Evidence, Policy and Practice: Charities and Disbursements

Hilary Pearson

The 2021 federal Budget made disappointingly few regulatory announcements affecting charities, although it did commit to important new spending that will support many of the charities and beneficiaries who have been hard hit in the pandemic. There is no shortage of policy ideas and suggested law and regulation changes for the charitable sector. We have made priorities clear: in Catalyst for Change, the report of the Special Senate Committee; in the first report of the Advisory Committee on the Charitable Sector, in the Effective and Accountable Charities Act (Bill S-222) being discussed in the Senate, sponsored by Senator Ratna Omidvar and endorsed by a large group of the best charity lawyers in the country. But none of these made it into the Budget, except for an announcement (Chapter 6, section 3) that consultations with charities will be launched on potentially increasing the disbursement quota, in other words, the minimum amount that charities are required to spend from assets not used otherwise on their own charitable activities.

I absolutely support more public consultation and discussion on the question of spending by charitable endowments. The point, one would hope, would be to collect objective evidence on whether there is a policy gap or need for policy change based on evidence. 

In this post, I want to put some facts on the table. In my last post, I expressed my thoughts on the merits of long-life foundations who balance the needs of today and the challenges of tomorrow in their giving decisions. Maintaining this balance also means maintaining the ability to hold the value of assets over time. Many donors to the endowments of charities are persuaded by the argument that their gift will support a charitable purpose over a longer run. They are also sometimes persuaded by the idea that their gift will give stability to a charity which will be able to depend on a stream of income from an endowment to pursue its purpose. Endowments are appealing to both charities and donors for these reasons.

So what is the policy issue raised by the Budget announcement? Malcolm Burrows in a post of his own points out that while the Budget text is coy about which charities are causing concern, the data that it presents points directly to foundations, their assets and their giving. It shows foundation assets growing over time while giving grows at a slower rate. According to the text, “while most charities meet or exceed their disbursement quotas, a gap of at least $1 billion in charitable expenditures in our communities exists today. Furthermore, growth in the investment assets of foundations has increased significantly in recent years. In 2019, charitable foundations held over $85 billion in long-term investments. But grant-making and other charitable activities have not kept pace.” It’s not clear what evidence supports the assertion that there is a gap of at least $1 billion in expenditures. It’s also not clear to what the growth in assets of foundations can be attributed. Finally, it’s not clear why the text would suggest that grantmaking and other charitable activities have not kept pace.

A few facts.

All charities must meet the 3.5% minimum disbursement quota. This quota applies to property that a charity isn’t using directly for charitable activities or administration, in other words mostly investments although the property can be cash, land or buildings also. Of course, most charities meet the quota by spending some of the value of that property on their own activities. Most foundations meet it by making grants. But many private foundations can meet it by spending their money on their own charitable activities as well. Some charities transfer property to agents because they work with non-charities. All of these disbursements, not just grants, must be considered in understanding whether there is a “gap” of some sort between assets and giving.

The Budget uses data collected by CRA. The last full year for which aggregate data is publicly available from CRA is 2018. This data suggests that foundations held a total of $91.9 billion, of which public foundations held $35.6 billion, one private foundation, the Mastercard Foundation held $23.7 billion and all other private foundations held $32.6 billion. It is important to know that one private foundation looms so large in Canadian data. The next largest grantmaking private foundations do not hold more than $2 billion each and the top 149 grantmaking foundations in the country by assets (excluding Mastercard) hold about 50% of all assets. Another important consideration is that Mastercard Foundation reports much more spending on charitable activities than on grants. It focuses much of its attention on Africa and its activities with agents in Africa account for a significant part of its disbursement.

The Budget shows a steadily growing rate of private foundation asset growth. A factor in this growth especially in the last three years is the unexpectedly large growth of the assets of the Mastercard Foundation which went from $12 billion in 2015 to $35.8 billion in 2019.

The conclusion is that it is important to look closely at aggregate numbers and to understand what the data can and cannot tell us. There is no black and white relationship between assets held and amount spent in grants. You cannot simply apply a 3.5% calculation to assets and derive a number that gives you a specific expected disbursement. The picture is even more complicated when you realize that the quota is calculated on an average asset value over 24 months and that charities may use disbursement “surplus” from a previous year to fulfil their quota, so not every year is the same.

Do we know if there is a “gap” in disbursements? What is the presumption underlying this statement? Should charities be spending more of their endowments, especially now? That is a normative question and as I have argued in other posts, larger private foundations have felt and responded to a moral imperative to change their practices and increase their disbursements during the pandemic. Indeed, there is data to show that larger private foundations have typically exceeded the minimum quota even pre-pandemic. Must the disbursement quota itself be increased and if so to an amount that will diminish the value of the endowment over time? This is a debate to have. But let’s make sure we are working from solid evidence before any policy change is made.

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