Don’t Eliminate Small Foundations

To the Editor:

Emmett D. Carson proposes eliminating two-thirds of all foundations to ease the workload of Internal Revenue Service agents and state regulators in his article, “An Easy Way to Curb Foundation Abuses” (Opinion, May 26). He predicts the emergence of a “more exclusive club” of foundations that will be better able to fulfill “higher standards of ethics and accountability” than foundations that don’t maintain $1-million in their endowments. These smallest foundations would be required to spend out their assets to charities or public foundations.

Mr. Carson’s desired goal, which we share, is to see fewer abuses reported in newspapers and stronger belief by the public in the integrity of foundations.

The public’s trust in institutions has been declining since the 1960s, and more precipitously following the collapse of Enron and WorldCom, which vaporized billions of dollars of savings. However, regaining true integrity will not be accomplished by erecting barriers, guild laws, and exclusive clubs, especially when admission is conditioned on wealth and the ability to afford a phalanx of attorneys.

Looking to the IRS to confer integrity is a burden the agency can’t carry because it is not designed for that purpose. Integrity will be earned through the actions of foundation boards that follow true philanthropic intent, demonstrate relevance in addressing the right issues, and treat those less powerful with respect.

One reason smaller organizations might get tagged with impropriety more often than large ones will be apparent to anyone who’s tried to read the phonebook-sized tax return of a $10-billion foundation. See how long it takes you to find misspent travel funds in there (not that there necessarily are any).

Most small foundations’ tax filings can be reviewed in a few minutes, and shenanigans are more easily spotted. In addition, as most small foundations’ grants stay local, it’s very easy to get a quick picture of the foundation. In the converse, once an organization has more than 10 employees, the scale of activity obscures many expenditures so that an outside observer (lacking subpoena powers) can no longer tell if funds are really being used carefully.

Transparency actually works in smaller organizations, and this leads to trust.

By the way, this is one advantage discrete foundations have over community foundations whose donor-advised fund activity is reported in aggregate, obscuring donors’ interests.

Whether a donor chooses to go it alone with a foundation or turn over assets to a community foundation, oversight requires labor, and that’s not always free. Using the Minneapolis Foundation, where Mr. Carson is chief executive, as an example, fees run 1.6 percent of assets for a donor-advised fund. This equates to $16,000 for a $1-million fund, or roughly 20 percent of revenue, assuming an 8-percent investment return.

The typical million-dollar foundation that belongs to the Association of Small Foundations, which we head, spends $11,400 on administration and investments, plus excise taxes of about $1,100, about 16 percent of revenue.

What this relative price parity points out is that the public will not recoup any funds for additional grant making by removing so many foundations from the IRS workload. Instead, the donor advised-fund industry gets the fees.

Small foundations tend to be fairly generous. Among foundations that belong to our association, those with under $1-million in assets give away an average 9 percent of assets annually.

We studied 200 North Carolina foundations worth less than $1-million, and saw that the median donation rate was 19 percent, the average donations surpassed 40 percent, and overhead expenses for administration and investment totaled less than 10 percent of all spending.

Many small foundations are located in outlying cities and towns. For them, Mr. Carson’s metaphor of “franchise” sounds unwise, as though he is recommending that Main Street businesses surrender to Wal-Mart and Starbucks because smaller businesses are not to be trusted.

In the midst of public dismay over foundation abuses of the public trust, we must develop solutions that truly address the issues at hand, rather than disqualifying those who have less money.

Landon Lane
Board Chair
Association of Small Foundations
President
L.B. Lane Family Foundation
Hickory, N.C.

Tim Walter
Chief Executive Officer
Association of Small Foundations
Bethesda, Md.

To the Editor:

As the president of one of the 48,000 private foundations with assets under $1-million, I was astounded — and somewhat offended — by Emmett Carson’s commentary regarding the inability of smaller foundations to deal with the “kind of structure” represented by the private foundation.

While Mr. Carson is entitled to his views on the matter, it does appear that his position is less a dispassionate assessment of the private-foundation sector given at arm’s length, and more a point of view clearly intended to benefit community foundations such as the Minneapolis Foundation, where he serves as CEO.

At a meeting you reported on in your May 12 issue (“Foundations Urged to End Their Timidity Over Advocacy”), Mr. Carson stated that private foundations “inherently [have] no advantage to giving.” However, it is widely known in philanthropic circles that private foundations offer a great number of advantages over other forms of organized philanthropy in terms of flexibility in grant making and overall operational control — two things that many donors value.

Mr. Carson’s recommendation goes against the democratic ideal of the small private foundation. As opposed to being compelled to join and be subject to the rules of a community foundation, the small private foundation allows individuals and families to pursue on their own terms and, based upon their own wisdom, the charitable missions that drive their philanthropy.

Mr. Carson’s recommendation for centralization and control within the community-foundation sphere is contrary to the spirit of individualism and the promotion of individual creativity that are bedrocks of this country.

In addition, small private foundations are the incubators of large private foundations, with many families establishing small foundations in anticipation of a future liquidity event such as the sale of a business, or to simply engage the family at an early age. To terminate all small foundations would be to cut off the lifeblood of large private foundations as a form of organized philanthropy.

While it is true that the private-foundation structure can be complex and require administrative oversight for proper operation, there are many experienced attorneys, accountants, and philanthropic advisers who have been providing guidance and advice so that their clients may enjoy the benefits of their private foundation.

More recently, there have emerged a number of highly qualified, third-party providers of private-foundation support services that specialize in serving the needs of small and mid-sized foundations. Two of these firms, Fidelity Investments and Foundation Source (of which I am the CEO), are designed to relieve the administrative burden on private foundations and ensure proper governance, so that families can focus on what matters most: philanthropy.

Community foundations and donor-advised funds certainly do offer families the advantages of outsourced administration, support, and advisory services. However, these very same services are equally available to all private foundations.

Daniel M. Schley
President
Schley Family Millennium Foundation
Chief Executive Officer
Foundation Source
Fairfield, Conn.