Six Hard Questions about ‘Set it at Six’

MacArthur President John Palfrey shares responses to the difficult questions we have heard about governance and values as we raise our charitable giving to 6 percent.

Since we decided to increase our charitable spending for 2025 and 2026 to a new floor of 6 percent rather than the typical IRS minimum of 5 percent, I have had many conversations and messages from colleagues in the nonprofit sector about how we reached this decision.

For us, the “why” is straightforward; we covered that extensively in my announcement of the decision. In short, it is plain that nonprofits need more funding right now, and we are willing to deal with the trade-offs of providing more now rather than potentially having more in future years.

The precise aspects of “to what end” is a work-in-progress. Generally, we will focus the additional funds on supporting grantees and investees with the greatest needs and opportunities before them, and we are paying special attention to the needs of our democracy. We will share more about our thinking and methods as we refine the ideas and hear more from the field.

It is plain that nonprofits need more funding right now, and we are willing to deal with the trade-offs.

In our case, the decision was reached by unanimous consent of the Board, supported by careful analysis of the implications, and consistent with our spending guidelines—for which I am endlessly grateful to our Board colleagues. We acknowledge there are many hard questions, but this was not a new conversation for the MacArthur Board, nor I suspect for others. There is ample commentary on these issues going back many years.

But as we invite others to join us, I have been thinking about hypothetical foundation boardroom conversations about whether to increase payout.

Imagine a foundation board that is grappling with the choice of whether and to what degree to raise payout for the next two (or more) years. Here are some of the honest, difficult questions, especially related to board members’ fiduciary duties, that have been put to me in the past few days. I offer up my replies, acknowledging others may have different views and perspectives, as reflected in the Stanford Social Innovation Review’s Up for Debate series a few years ago on this topic.

Six Hard Questions about Set it At Six

“If we spend more now, won’t we have less money to give out later?”

Yes, likely. Basic arithmetic cannot be avoided, assuming current growth rates for the investment portfolio. If we give out more in 2025 and 2026, we will indeed likely have fewer dollars to give away in future years, unless our investment portfolio grows in excess of what we have forecasted. There is no way around this trade-off.

But reframe the question and think about it from another angle: if we spend less now, will we have to spend more later to get the same or greater social results? Instead of thinking how many dollars we have in the bank, think about the social return on those dollars spent today compared to the social return on the same dollars in the future.

In a time of crisis for the social sector, the return on well-invested charitable funds will be higher than at other times, and the consequences of not investing those funds can be more dire. These funds might bridge an essential player across a chasm of funding that might otherwise put them underwater. Funds today might allow a surge in activity to take advantage of an unexpected opening. Funding a young leader today might support a major leader of the sector serving for a generation rather than falling back into other types of jobs.

“Our charter says that we are a perpetual foundation. If you crank the dial above the 5 percent minimum required by the IRS, won’t we go out of business, violating our fiduciary duty in the process?”

This is a good point. Many legacy foundations, including MacArthur, have “perpetual” in our founding documents, our charters, or other indicators of donor intent. It is our fiduciary duty as board members to abide by the charter.

But no, in fact there is little chance that increasing our payout modestly for two years will put us out of business or in any way violate that commitment to perpetuity. It is possible that a charter or by-laws might stipulate a specific spending level, but I have not seen a single case as a board member, board chair, or staff person at a foundation.

Moreover, if a foundation wishes to spend down their assets in spite of an indication of perpetuity in a charter or other donor intent, a board can take up that question, too. In most states, the Attorney General oversees nonprofit foundations and should be asked to sign off on that decision.

“During the Great Recession, we increased our payout well above 5 percent, so we could keep spending at the same level even after the stock market declined. Now we are a much smaller foundation than we would have been otherwise. We should have cut our payout to match our declining assets. Isn’t that a risk here too?”

Yes, that is a risk here too. I am aware that a number of charitable foundations spent well more than 5 percent of their endowment value each year during the Great Recession to keep grantmaking budgets up even when the stock market went way down. Today, some of those foundations are smaller than they would have been had they otherwise reduced their spending or kept it at 5 percent at that time. That is indeed a possibility here.

As of right now, however, this is a counterfactual, and, in my view, not a reason to maintain the status quo.

The stock market has not yet plummeted as it did then. Of course, no one can know the future of the stock market. What we can know is that returns in the markets over the last ten years have been strong, and most endowments, as a consequence, are at or near all-time highs.

Second, return to the question of social returns. Those dollars spent toward meeting our respective missions during the Great Recession may have made an enormous difference during a terrible time. That seems much more important than focusing on the size of an endowment or investment portfolio today. Moreover, size is not always a determinate of impact.

“If you only spend 6 percent of your assets, isn’t it possible that your endowment will nonetheless go up even more during that period ?”

Quite possibly, depending on markets. And yes, you could certainly argue we should spend more than 6 percent at this stage, given what is at stake.

First, let’s step back and look at why many foundations tend to stick with the 5 percent. There is, of course, the IRS minimum, but more fundamentally, there is a mathematical equation for perpetuity if one wants to retain the same capacity for future generations.

The broad theory is that our returns should balance out our spend and inflation. Based on historical returns of a balanced portfolio, the sort most foundations hold, and inflation trends, 5 percent tends to meet the obligation of being a “perpetual” foundation over long stretches of time.

But if that is true, why not stick with the 5 percent? Of course, the specific numbers do matter. And boards have a duty to be informed and work with their investment team to find the right balance, as we have done. We landed on 6 percent after our own analysis and scenario planning.

In fact, the stock market has been on a tear for the past decade-plus. Many endowments have likely, therefore, grown. We can afford a surge in spending for at least the two years that we have committed to “Set it at Six.” Our Staff and Board landed on this baseline as both respecting our commitment to “perpetuity” and meeting the need for an increase in funds.

“But there’s no way that philanthropy can make up for the cuts in the federal budget to foreign aid outside the U.S. or the cuts to social services inside the U.S. Shouldn’t we just play the long game and stick to the 5 percent, since our additional spending is a drop in the bucket? And won’t that just help make the case for those who think the federal government should do less anyway——that private philanthropy will step in to fill the gap?”

There is absolutely no way private philanthropy can fill the gap left by federal funding. And it is almost certainly the case that people who oppose things like foreign aid will say that the U.S. government should be out of the aid business and leave it to private philanthropy.

But it is a terrible idea to let these concerns get in the way of doing what we can. We are here to help and pursue our mission. There is more we can do to help nonprofits and civil society; the need and opportunity are plain, and we should do our part, even if it is just a drop in the bucket compared to federal funding.

More important, perhaps, than what we can do alone is what we could all do together. If other foundations and donor advised fund holders and families were all to step up their giving during this period, we could make a big difference at scale.

According to Giving USA, foundations’ charitable giving is over $100 billion per year in the United States. If together foundations raised giving from 5 percent to 6 percent, it would result in an additional $20 billion given to the sector each year. And if individuals and other giving increased, the impact would be even greater.

Imagine what a difference an additional $20 billion this year and another $20 billion in 2026 could make? That is what would happen if all foundations simply cranked up the charitable payout 1 percent for these two years: $40 billion in additional support at a time of great need and opportunity.

I believe we have a responsibility to step in when commitments are not met, but we cannot and indeed should not be the only providers of services that are the domain of governance as determined by the democratic process.

“Shouldn’t we do much more than 6 percent? Given the extent to which the progress of the last 50 years of nonprofit work is at risk right now, shouldn’t we dig deeper?”

There is a case to be made to spend even more. As many have noted, if we believe that the stakes are as high as they seem, why would we leave 94 percent of our assets on the sidelines?

So, yes. It is a fair question, and I know some boards have decided or will decide to spend more during these years. We know of multiple foundations that have committed to over 10 percent. Many living donors have committed to higher payouts still, showing they have conviction in their investments. We cheer them on. That is great philanthropy and to be commended.

Indeed, everyone will have a different level and capacity to give that is right for them. At MacArthur, we came the conclusion that a 6 percent baseline balanced the urgency and stakes with our fiduciary duties. Six percent for two years is a floor, not a ceiling, and we will continue to assess the circumstances.

Others will come to different conclusions as they ask these hard questions about what more they can do now. And we invite you to ask these questions of yourself or your boards or your organizations. We are eager to see what is possible and how others are stepping up.

At our best, philanthropy can be society’s risk capital, providing the flexibility for growth and discovery.

Generosity, discovery, and commitment to making the world better for future generations is a value most Americans share, and philanthropy is just one expression of these values. At our best, philanthropy can be society’s risk capital, providing the flexibility for growth and discovery. And right now, we can work to make sure we do not lose opportunities to stabilize organizations contributing to our society and the growth that funding enables.