Foundations’ failure to give more is inexcusable

[Editor’s note: A longer version of this column was published in The Chronicle of Philanthropy]

Pablo Eisenberg
Pablo Eisenberg

Pablo Eisenberg

While taxpayers, investors, homeowners, consumers and working people are suffering from the near collapse of the financial system, foundations seem unwilling to play their part in maintaining America’s social fabric and mitigating the impact of the global economic downturn.

Only a handful of foundations, mostly community funds and the rare private grantmaker, have made emergency grants to charities or shown any indication that they plan to step up their grant making to charities suffering in the economic downturn.

Instead, many plan to give less and reduce long-term grants, largely because foundation investment portfolios have been hard hit in recent months.

Foundations have felt little pressure to increase their giving.

In exchange for the substantial tax breaks they and their wealthy donors receive at great cost to America’s taxpayers, foundations are required by law to distribute annually at least 5 percent of their net assets.

Since they are permitted to include the costs of managing charitable grants to meet that goal, many foundations donate substantially less than 5 percent to nonprofit institutions.

Although foundation assets have skyrocketed to more than $600 billion, the payout requirement has stayed the same since it was adopted in 1969.

Foundations and especially their trade associations have fought vigorously against raising the payout.

It is time to raise the minimum amount foundations must distribute annually to at least 6 percent in grants.

That change alone would add more than $6 billion a year to nonprofit organizations.

The Obama administration should urge Congress to pass such a change immediately, as part of its efforts to stimulate the economy.

Leaders of the nation’s largest foundations have long argued that raising the payout rate would inevitably lead to a reduc­tion in their endowments and, eventually, to their de­mise.

Yet numerous studies have concluded foundations could maintain the basic size of their endowments even if they distributed 7 percent or 8 percent a year.

Foundation officials often note that the donors who created their organizations expressed a desire to maintain their assets in perpetuity, and that forcing them to give more would mean they would be put in the position of violating a donor’s intentions.

But even if the perpetuity of a few foundations were threatened by an increase in the required annual distribution, why should the American public, which subsidizes foundation tax breaks, care whether these organizations exist forever?

The number of foundations that oppose an increase in payouts is probably much smaller than it might seem when lawmakers hear the views of the Council on Foundations and other groups.

Many leaders of small and mid-size foundations think it’s fine to increase the required distribution level.

So do nonprofit leaders, but almost none of them have the courage to push for an increase — in part because some charity executives have been threatened with the loss of grants for speaking out in favor of increasing the federal minimum distribution rate.

Still, one would expect that their inability to provide services to those in need might lead to greater courage in pushing for an increase in grant making.

And even a move by Congress to force foundations to give more will not provide the much-needed transformation in how grantmakers do their jobs.

They operate with no sense of urgency. Their boards meet a few times a year to award grants, regardless of the budget requirements of their grantees. The majority of foundations still refuse to provide general operating support, though this is the type of money nonprofit groups view as their lifeblood.

Foundation boards, composed of the wealthiest people and most highly paid professionals in the country, are fixated on such issues as whether their investments are doing well enough to ensure their perpetuity, rather than on the needs of the nonprofit groups and constituents they are supposed to serve.

Their institutional interests often seem to pre-empt those of their grantees, whose lives are based on a sense of urgency to meet budgets, serve clients, retain key staff members, or start important efforts to influence public policies.

Even more distressing than the emphasis on self-preservation is the fact that foundation board members are often paid for the ostensibly charitable work they do. Some $300 million is probably allocated for this purpose.

That means foundations are diverting money to their trustees that charities could have used to sustain their operations.

With the crash of the nation’s financial institutions and economy, and with thousands of important charities in danger of going out of business or severely reducing their services to needy people, that diversion of funds is reprehensible

The reluctance of foundations to give more is a sad reflection of their priorities and their lackluster commitment to charitable organizations.

It is up to President-elect Barack Obama and Congress to take action to raise the payout rate and either abolish or severely limit the practice of trustee fees.

Let us hope that such an effort will not be met once again by the full-blown resistance of insensitive and unreasonable foundations.

Pablo Eisenberg is senior fellow at the Georgetown University Public Policy Institute.

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