How much money should a private foundation--one that makes grants based on a charitable endowment and does not actively raise funds or seek public financial support--give away each year? Although there is a legal requirement of at least 5 percent of the value of a foundation's assets, some movers and shakers in the charity business are angling for more.

A bit of background: To thwart a private foundation's ability to build up assets without giving any of them away, Congress set (in the Tax Reform Act of 1969) and later revised a minimum amount that private foundations are required to distribute. This is the rule for all private foundations, whether they make lots of money or none at all. Initial penalties for failure to comply include an excise tax of 15 percent on amounts not distributed.

That 5 percent can include administrative expenses in running a grant-making program as well as direct charitable activities such as hiring researchers to do a study and publishing its results or sponsoring a conference. (The IRS has found that 93 percent of all such distributions are grants, however.) IRS data from 1995 showed that the average rate paid out by foundations was 5.8 percent.

But is that enough? The National Network of Grantmakers (NNG) thinks the recent growth of foundation endowments should be reflected in increased giving--specifically "social change" giving that addresses the root causes of poverty. The Foundation Center, which monitors trends in philanthropy, compiled data that showed private foundations amassed $56 billion more in 1998 than the previous year, but did not pay out more than the minimum requirement.

The NNG has campaigned to get those foundations that are meeting the 5 percent minimum to raise it to 6 percent, though there has been no official action by Congress so far. Folks in this camp often refer to this as a payout, although that term does not appear in the legislation.

Those who favor keeping the rule as it stands are concerned with protecting foundations' endowments in the long run. An ongoing study by the Council on Foundations (COF) found that if permanent endowments paid out at rates higher than 5 percent, their assets would erode, which would reduce their ability to give. The COF supports the 5 percent minimum rule and believes that foundations that don't adhere to it must be penalized, but its appetite for further government involvement ends there.

COF's general counsel, John Edie, suggests that the make-more, give-more approach does not factor in certain realities: If a foundation does not meet the 5 percent standard at the end of a given year, critics may decry its lack of giving. But that foundation has time in the following year to make up the difference, and often the totals cannot be calculated by what is technically the end of a year, anyway, due to market fluctuations. Also, a typical permanent endowment that meets its 5 percent requirement (and is subject to certain taxes on investment income) has to pay in the neighborhood of 4.5 percent more to cover asset management fees, inflation, etc. That means the endowment must invest to get an annual return of about 10 percent if it is to exist in perpetuity--which could force it into riskier investment ventures.

-- Bonnie Benwick, for Outlook