Donors Forum Releases New Report on Foundation Expenses

Wednesday, August 28, 2013

Foundation expenses thumbDonors Forum, in partnership with the Foundation Center, has released Understanding Foundation Expenses: Focus on Illinois, a report which will serve as as a key resource for understanding foundation operating and administrative expenses and as an unbiased source of facts on actual practice in Illinois. 

Policy discussions about grantmaking foundations often focus on how much they spend on administrative activities relative to their giving. Yet often missing in these discussions is an understanding of the nature and range of foundations’ operating and administrative costs and of what drives them. Foundation size, operating characteristics, and programmatic activities are among the many factors that must be considered when assessing charitable administrative expense levels, whether in Illinois or nationwide.

 To provide a more informed perspective on this issue, Understanding Foundation Expenses: Focus on Illinois defines and delineates charitable (program-related) administrative and operating expenses, which are those that count toward a foundation’s payout requirement. The report addresses specific questions such as: Which foundation costs are included in charitable administrative expenses? What are the limitations of Form 990-PF for reporting expenditures? How are charitable administrative expense levels measured? What are the most important factors driving expense levels? It also offers multi-year trend information (2008–2010). 

Among key findings from this report:

• Illinois independent and family foundations’ characteristics and practices strongly influence their charitable administrative expense patterns.

• Employment of staff is the single most important factor affecting foundation charitable expense levels, followed by staff size. 

• Foundations that employ staff have median charitable expense-to-qualifying distribution ratios of nearly 9 percent, on average, compared with less than 1 percent for those without staff.

• National and international grantmaking, direct charitable activities, and operating as a “health conversion” foundation are strongly associated with higher charitable expense ratios in staffed foundations.

 • Donor or donor-family involvement often coincides with lower charitable administrative expense ratios.

• Compensation is by far the biggest component of expenses for independent Illinois foundations, followed by other expenses and other professional fees. 

• Illinois foundation charitable expense patterns are similar to those of U.S. independent and family foundations overall, and the characteristics that are associated with higher or lower expense ratios are the same. Foundations that engage in direct charitable activities or conduct other complex activities are most likely to have the highest expense ratios. 

Charitable Administrative Expenses as a Share of Qualifying Distribution by Giving Range
See the full report for additional figures and charts

The report concluded that foundation oversight and regulation would benefit from deeper understanding of the diversity of foundations’ missions and activities. To promote better understanding and greater transparency, improvements are needed in IRS Form 990-PF. This key information source has not kept pace with the changing activities and costs incurred by private foundations. As there are presently no public plans to modernize the Form 990-PF, it will be up to foundations themselves to ensure their program-related expenses are properly understood by policymakers, community leaders and the public.

In the report, Donors Forum suggests that Illinois foundations consider a few practices beyond completing their required reporting on the Form 990-PF. 

• Use the data contained in this report to benchmark your foundation against peer institutions.

 • Provide a breakdown in your annual Form 990-PF of the catchall categories other professional fees and other expenses and footnote expense line items to provide additional detail.

• Use your annual reports, web sites, and other communications vehicles to convey how your foundation’s mission translates into your specific operating strategies in terms of both your grantmaking and activities that go beyond writing checks. 

• Encourage your peers to be equally transparent about their foundations’ strategies and expenses.

 Read the full report here.