Is Perpetuity Still Relevant?

As the economic crisis crashes all around us, the question about whether then notion of foundations existing in perpetuity is still relevant, and if so, under what circumstances?

A story comes to mind. About ten years ago, I attended a meeting of some rather large foundations that had gathered to discuss the possibility of impending regulations, one of which was a proposal to increase foundations' payout rate. The convenor of the group advised everyone to "stand firm against raising the payout" but provided little rationale as to that stance.

After the meeting, I spent some time digging around to see if I could unearth some of the arguments for and against the notion, and there were plenty of those, none of which came to any consensus. The primary argument against it, however, seemed to be that any attempt to increase the payout rate would mitigate the likelihood of foundations remaining in perpetuity. The assumption behind that argument, of course, was/is that perpetuity is inherently a good thing. But is it?

A few recent articles tackled that question. In a recent article for the Nonprofit Quarterly, Buzz Schmidt, founder of Guidestar, argues that we need to "escape the perpetuity mindtrap" because it imposes fundamental limitations on foundations’ strategic potential. Specifically, it "diminishes foundations' internal accountability, ability to place consistent performance demands upon its grantees, and ability to optimize deployment of its assets," among other things. It's a compelling argument that has been made many times, but the piece puts it forth in a comprehensive and thoughtful way.

Ray Madoff, a professor at Boston College Law School, bolsters the argument against perpetuity with a withering piece in the New York Times, wherein the author asserts that the perpetuity argument assumes that "people can make intelligent decisions about the use of resources far into the future. But a look back shows how flawed this thinking is. Would it really make sense for current policy to be dictated by the vision of someone living in 1930? 1630? 1230?"

As nonprofits face considerable funding deficits in the near future, it may be time to have a richer and more robust discussion about whether the current payout rates and regulations are still relevant and why.