Foundations under fire

By Todd Cohen

RESEARCH TRIANGLE PARK, N.C. — Efforts in Congress to tighten regulation of private foundations pose the most serious threat they have faced in decades, a leading charity advocate says.

And while charity advocates say they can live with a compromise charity bill approved by the House on Sept. 17, foundations and nonprofits can expect continuing moves in Congress and by regulators to police charities, says Dorothy Ridings, president and CEO of the Council of Foundations.

To better educate foundations about regulatory matters and other challenges they face, the council is launching a two-year effort that will include 12 regional forums to educate and learn from grantmakers.

If Congress passes the charity bill, Ridings says, “massive education” will be needed.

The council also plans a series of publications and initiatives on issues ranging from the need for audit committees for nonprofits to the role of governing boards, philanthropic advisers, legal counsel and retired foundation executives.

The House bill, which now goes to a conference committee to resolve differences with a bill previously passed by the Senate, includes incentives to stimulate charitable giving.

But heavy lobbying by charity advocates prompted the House to soften proposals that would have stopped letting private foundations count overhead as part of the 5 percent of their assets they are required to pay each year in grants.

Those proposals, which would have had the effect of increasing total dollars paid in grants, were triggered by disclosures of excessive pay at some foundations.

“Foundations by and large, the vast majority, do their work wisely and well, not only adhering to the law, but also to the moral and ethical spirit of philanthropy,” Ridings told funders, donors and advisers at a meeting Sept. 11 of the Triangle Donors Forum in the Raleigh-Durham area of North Carolina.

But “we didn’t look so good” in the wake of reports about “excess in our field,” she said. “Some foundations are clearly doing things wrong.”

Some lawmakers reacted by proposing to eliminate overhead from the required payout, she said, adding that “members of Congress were woefully undereducated.”

Whatever form the final bill takes, she said, the charity world continues to face big challenges.

Those include greater scrutiny from state attorneys general who are becoming more aggressive charity watchdogs; the likelihood that the Sarbanes-Oxley Act of 2002 will result in a push for tighter auditing and investment oversight for charities; the impact on grantmaking of the U.S. Patriot Act; and possible application of the payout rule to community foundations, colleges, universities, hospitals and other endowments.

Increasing the share of assets that private foundations must pay out each year, she said, could mean that foundations would go out of business.

To maintain their “purchasing power,” she said, foundations need an annual return of 9.5 percent on their investments – 5 percent to cover grants, 4 percent to cover inflation and 0.5 percent to cover the cost of managing the investment of their assets.

“We’ve always thought an increase in the payout rate was the ‘third rail,’ she said. “We have terrible issues to solve in this country. Our children and grandchildren are going to have problems. If foundations are not allowed to exist, then this country will be in deep, deep trouble.”

Ridings also said the U.S. has “too many really small foundations,” or those with less than $100,000 in assets.

Those foundations are “fee generators,” she said, and fees paid to lawyers, accountants and other advisers can “eat up the assets of the foundation in no time.”

She also warned that community foundations were “in the cross-hairs of donor-advised funds,” and said audits were likely for some “free-standing” donor-advised funds that had been “set up for self-dealing purposes.”

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