Guest column – Counting overhead costs could backfire

By Tony Pipa

Foundations can, and must, do more.

But the U.S. House bill that would disallow private foundations from counting administrative costs towards the federally mandated payout rate of 5 percent actually may inhibit them from doing so.

For all their supposed largesse, foundation giving comprises 2 percent of overall revenue for nonprofits nationally. So why is so much attention paid to what they do?

Philanthropy done well adds value far beyond the dollar amount of its grants.

Foundations seek out, support and provide credibility to people whose passion and ideas have the potential to transform their communities.

They seed and help create new ways of addressing tough social problems, collect and apply knowledge in practical and innovative ways, and advocate with policymakers and business leaders for more vibrant, healthy and just communities.

While I agree that too many cases of profligate spending exist, responsible foundations attempt to keep costs reasonable.

The proposed change, which makes administrative costs additive to required payout, has the psychological potential to make foundations worry not about compensation levels but about overall staff and administration instead.

If, over time, boards of directors of foundations shift from being reasonable to being parsimonious in their allocation of human and intellectual resources, that could produce serious implications for very grass-roots organizations that, with their strong ties to local constituents and their willingness to engage in difficult issues, are sometimes best positioned to create enduring change in their communities.

For example, 81 percent of the nonprofits in North Carolina have budgets less than $100,000, and many are working in isolated communities on behalf of people who traditionally have not had access to significant resources.

Such organizations that have received foundation grants have undoubtedly received them from institutions with sufficient staff to learn about the opportunities in isolated communities, get to know the leadership and shepherd proposals to board review.

If foundations begin to invest less in such human resources, funds may trend toward larger organizations whose infrastructure allows them to be more aggressive in pursuing grants.

The Winston-Salem-based Z. Smith Reynolds Foundation, which has been a primary source of seed funding for many locally-based efforts in our state, receives only 5 percent from its source trust. If forced to distribute the entire 5 percent in grants, it would have nothing to pay for staff to identify those types of programs.

This would unintentionally weaken an important part of our nonprofit sector.

Other extracurricular efforts may also suffer. In North Carolina, for example, we are experiencing a surge of welcome activity among foundations that are interested in increasing their impact by leveraging their assets, expertise, and influence.

We recently established the N.C. Network of Grantmakers, a forum through which foundations with like interests can learn together and coordinate their efforts, and created large local sites of the Funders Collaborative for Strong Latino Communities and the Funders Collaborative for Racial Justice Innovation.

These efforts have required leadership and time, and all have the potential to have influence beyond the dollars being pooled together.

If staff resources tighten, having the capability to convene potential partners – nonprofits or funders – to create new strategies and policy ideas around emerging social issues will surely be affected.

If excessive compensation is the issue, there are better ways to address it.

If board compensation and reimbursement are the worry, it’s easy to exclude those activities from payout.

And if the real issue is the overall payout rate — and I personally believe that too many foundations view the 5 percent rate as a maximum, rather than a minimum, and that the field can be more aggressive with its assets – then let’s discuss overall payout.

But a sledgehammer has been proposed to crush an insect, and what might be lost could be far more valuable than the tiny percentage of dollars added to the overall capital market for nonprofits.

Tony Pipa is executive director of the Warner Foundation in Durham, N.C.

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