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Watchdog backs bigger payout

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Private foundations in the U.S. could give $4.3 billion more a year, still sustain themselves and become more efficient, a watchdog group says.

Backing a move in Congress to stop foundations from counting overhead in the share of their assets they must give to charity each year, the National Committee for Responsive Philanthropy says foundations in 1999 counted $2 billion of overhead in their giving.

Current law requires foundations to give 5 percent of their assets to charity, but lets them include salaries and other overhead costs.

In 2001, the last year for which data are available from the AAFRC Trust for Philanthropy, U.S. foundations gave $25.9 million to charity.

The National Committee says Section 105 of H.R. 7 represents a “modest and reasonable reform” that would not hurt foundations over the long term but would end their “rampant practice of counting much of their own administrative costs toward their annual charitable spending obligations.”

The measure would also halve, from 2 percent to 1 percent, the excise tax for private foundations.

The National Committee also backs that change but only if revenue from the excise tax is used to improve oversight and support of foundations and nonprofits by the Internal Revenue Service.

The bill does not require that the excise tax revenue, which totals about $500 million a year, be used for IRS oversight.

Analyzing data from the National Center for Charitable Statistics on the top 100 U.S. grantmaking foundations, the National Committee found that in 2001 they counted $883 million, or 62 percent of their administrative expenses, in meeting the 5 percent payout requirement.

That overhead included 89 percent of the foundations’ occupancy expenses, 68 percent of travel expenses and 63 percent of total compensation expenses.

That same year, according to data from the Internal Revenue Service, 47 percent of administrative expenses for all private foundations in the U.S. were counted as part of their 5 percent payout, the National Committee says.

It also cites studies by other groups “bolstering the case that private foundations can be doing significantly more to help struggling nonprofits while still preserving their own long-term sustainability.”

A 1999 study commissioned by the Council on Foundations, for example, concluded that foundations could have paid out 6.5 percent a year and still have increased their assets by nearly one-fourth from 1950 to 1998, the National Committee says.

Yet the Council of Foundations opposes the bill, saying it could hurt their operations by “forcing them to choose between effective grantmaking or what amounts to an increase in the required payout rate.”

And the council says the bill would make it “difficult or impossible” for some foundations to “exist in perpetuity.”

The National Committee also says that a June 2001 study by two Harvard researchers who looked at 290 of the biggest foundations from 1972 through 1996 found they generated an annual return of 7.62 percent on their assets while paying out 4.97 percent on average.

The current House bill would increase foundation expenses by only 0.4 percent, to $5.4 percent, “well below the 6.5 percent level that the research sponsored by the foundation sector itself has found to be sustainable,” the National Committee says.

 “This modest change is sustainable for foundations,” says Rick Cohen, the group’s executive director.

“It doesn’t require them to reduce their administrative expenditures one iota,” he says, “but it does get new money into nonprofits now, to address today’s problems, when nonprofits face the triple whammy of charitable giving declines, federal and state public investment cutbacks, and increasing demands from constituents in the most difficult economy in two decades.”

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