Dateline, May 21, 2007, Chicago
Debra Blum of the Chronicle of Philanthropy reported last week that T. Boone Pickens gave Texas Southwestern Medical Center and M.D. Anderson Cancer Center each $50 million. Oil Tycoon Gives $100 Million—With Strings Attached, May 16, 2007. Hard to argue with his generosity, but it is worth noting that the each gift carried some unusual restrictions. Had we been either of these institutions, we would have...
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rejected the gift. The structure of these two gifts smacks of unnecessary meddling. We aren't big fans of restricted gifts, particularly ones that carry the sorts of implications that are implicit in the restrictions found in the Pickens gifts. We, however, are realistic, recognizing that nothing we say is going to limit some donors from imposing restrictions on their generosity. In our view, the Pickens gifts are examples of restrictions that push the limits beyond what we believe to be warranted, but then again, it isn't our money.
The restrictions work as follows: The institution is not permitted to spend the $50 million until the fund has grown to $500 million. If, after 25 years, the fund has not reached $500 million, whatever is then in the fund is to be paid to Oklahoma State University for student scholarships. Our back of the envelope calculations indicate that this means that the fund much produce somewhere around a 10% compounded annual return. That certainly is doable, but the institution needs to worry about market downturns if it is at $450 million shortly before the 25th anniversary is reached. This could produce irrational investment behavior—with the institution possibly supplanting a prudent long-term investment style with a short-term speculative one.
Pickens does permit other donors to contribute to the fund in an effort to push it over the $500 million threshold. However, as we read Blum's article, if at the end of the 25-year period, the threshold is not met, the money from other contributors also goes to Oklahoma State University. If that is how the restrictions work, Southwestern Medical Center and the M.D. Anderson Cancer Center had better make sure that those supplementing the fund understand the consequences of failure.
At this point, we should acknowledge that this sort of restriction is probably legal, although there has been litigation over it in the past. See Fulton v. Trustees of Boston College, 361 N.E. 2nd 1297 (Mass. 1977), upholding an accumulation until January 15, 2000. On the other hand, one court struck down a 400-year requirement found in a will. James' Estate, 199 A.2d 275 (Pa. 1964). Depending on state law, there are potential issues under the rule against perpetuities. If the institution is a private foundation, the parties must take into account the minimum payout requirements imposed under Section 4942 of the Internal Revenue Code.
Now back to the two gifts in question. Several aspects of these restrictions bug us. First, implicit in Pickens' gifts is an apparent belief that our present day medical system is not worthy of funding or investment. More specifically, there is an apparent belief that a $1 invested today provides an unaccetpable return. Sure $500 million looks like a lot of money, but suppose there were an opportunity to invest $50 million in an obesity education program that really worked. Let's further assume that each year, the program produced $100 million in reduced costs to the health care system. That is a $2.5 billion return on the $50 million investment. Now does it make sense to defer expending the money for 25 years?
Second, Pickens earned his money from activity he has already conducted. He will presumably receive a current charitable contribution deduction, which is financed by those who are alive today. The question: If those who are alive today are subsidizing the contribution, why should they not be the ones to benefit from it? Instead, Pickens is skipping a generation.
Basically, Pickens is mandating that the two institutions build endowments. What is so good about endowments? Some level of endowment is warranted because it provides for a degree of stability in tough times. But bigger and bigger endowments are not always a good thing, as students at many universities can tell you as they go deeper in debt to finance tuition payments while their universities endlessly keep building reserves for a rainy day.
Third, Pickens apparently believes the world will be the same tomorrow as it is today, or at least his behavior suggests that this is his belief. Suppose the United States finally comes up with a rational and efficient pulbic health care system. It may no longer finance health care the way we finance it today. In that case, there may be no need for private endowments of health care institutions.
Fourth, we can see others with less money, but big egos forcing community foundations and other grantmaking charities to accumulate income for long periods of time. Some donors may be inclined to do this because they perceive a $5 million gift as not large enough to have their names attached to it, but a $50 million gift to be worthy of their names. In other words, "I didn't make enough while I was alive to impress my neighbors so I will artificially restrict the fund so it looks like I left more." The problem: People ignore the effects of inflation. In today's dollars, $50 million is ten times more than $5 million, but in tomorrow dollars, $50 million dollars is considerably less than ten times $5 million in today's dollars. In any event, when the donor recognition plaque is mounted on the wall, today's $5 million donor should be recognized as a $5 million donor, not a $50 million donor.
In short, Pickens, like many wealthy donors, is acting in a paternalistic manner. He implicitly doesn't trust those who are running these institutions to make the right allocations with respect to capital. In our view, donors should show more respect for those running institutions. That is why we don't like much of the restricted giving that we see. Everybody is very appreciative of the donor's generosity, but donors should stand back and let competent people make decisions regarding the allocation of capital between programs, and between today and tomorrow. If a prospective donor doesn't think the administrators are capable or the current mission is the wrong one, the donor should find another institution that more closely addresses the mission he is interested in funding or that, in his judgment, has more competent administrators.
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