Cutting up the government's visa card

December 15, 2007 6:45 AM

Why don't large organisations make more use of capital investment?

Why don't governments and charities take advantages of returns on invested capital? An example, Oxfam receives $1000 dollar donation, they spend it immediately. If they invested it, and instead spent the 5% dividend each year, then wouldn't they be doing more good in the long run? Do any charities do this, and if not, what are the reasons why they don't?
On a related side note, I'm curious as to why governments don't do this too. Instead governments are always colossally in debt. Wouldn't it be a much better idea to store up a large surplus of capital invested in business? Hell, we could even stop paying taxes, right?

posted by greytape to work & money (14 comments total)

Using returns from investments to fund charitable projects is quite common. Take a look at the largest foundations in the U.S. These foundations are worth billions of dollars and they don’t spend all of that money each year. Most of that money remains invested.

. . .governments are always colossally in debt. Wouldn't it be a much better idea to store up a large surplus of capital invested in business?

Not necessarily. Debt is neither good or bad. It is simply a means for smoothing consumption over time. Who is better off? A person who scrimps and saves for years until they can finally buy a house without a mortgage, or a person who goes into debt and buys a house and then slowly pays off the mortgage. The person with the mortgage is able to enjoy the house for a much longer period of time. If the government wasn’t able to borrow money, it would take much longer to build infrastructure.

Many countries rely on investment income to fund some projects/services. These funds are called sovereign wealth funds. But, modern governments require much more money to operate than these funds generate. Also, the fact that democratic governments rely primarily on taxes for funding is a good thing. Knowing that tax payers will get angry if they are taxed to heavily, helps keep the government responsive to the wishes of the electorate.
posted by Jasper Friendly Bear at 7:25 AM on December 15, 2007 [1 favorite has favorites]

You're describing endowments.
posted by mpls2 at 8:05 AM on December 15, 2007

The main answer is that charities do build up foundations and use investment income. Debt is a useful mechanism for governments which have large projects with up front expenses but steady income streams. Some governments (norway) do have built up foundations invested. However, think about how that comes about. It means that for a long time, taxes are generating more income than outlays, and most people would think of that as "taxes being too high." Also, it means that government would become a prominent investor and hence have a large managerial role in private firms. Many western people would object to government directly controlling private enterprise like that.
posted by a robot made out of meat at 8:06 AM on December 15, 2007

The Irish government does invest money - specifically the National Pension Reserve Fund, the Social Insurance Fund and the Dormant Accounts fund - through an agency called the National Treasury Management Agency. This agency was set up to manage the National Debt but seems to have expanded its portfolio, so to speak.
posted by tiny crocodile at 8:41 AM on December 15, 2007

As has been said, charities do often have endowments. But people often don't like donating to an endowment and would prefer that 100% of their money go "directly to those in need" or direct program support of whatever type. (A lot of charity report-card organizations encourage this mindset among givers, splitting out the percentage of donations that go directly to program support, with 100% implied as the correct answer.) So charities need to balance what makes financial sense for them with what's going to inspire people to give -- it's a lot easier to drum up support by saying "Your donation will buy a yak for a Tibetan village!" than by saying "Your donation will be invested in real estate that will give us a 5% annual return, with which we can pay our staff, keep our lights on, and work to eradicate poverty!"

There's a kind of weird mindset in society that non-profits and charities should be working extremely close to the bone, that their salaries and office space and other overhead should be almost criminally low otherwise they're not in it "for the right reasons." Encouraging people to give to endowments works against this image of the selfless do-gooders who'd give the shirt off their backs for the cause; even though it's financially prudent to be able to pay the bills and have some money reserved and invested, and it's economically prudent to be able to pay your staff enough money that you attract responsible competent experienced people, that's not really the "sexy" image that most charities want to broadcast as a way of soliciting donations.
posted by occhiblu at 8:42 AM on December 15, 2007 [1 favorite has favorites]

(I'm using "sexy" in that last sentence in an ironic marketing way, by the way.)
posted by occhiblu at 8:42 AM on December 15, 2007

I was once in the Board of Governors for an alumni association and there was a big debate over whether part of their endowment should be transferred to scholarships. The original educational program (which I'm an alumni member of) had just restarted and really needed some assistance with scholarships to support students from developing countries.

Our Treasurer argued that the money should be invested and only the interest be spent; a lot of us argued that since we have so much money just sitting there doing nothing, we should at least make use of some of it. This debate lasted quite a while.

After a while we had a meeting with the CEO of the main org, and one of us asked him what you do with endowment money. His answer: "Invest it and spend only the interest, of course!"

I think our Treasurer must have felt pretty vilified then.
posted by divabat at 9:35 AM on December 15, 2007

divabat, did you mean "vindicated" instead of "vilified"?
posted by bruce at 9:46 AM on December 15, 2007

The idea of dynastic foundations with perpetual endowments has gone out of favor with some philanthropists. They believe that the greatest return they can realize comes when money is spent on executing their mission as quickly a can be effective.

The Gates foundation may be the biggest example, but it isn't the only one. It's a bit ironic that, at this point, the Gates foundation is having a hell of a time spending money as quickly as they'd like (especially since Buffet added to the pot). They aren't just throwing money around, they want it to be used "efectively" and developing and scaling effective programs can take a lot of time.
posted by Good Brain at 9:51 AM on December 15, 2007

It is also worth noting other examples of govternment investment funds. Norway invests proceeds from oil production, and I think there are other governments who invest part of the proceeds from the extraction of natural resources as sort of compensation to future generations.
posted by Good Brain at 10:50 AM on December 15, 2007

As Good Brain suggests, the current vogue in philanthropy is a balance: invest donations, but spend not only the interest but some portion of the principal.

It's not just speed, though, that's motivating this, but also preservation of donor intent. "Spend the interest only" endowments tend to migrate far afield from their original donors' values and priorities as the decades go on. People who worked hard for their money don't like the idea of giving a blank check to bureaucrats who haven't even been born yet.
posted by MattD at 11:22 AM on December 15, 2007

To underscore what was said above with a pertinent example, here's Oxfam America:

International relief and development agency Oxfam America announced a new $50 million fundraising initiative, the Campaign for Oxfam America....

"This is not a typical campaign,” said Janet McKinley, chair of Oxfam America’s board of directors and of the Campaign for Oxfam America. “We're not raising money for new buildings or for a perpetual endowment. The highest return a donor can get is to put money to work now.”

On the opposite end, did you hear about that anonymous $100 million gift to the Erie (Pa.) Community Foundation? That donor helped the foundation carefully select organizations to receive portions of the money over a three year period, but:

Though the grants will be unrestricted, the donor expressed a strong preference that charities use the money to create endowments within The Foundation that would give them a long-term financial base.

I know that the nonprofits my dad worked for regularly asked their members to give them bequests in their wills, but they were not necessarily large amounts ($1000 here and there) and were usually directed gifts, e.g. "for the [local artist] Pottery collection". It's a lucky NPO that gets a large enough gift to make an endowment worth starting. In one case, there was a gift of stock in a certain locally based company just before it was sold (and we always wondered whether there was an insider angle there). The NPO spent about a year discussing whether the five-figure value of the stock sale was better spent immediately or not, and unfortunately a majority of the board voted for spending it. Similarly, it can be hard to keep putting the interest earned on an endowment back into the fund until it's large enough to matter.

There's a gap here between the non-profit management professionals who see the value of long-term planning and the generally local, generally business-oriented board members who want to see more immediate gratification during their generally limited tenure. A new wing! A special one-time program! Etc.

One of the few government examples in the US is Alaska's Permanent Fund, which invests oil revenues and pays residents dividends (there is no state income tax). Eligible Alaskans can receive a few thousand dollars a year, which helps offset the high cost of living at least. (One can also construct moral hazard arguments for that, I suppose.)

A number of resource-exporting countries are also quite keen on investment for the long term (especially the ones that see an end to the extraction business in a lifetime or two, like many of the OPEC countries). But resource-importing states tend to be more interested in debt management. There are complicated arbitrage rationales here. As a country it is not an entirely bad thing to be a debtor nation, as the holding of debt is a way to create an interdependent (or given an initial disparity, a dependent) relationship.
posted by dhartung at 12:45 PM on December 15, 2007

Norway is a major example of a country using investments to protect itself in the future. Previously a pretty poor country, when Norway came across its oil wealth they decided to invest heavily to maintain the welfare system in the future for when the oil runs out.
posted by wackybrit at 1:40 PM on December 15, 2007

bruce: indeed I did, whoops!
posted by divabat at 4:16 PM on December 15, 2007