Time to push for changes in how foundations operate

[Editor’s note: This is the first of two columns on changes needed in the foundation world.]

Pablo Eisenberg
Pablo Eisenberg

Pablo Eisenberg

The downturn in the economy and the budget troubles of nonprofit groups have made it painfully clear that many of the problems that have long plagued the foundation world have not yet been solved.

In these troubled times, it is important for nonprofit groups, enlightened foundation executives, and members of the Obama administration and the public to push for needed changes in a more comprehensive manner.

To improve foundation responsiveness to today’s needs will take legislative and regulatory changes, as well as efforts by foundations themselves to improve their performance.

Here’s a list of what should be on the agenda, starting with those that should be imposed by government and state officials:

* Increase the minimum amount foundations must distribute annually.

Federal rules requiring foundations to give five percent of their net investment returns have not changed for almost two decades, despite the enormous increase in foundation assets.

And as part of the payout foundations can count all administrative and operating costs, substantially reducing the actual amount provided to charities.

So taxpayers are cheated by foundation donors who have received enormous tax benefits for their contributions.

Congress should require foundations to give at least six percent of their assets to charities annually in the form of grants. That change could add at least $8-billion a year to the coffers of nonprofit groups.

* Abolish or tightly limit trustee fees for foundation board members.

Foundations probably spend $300 million on fees to their trustees each year.

Foundations probably spend $300 million on fees to their trustees each year, money that could go into grants but instead is put into the hands of people who, for the most part, are among the wealthiest people in the country.

Those fees should be abolished or, at a minimum, limited to payments that allow low-income or working-class trustees to devote their time to foundation business.

* Eliminate the loophole in federal regulations that permit foundation officials to realize a financial gain from their insider roles.

Internal Revenue Service rules prohibit “self-dealing,” yet permit trustees and foundation managers to receive compensation not just for their board and managerial duties, but also for providing legal, accounting, and other professional services to the foundation that are “reasonable, necessary and not excessive.”

Many abuses result from the fact that all kinds of self-gain are not prohibited.

Legal, accounting, consulting, and investment services, as well as many of the other services handled by foundation trustees, should be provided by outsiders.

* Limit the maximum size of foundations.

The growth of mega-foundations like the Bill & Melinda Gates Foundation pose a danger to democracy.

With trillions of dollars projected to be transferred from super-wealthy Americans to foundations and charities in the next three decades, many new foundations could have assets larger than the budgets of all but the biggest countries in the world and might be run by two or three family members.

Huge amounts of money – billions of dollars – will be distributed without any public discussion or political process, and without any public accountability.

A legislative limit – say $15 billion – should be placed on the size of new large foundations, while existing giants like Gates would be given 15 to 20 years to reduce their size or spin off a portion of their assets into one or more new foundations.

* Require family foundations to shut down within a specific period of time if they do not add outsiders to their boards.

Family foundations should be required to develop boards with at least five members, a majority composed of people who are not family members, or their retainers and advisers.

Foundations that refuse to expand their boards would be required to close within 15 to 20 years of their creation.

Small boards are not sufficiently broad to bring adequate perspectives and points of view to the grant-making process.

Nor generally are boards of family foundations composed solely of family members; such boards often are insular and their grant making focuses primarily on family interests.

* Prohibit foundation executives from sitting on corporate boards.

Serving as a corporate board member takes a lot of time and effort, energy that should be devoted to the full-time work of running a foundation.

In some cases, corporate products and policies may be closely aligned with a foundation’s priorities, creating a conflict of interest.

In others, corporate practices may conflict with foundation investment policies.

Foundation executives already earn substantial salaries; they do not need to augment their earnings with corporate trustee fees.

* Require all private foundations to pay a flat excise fee of one percent on their net investment returns.

A uniform rate should be levied on the investment returns of private foundations, instead of the complex variable rate they now pay.

The money produced by this tax should be dedicated to the Internal Revenue Service’s efforts to provide oversight of nonprofit organizations and to enforce laws that govern such groups.

* Give the IRS and state attorneys general adequate resources to effectively oversee both foundations and charitable organizations.

The IRS has had neither the will nor the resources to do a competent job of regulating foundations, not to mention other nonprofit groups.

Congress not only should provide additional resources so that the tax-exempt division of the IRS can properly do its job, but also should make it clear that the agency is expected to enforce accountability and ethical practices.

Congress should also allocate a substantial sum of money to the states so that their nonprofit regulatory offices, starved for money, can competently complement the federal government in regulating foundations and nonprofit groups.

All barriers to the sharing of information between the IRS and the state attorneys general should be eliminated.

* Make federal data about all foundations and their grant making available to the public at no charge.

Grant seekers and others who want information about grant makers now have to pay fees to get it.

To remedy this, the IRS should make all data about foundations available free through GuideStar and other online sites.

* Prohibit foundations from forbidding grantees to lobby.

The law permits nonprofit groups to undertake a limited amount of  lobbying.

Some foundations, however, still include in their grant agreements a requirement that grantees not use any of their general-support money for lobbying.

This is against the spirit of federal law that permits charities to lobby.

Related column: Steps foundations should show they can police themselves.

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

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