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Payout bill’s impact feared

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By Todd Cohen

WINSTON-SALEM, N.C. — The Z. Smith Reynolds Foundation could suffer if Congress okays a bill to change the way foundations calculate the money they must give to charity each year, its top executive says.

Current law requires foundations to make annual grants equal to 5 percent of their assets, and lets them count salaries and other administrative costs.

The bill would not let foundations include administrative costs in meeting the “payout” requirement.

“That could have a devastating effect on the foundation and consequently on North Carolina,” says Tom Ross, executive director.

While most foundations control their own assets, he says, Reynolds gets income from two trusts the Reynolds family formed in 1936 and 1951.

Documents creating those trusts – one managed by Mercantile Bank in Baltimore, the other by Wachovia and two individual trustees – require they pay only their income to the foundation.

If annual income falls short of the 5 percent that federal law requires foundations to give away each year, the trusts can tap their assets to meet that requirement, Ross says.

But if Congress excludes administrative costs from the required payout, he says, the trusts could not tap their assets to cover overhead unless the courts let them.

That would effectively cut off funding for the foundation’s staff, which is critical for evaluating grant requests from charities, and for programs the foundation runs, Ross says.

Those programs include the Nancy Susan Reynolds Awards, an advisory board, a sabbatical program for nonprofits, a young scholars program and efforts to convene North Carolinians to address issues in the state, Ross says.

If Congress wants foundations to give more money to charity, or to limit excessive salaries, he says, it should address those issues directly, not by excluding administrative costs from the payout requirement.

“It has the real impact of reducing the quality of grantmaking because it does affect the professional staff that foundations rely on,” he says.

While requiring foundations to give away more may be justified, he says, now is a bad time to make that change because the slumping stock market has reduced the value of foundation assets.

Assets of the two trusts that support the Reynolds foundation, for example, have declined to roughly $380 million from about $490 million three years ago.

In 2002, the Reynolds foundation, which has a staff of 13 people, paid $2.1 million in administrative expenses and programs operated by the foundation that it counts as part of its 5 percent payout.

If Congress approves the bill, Ross says, the foundation probably “would have to seek relief from the courts.”

Without court relief and thus limited staff screening, he says, larger and more savvy nonprofits could gain an edge in seeking grants.

Another option, he says, would be for new nonprofits to emerge to screen funding requests to foundations, which could make grants to the new nonprofits as part of their 5 percent payout.

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