then total $29 million) will go out to meet the challenges facing Minneapolis at the time, and the remaining 20% will then be reinvested for another fifty years. In 2116, 80% of the fund will again be distributed. And so on.

It’s a philanthropic perpetual motion machine, and the concept is getting a good response: so far, the Pay It Forward Forever Fund has already received commitments from 70 donors.

Those organizing the Pay It Forward Forever Fund note that if donors had done something like this in the 1930s, the community could have had a source of ready capital in the 1980s with which to combat the AIDS epidemic. That seems compelling. But it misses the point.

Common wisdom has it that building up charitable dollars for the community’s use in the future is an unalloyed good. I assert that it’s not. Certainly, the money would be nice to have in the future. The problem is that the funds won’t be put to any good use in the interim, so that societal problems – many of those very problems to be addressed in 2066 or whenever –  actually grow worse. There are community needs that are crying for support now. I argue that if we attend to those problems today rather than defer them to the future, the solutions will be less expensive, the human cost will be more modest, and the consequences will be less dire.

To see what I mean, I ask you to answer the following questions:

  • If we have the choice, should we:
    1. Spend money now on research to kill the HIV virus and end the AIDS epidemic, saving tens of millions of lives, or
    2. Invest that money for fifty years, and have funds at that point to respond to whatever health crisis we are then facing?
  • Should we
    1. Spend money now to stem the tide of otherwise irreversible climate change, or
    2. Invest that money for fifty years, and have funds to spend on climate change once all our coastal cities are under 40 feet of water and human habitation on the planet is unalterably compromised?
  • Should we
    1. Spend money now to educate promising young people, including future scientists, doctors, entrepreneurs, and teachers, or
    2. Invest that money for fifty years, educate fewer people in the meantime, and then have funds to spend on the children and grandchildren of these under-educated and overlooked folks?

If you chose the first answer to these questions, you understand what I mean. If we can cure diseases, stop environmental degradation, save endangered species, educate future leaders, feed toddlers, rehabilitate drug addicts, and house impoverished families today, that is what we absolutely must do. All of those uses of charitable money, and a thousand more, provide a vastly better return than investing in stocks, bonds, and hedge funds for a charitable payout half a century from now.

But people love this sort of scheme. Why? I think the root of the problem is that people apply inappropriate lessons from their own personal experiences with investments.

Think about how we prepare for retirement. When we’re 35 or 50, assuming we have surplus income, we work to put as much money as we can into our retirement accounts. That way, when we’re 80 we’ll be able to support ourselves. If we’re currently earning enough, our need is later, not now.

But with charitable causes, the need is now. Certainly, there will be need later, too, but there are lives and a planet to save today.

And why is the Minneapolis Foundation pushing this idea? Certainly part of their motivation is simply to promote philanthropy and the notion of investing in the community. But the Pay It Forward Forever Fund also connects them to donors (24% of whom are new to the foundation). These relationships can lead to more significant gifts, of course. I would presume, meanwhile, that the foundation will be taking a management fee from the fund each year – as will its investment managers. This care and feeding of the philanthropic machinery is a cost most people don’t think about, but the expense is noticeable when it is associated with a fund that will produce not a penny of community benefit for half a century.

We need to remember that any endowment fund, by its very nature, defers charitable impact until the future. But at least with traditional endowments, some money is distributed every year to meet current needs and to help mend the fabric of broken lives and to repair an endangered planet.

The benefits of the Pay It Forward Forever Fund are all off in the future, with absolutely nothing going to help with the problems now, or in ten years, or in thirty years. It sounds good. It has a catchy name. It resonates with donors. But it makes no sense.

Copyright Alan Cantor 2016. All rights reserved.

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16 Comments. Leave new

  • Another great article!
    Forever sounds appealing, but often delivers less than it promises and imposes serious costs along the way!

    Reply
  • Paul VanDeCarr
    August 2, 2016 1:35 pm

    Al, you’re one of the most lucid writers on philanthropy today!

    Reply
  • Jane Mclaughlin
    August 2, 2016 3:31 pm

    Spot on, Alan. It is so curious that many well-intended individuals and organizations will find yet one more creative way to avoid addressing the challenges that should be front and center TODAY.

    Reply
    • Thanks, Jane. I do think most donors mean well, but they don’t think things through. “Forever” sounds far-sighted, but donors forget that investing in solutions and people now stops us from needing those later donations.

      I think along with the elevation of endowment into what is pitched as a thoughtful investment, there is a concurrent dissing of giving to current program needs as “throwing money at problems.” Neither is true, and we need to change the vocabulary around this choice.

      Thanks so much for weighing in, Jane, and for all your thoughtfulness on these issues!

      Reply
  • Right on, Al! One of several points that especially resonates for me is that investing in helping people and solving pressing problems NOW is FAR MORE REWARDING than investing in stocks, bonds and hedge funds could ever be. Besides, who’s to know how the money we actually be used 50 years hence? I don’t trust it, and I don’t like it.

    Thanks for steering folks clear of another bright, shinny, bad idea.

    Reply
  • Stellar work, Al! I’m disappointed – though not surprised – to not read that at the very least the MF would be investing their PIF endowment in community investments. One is otherwise left to conclude it’s simply going into more hedge funds . . . and more destruction of local ownership and wealth creation that supports little league teams (among other things, and there are other things, right?)

    Reply
    • Hi, Paul — Yeah, I don’t even get into the failure to put a share of the money in community investments. That would certainly mute the challenges this fund presents.

      Reply
  • Good stuff Al. It does sound like a fine idea at first, nice long range planning and all, but in reality perpetuating their own existence and who knows what their calculated $29MM will actually be worth in 50 years. Spend some of it now, do impact investing, and encourage your investors to do it on their own.

    Reply
    • Thanks for bringing this up, Glen. Yes, the present value of that money in fifty years is another part of what makes this project far less than it seems. I went to the federal Consumer Price Index calculator and entered $2.5 million for 1966 (fifty years ago). That $2.5 million in 1966 had the same purchasing power as $18.5 million today. So, assuming a similar rate of inflation going forward, the supposed $29 million in the Pay It Forward Forever Fund will only be worth 56% more purchasing power in fifty years than today — or $3.9 million in 2016 dollars. Really nothing to write home about. I also calculated that figuring a 1% investment management fee, the fund would pay the investment firms five million dollars over the next fifty years. And that doesn’t count the management fee taken by the foundation.

      Reply
      • Some foundations, like Merck are actually planning a spendout by 2022. They’re message is clear- these are pressing issues and we cant wait.

        Reply
  • Compelling piece, Al. To play the devil’s advocate – what about a hybrid value proposition?

    A gift if $25k – contributed as a split gift where half has an immediate benefit and the other half is invested. Were I in a position to make such a gift, this would be attractive for your stated reasons plus those of the original campaign. The tagline could be something like, “Transform Today, Touch Tomorrow” or somesuch.

    The 50-window, though probably based on sound investment return data, seems a fatal flaw in the campaign. One that donors might not adequately consider.

    As usual, Alan, a nice piece. You and I might always quibble a bit, but you raise some good points.

    Reply
  • Norm Rickeman
    August 4, 2016 8:57 pm

    Mr. Cantor,

    I’m the Board Chair of The Minneapolis Foundation, and I’d like to respond to some of your conclusions about our Pay it Forward FOREVER Fund.

    First, I want to set the record straight on two points:

    1. Contributing to the Pay It Forward FOREVER Fund is not an “either/or” but an “and.” Its donors already give substantially to other causes, including those that you mention. The existence of the fund has enabled The Minneapolis Foundation to start many conversations with donors about the meaning and purpose of philanthropy, and we’re hopeful that the fund will help us expand the culture of giving in our community.

    2. The Minneapolis Foundation takes no fee for managing the Pay It Forward FOREVER Fund and never will.

    I will tell you that when the fund was first proposed to me, I had some reservations. Like you, I’m a strong supporter of putting charitable dollars to work in the community to address today’s needs. This is a core value of The Minneapolis Foundation and its donors, which distributed more than $50 million last year alone. But after thinking about it, I concluded that the Pay It Forward FOREVER Fund was the perfect way to honor the Foundation’s Centennial year. (The Minneapolis Foundation is one of the oldest community foundation in the country.) There is nothing like having a 100-year history that makes one think about legacy, the role of a community foundation and the future of place-based philanthropy. We followed the lead of Ben Franklin with his Philadelphia endowment, and I was proud to be the first donor to our fund. I was personally involved in many of the subsequent solicitations and have been very pleased with its reception by donors of all kinds, including those who describe themselves as anti-endowment.

    Why this positive response? I think it is because it is a one-time opportunity to give a vote of confidence to our community and its future leaders. Our community has a long history of selfless giving and a strong sense that we want this legacy to live on in perpetuity. We can and will solve our most pressing problems.

    We’re well aware of arguments along the lines of, “If we don’t address climate change now, we won’t be around in 50 years so it won’t matter.” The fact is, our donors DO give generously to address climate change and a host of other pressing current needs. But as a community foundation, we have an obligation to invest in both short-term and long-term initiatives to help ensure the continued vitality of our community; the Pay It Forward FOREVER Fund is one way we do that.

    Reply
    • Thank you, Mr. Rickeman, for your thoughtful response to my piece.

      I appreciate the tone of your comment. Sometimes the rhetoric on issues of philanthropy can grow unexpectedly and strangely heated. Your articulate and open explanation of the fund from your point of view is a model of civility and clear argument. Thank you!

      I also want to thank you for your commitment to the Minneapolis Foundation and your community. You are the kind of person who makes the good work of the nonprofit sector possible.

      In response to your comment, first I want to apologize for stating that the Minneapolis Foundation would be taking a fee from the Pay It Forward Forever Fund. I stand corrected, and I applaud the foundation’s decision not to take a fee.

      That said, I presume that there will be annual fees paid to investment advisors. These fees add up — by my back-of-the-envelope calculations, to the tune of a few million dollars over fifty years. This is part and parcel of how endowments work, and I don’t fault the foundation for paying the investment fees that every other organization pays as well. But… it’s a real costs, and it’s one reason why I tend to be a skeptic about endowments in general. This larger skepticism, in fact, was what led me to take notice of this particular fund. I think that, in general, too high a portion of the charitable dollar is going to endowments, at the expense of meeting short-term needs. That the Pay It Forward Forever Fund is structured as it is — as sort of a hyper-endowment — inspired me to use it as an example of misdirected philanthropy. It’s not that I think the Minneapolis Foundation is doing anything evil, or that it has ill intent. It’s that I find the effort less effective than other forms of giving.

      You make a valid argument about the need to balance short-term needs in the community with a long-term commitment. You also talk about how the donors to this fund are working with the foundation to make other contributions — a relationship that I referenced in my essay. Given that, if you’ll indulge me, I’d like to make a suggestion.

      You talk about your donors giving to the community in other ways. No doubt one way is through the creation of donor-advised funds at the Minneapolis Foundation. As you may know, I’ve been involved in the national conversation about whether donor-advised funds need to be reformed, I’ve suggested that money donated to donor-advised funds should be fully distributed within a certain number of years (say, ten or fifteen), rather than having the DAF act as a perpetual fund. I and others who have made this suggestion have met with great resistance from community foundations and other sponsors of donor-advised funds. But the fact remains that donor-advised funds spend out their charitable distributions at a slow rate, and individual DAFs don’t have to give out anything whatsoever in a given year.

      My point of view — and that of many others in the nonprofit world — is that donor-advised funds may actually be slowing the flow of charitable giving to important charitable causes.

      What do I mean? Let’s imagine that one of the people who donates $25,000 to the Pay It Forward Forever Fund also gives the Minneapolis Foundation $100,000 to set up a donor-advised fund. If that person then sends $5,000 or $7,000 a year out to charities from that fund, that’s not doing nearly as much to help the community as if the money had been given directly in the first year to Minneapolis charities, or if the money were spent out fully over a few years.

      I would feel much better about the Pay It Forward Forever Fund if the foundation were simultaneously to encourage its donors to spend down their donor-advised funds over a ten- to fifteen-year period. Then there would be a truly significant flow of money to today’s needs, balancing the long-term view of the Pay It Forward Forever Fund.

      Reply

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