The spending practices of private foundations are currently the subject of debate. Conditions among nonprofits are deteriorating because of economic, social, and policy shifts, while the assets of private foundations that fund them grow. Couldn’t foundations spend more on grants and less on their own operations, so more money can flow to nonprofits? These are not new debates, but in the current climate, they seem especially pointed. Some welcome the debate. “It’s good to be scrutinized,” says Steve Joul, president and CEO of CommunityGiving, a group of community foundations based in St. Cloud.

Not everyone agrees, however.

Nonprofits Struggle to Stay Afloat

Though Minnesota’s nonprofit sector seems to grow exponentially, federal policy changes (such as the ending of AmeriCorps grants and the elimination of the Corporation for Public Broadcasting) have resulted in less money for nonprofits as demand for their services rise. Nonprofits that support housing, food access, and health care have been particularly hit.

To fill the revenue gap, many nonprofits are looking for more money from private philanthropy—not only from individual donors but also from private foundations—typically, organizations that are funded by an endowment from a single benefactor, usually an individual, family, or business. The good news would seem to be that the private foundation sector is growing: Endowed foundations, such as the 10 largest in Minnesota, are benefiting from a surge in rising stock values in recent years, with many indices up 60% or more since 2022.

Not only do private foundations have more money to spend, but there are more of them. In 2020, the Federal Reserve reported a total of nearly $1.1 trillion in assets held by private foundations in the U.S. (Today, that number is $1.8 trillion.) Cause IQ, which aggregates philanthropy data, identifies 2,200 private foundations in Minnesota, as of the end of 2025, with estimated assets of almost $24 billion. It’s not small potatoes.

The Payout Debate

But before thinking about whether foundations are spending enough or asking them to run their organizations more frugally, a number of factors influence their decisions:

• Donor intent. This is first among considerations because donor intent at the time of the gift provides the legal framework for the dollars that flow to nonprofits, where and how the money can be spent, for how long, and other restrictions. Donor intent can define whether a foundation focuses on people most in need, on specific locations, or on particular areas of need, for example.
• Federal rules. The government’s regulatory framework requires that endowed foundations spend at least 5% of their average assets for charitable purposes each year. Assets are valued annually, which determines the dollar amount for the payout. The penalty is an excise tax of 30% on undistributed income. To complicate matters, payment of more than 5% in any given year may be “carried over” to meet the payout requirement in the future for up to five years.
• Why 5%? This rule was derived from historical market data that calculates a long-term spending rate aimed at preserving purchasing power over time while factoring inflation and other market conditions. It’s much like the recommended spend rate of your own retirement savings. The definition of spending that qualifies as being “for charitable purposes” includes both grants and the expenses associated with making grants (including operating and administrative expenses).
  
• The board. Another factor is whether the governing board is willing to change spending rates. A board can vote to spend more than the legal requirement provided they’re adhering to donor intent.

The 5% Rule

Foundation boards committed to existing “in perpetuity” generally have not wanted  to spend much more than the 5% requirement. The standard rationale is that coming generations are likely to need support as much as, if not more than, the present recipient base. Spending beyond 5% will deplete future spending power. And, although markets have boomed in recent years, eventually they’ll go down.

But in a recent blog post, Phil Buchanan, CEO of the Center for Effective Philanthropy, argues that the urgency of the current moment demands an urgent response. “It’s more expensive to start over when vital programs or nonprofits cease to exist … perpetual foundations, with their endowments and longtime horizons, are especially well-positioned to act.”

The Minnesota-based McKnight Foundation and the MacArthur Foundation have been vocal national proponents for higher payouts. McKnight has an expansive mission that allows it to deploy its resources broadly.

It’s put its money where its mouth is. In 2023, the board authorized an additional $200 million over five years. As of 2025, McKnight had its highest grantmaking year in nearly 75 years, says Jacques Hebert, communications director, awarding more than $150 million with a payout above 7%.

At MacArthur, CEO John Palfrey introduced the  “Set It at Six” initiative, pledging the foundation’s support for increasing giving to 6% in 2025 and 2026. “The need for a surge in funding is plain. Philanthropy needs to step up. We at MacArthur believe it is time to tap our reserves to get more money flowing.”

Such moves don’t go far enough for some advocates. Forty foundations have signed the CHANGE Philanthropy pledge to increase grantmaking by 20% or more, or deliver an endowment payout rate of 8% or higher for at least two fiscal years. Signers in Minnesota include the Saint Paul & Minnesota Foundation, the state’s largest community foundation, with broad funding guidelines; Headwaters Foundation, which supports “organizations and groups on the front line of social change”; and Borealis Philanthropy, which “funnels resources to grassroots movements” and names “intersectional justice, narrative power, community safety and well-being, and economic equity” as funding priorities.

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Glitches in the Stream

With private foundations’ total assets topping out at nearly two trillion dollars in the U.S., these arguments, if successful, could send a lot of money to nonprofits. An increase from 5 to 6% could result in nearly $20 billion for charities.

“Please stop it with the white papers and summits and hiring consultants to do research and teaching people about capacity building or resilience or whatever.” 

—Vu Lee, national blogger on foundations and nonprofits

The Cost of Philanthropy

Another element of the foundation business model escapes regular scrutiny and has fewer—but possibly braver—activists. These are observers willing to assess, and critique, the costs of philanthropy, and they believe some foundations could operate more frugally.

The Council on Foundations (COF) published a data set on spending patterns of U.S. foundations including these operating costs as a share of qualifying distributions, a kind of efficiency metric. In most businesses, efficiency is valued, tracked, and when possible, improved. But nonprofits and foundations by their very nature are set up to deliver services that can’t be addressed by the market. These services and programs are inherently inefficient.

So how much expense is reasonable and necessary vs. excessive? Foundations tend to offer jobs that are relatively well paid, secure, and come with desirable benefits and amenities. Many foundations have offices that seem luxurious by, say, startup standards. When businesses and nonprofits are asking workers to do more with less, are foundations in tune with the times?

With more than 2,000 foundations in Minnesota it’s not feasible to study each. But an analysis of Minnesota’s 10 largest private foundations by asset size shows a range of payout rates and administrative and operating expenses. Mainly both fall at or below the median for similarly sized endowed foundations in the United States.

The Schulze Foundation paid out far more to charities, at 20%, and at a lower expense share. (The local top 10 typically spends between 10%–20% of their charitable disbursements on program expenses.) The Bush Foundation spent above the median on its share of charitable administrative and operating expenses compared to similarly sized foundations nationally, while the McKnight Foundation was just under, and the Margaret A. Cargill Foundation spent well below, according to data published by the Council on Foundations.

While there are no big red flags among Minnesota’s largest foundations, these data points are not in themselves sufficient to understand whether foundations’ payout rates and internal expenses are reasonable or what spending philosophy guides their decision-making. For that we would need more information on how funds were spent and what public value was derived. It’s that sort of information that the nonprofit field would like to see from its mainstay foundations.

“There is no incentive for foundations to economize. Philanthropy thinks theirs is maybe the world’s most difficult job, because you’re trying to figure out what the world needs from your money and how to make the most difference,” says Jon Pratt, former executive director of the Minnesota Council on Nonprofits, who now co-chairs the national Philanthropy Project which works to draw attention to the critical and beneficial role that regulation and public accountability have for American philanthropy. “You end up in a lot of conversations and doing a lot of research and you end up thinking that what everyone wants is the insights and conversations, not the money. Basically, you are inside the castle walls and over time you get so used to it that you can justify any expense as making you more rigorous and selective.”

Further, philanthropic “efficiency” is not as hotly debated as are payout rates. One reason: there’s little data on what the operating expenses are. “It’s like we are poking at a dark hole to figure out what’s inside.” says Jan Masaoka, also of the Philanthropy Project. 

Foundations are often reluctant to broach the subject, even among themselves. “When I’m in a meeting with other foundation CEOs, the conversation isn’t generally about how much we spend to make grants,” says Mark Dienhart, president and CEO of the Richard M. Schulze Foundation. “It’s a sensitive item.” The Schulze Foundation’s operating costs are particularly low among large foundations in Minnesota. “All of us who work at Schulze, we spent all of our lives working in nonprofits. We are fundamentally cheap. We could spend more, but we choose not to. I would know no other way of doing it.”

And nonprofits don’t want to bite the foundation hand that feeds them, so seldom speak publicly about how foundations are run; they risk not only grants, but foundations’ attention and expertise such as field research, meetings, and organizational development.

That’s starting to change, particularly when it comes to what advocates view as excessive costs, such as salaries and luxury travel for meetings. Voices for reform come from both ends of the political spectrum. Funders “…need to get over whatever their reasons are for supporting anything except giving out more money—and just give out more money,” says Vu Lee, a prolific national blogger about foundations and nonprofits. “Please stop it with the white papers and summits and hiring consultants to do research and teaching people about capacity building or resilience or whatever.”

Others are finding creative new ways to economize. CommunityGiving, based in St. Cloud, strives to increase both impact and efficiency by sharing back-end and infrastructure costs and increasing collaboration among 16 local community foundations in rural Minnesota and one in Kansas. “Because they work together, these foundations have lower costs than anyone would individually. We can do more together than we can apart. Doing more by working together is the very essence of community,” says CEO Joul.

Policy advocates also are working to redefine how qualifying expenses are calculated. For foundations with a fairly common 15–20% operating cost share, a significant redefinition of allowable expenses could have real impact on foundations’ internal budgeting and could result in more available dollars for grantmaking.

Some of foundations’ internal spending can be counted within the 5% charitable disbursement requirement if these costs can be attributed to “charitable purposes”—things like analysis of grant requests, foundation-led grantee conferences, public information activities, and travel to visit grantees and their projects.

Finally, a telling stat: Researchers note that newer philanthropies with living donors typically operate with a leaner staff and spend less on in-house expenses, because the donors are actively involved.

Industry publication Inside Philanthropy, shared a detailed study in 2025 that showed the contrast. While apples-to-apples comparisons are challenging, the authors concluded that these newer philanthropies’ disbursements were close to 11% of investible assets—more than double the required 5%—and typically lack administrative bulk, making it easier to “move more money out the door” and make “bigger, riskier investments on a tighter timeline.”

What’s Next?

Foundations are already taking a close look at themselves. A stinging report from the Center for Effective Philanthropy in 2025, “A Sector in Crisis,” reported that, “more than 40% of foundation leaders interviewed are dissatisfied with the overall response from foundations [to current field conditions] and believe their peer funders could be doing more to help nonprofits and communities.” A foundation leader is quoted as saying that, while a number of their peers have made changes, too many foundations have not, suggesting that “this time offers an opportunity to be nimble and act more quickly.”

Further, “while 93% of foundation leaders believe their foundation has been effective in understanding the challenges their grantees are facing, only half of nonprofits report their funders have been effective in this way.”

These critiques seem best addressed by greater transparency. That’s something foundations can work on now. “There is a saying in the field that, ‘If you’ve seen one foundation, you’ve seen one foundation,’” Dienhart says—each one has its own origins, purpose, approaches, and costs to the work.

Why not say more about that? Isn’t it time for each foundation to disclose more about its choices and its board’s rationale for about how they use their money? Some, such as the Oregon-based Meyer Memorial Trust, now present a detailed expense analysis that includes all grants and spending. In their Reader’s Guide to the Form 990, the trust publicly explains its finances, line item by line item.

Foundations hold grantee organizations to a high standard of disclosure and transparency. Foundations can apply that same ethos more emphatically than many do today.