Don’t Cry for Thee, Foundations

From the anguished cries, wringing hands, and self-pity generated by foundation officials during the past few weeks, it sounded like the end of the philanthropic world is at hand. At least one journalist for a prominent daily newspaper says grant makers are so terrified that she has received frantic calls from foundation officials who say they need help in exposing what they call sinister threats to philanthropy.

But nobody has suggested that foundations be put out of business. All that has prompted this outpouring of anxiety was a proposal by two members of Congress that would, in effect, force most foundations to give more to charity each year.

The legislation, introduced by Reps. Roy Blunt, Republican of Missouri, and Harold Ford Jr., Democrat of Tennessee, would prohibit foundations from counting administrative costs — such as rent and staff salaries — when they determine whether they meet federal requirements to distribute at least 5 percent of their assets to charities. Leaders of many of the nation’s wealthiest foundations, including the Ford, Annie E. Casey, and Northwest Area Foundations, have all spoken out against the measure.

Since many large foundations spend 0.5 percent to 1 percent of their assets each year on administrative costs, the increase in grants to charities would be considerable, potentially adding several billion dollars to their coffers.

Poor foundation executives. One really has to feel sorry for grant makers who may be forced to provide more money to charity. The reaction to the Blunt-Ford proposal has been so intense it’s almost as if foundation officials were asked to spend more of their own money. Instead of bemoaning their fate and fighting against a measure that is long overdue, foundations should be aggressively attacking issues that are truly important to nonprofit organizations and the public. Excessive compensation, conflicts of interest, and inattentive boards have plagued the foundation world in recent years, and no grant makers seem to be doing anything to stop that.

In their reactions to the Blunt-Ford plan, grant makers seem to have forgotten that foundation donors have received huge tax benefits in exchange for the privilege of giving away money to meet important public needs. They have overlooked the obligation of foundations to support nonprofit groups struggling with big budget problems, brought on by enormous cuts in federal and state program funds and reductions in foundation grants.

What’s more, grant makers conveniently forget that during the 15 boom years of the market through 2000, when their assets ballooned to almost $500-billion, the aggregate sum distributed by foundations decreased rather than increased. When times were good, they somehow weren’t good enough to give nonprofit groups the money they deserved. Foundations’ banking instincts preempted their grant-making responsibilities.

And many well-intentioned but misguided foundation officials are still belaboring the spurious contention that foundations will become extinct if they have to distribute any more than the minimum share of assets now required by the federal government. Several studies prove them wrong, as do foundations that have distributed more than 5 percent annually and survived in good health.

Some grant makers are also arguing that the proposed legislation would force foundations to reduce their support for management training for nonprofit groups and accountability activities, such as publishing annual reports. That assertion belongs in a joke book. The proposal in the House doesn’t say that foundations have to stop putting money into administrative activities; it just says that money can’t be counted to meet the payout requirement. If foundations stop spending on administrative activities that are vital to charities, then it isn’t because Congress forced them to do it. The onus for this irresponsibility falls directly on the foundations themselves, not on the legislation.

Foundations should also realize that all their whining about the proposed change to the payout rules is just going to attract more scrutiny of their activities by the news media, and ultimately by lawmakers. In particular, journalists are likely to look more carefully at some of the administra-tive spending that foundations are so zealously trying to preserve.

Plenty of foundation directors are overpaid and the recipients of special perks. The Chronicle’s most-recent survey of compensation at 20 of the nation’s largest foundations, for instance, found that six chief executives of foundations make more than $500,000 annually, and six others make between $400,000 and $500,000. Some foundation CEO’s sit on corporate boards, for which they receive trustee fees and are sub-ject to potential conflicts of interest.

Many foundation CEO’s are also responsible for their institutions’ high administrative costs: sumptuous offices often renovated at enormous costs, such as the $2-million expenses incurred by the James Irvine Foundation to move into offices with spectacular views of San Francisco and its bay; lavish expenditures on meals and entertainment; and first-class air travel and expensive hotels. While no one expects foundation executives to wear hair shirts, their high living cannot be justified.

Conflicts of interest are a continuing problem at many foundations, and often lead to an abuse of tax-exempt funds.

For example, the Yawkey Foundation, in Boston, is being investigated by the state attorney general’s office for its $15-million grant to Boston College, because of the close ties of five of the foundation’s trustees to the college. Foundation boards of trustees all too often exercise little oversight over their institutions’ activities. Some accept high CEO compensation packages as a way of philanthropic life, reinforced by the view of numerous business executives who serve on foundation boards and expect any CEO to be highly paid. Other trustees, often family members and friends, are neither aware of nor concerned about conflict-of-interest problems or the potential that top foundation officials are getting overly generous financial rewards through their philanthropic connections.

The prevalence of large trustee fees is another matter of concern, especially because such fees can be counted by foundations that want to prove they have given away the minimum required 5 percent.

American foundations are spending many millions of dollars each year on fees to their trustees who are among the wealthiest and most highly paid professionals in our country, money that could otherwise be spent on nonprofit organizations and their programs.

In a study of 238 foundations — including 175 of the wealthiest foundations — that two of my former Georgetown University colleagues, Christine Ahn of Food First and Channapha Khamvongsa of the Ford Foundation, and I are completing, we found that the foundations in our sample spent more than $44-million in 1998 just on trustee fees.

Many of those foundations have subsequently raised the amount they give to their trustees. Why should trustees of foundations receive any money for their charitable work, while board members of charities, many of whom are poor or middle class, get no money for their charitable efforts?

It is time that grant makers, led by the Council on Foundations, take a tough stand on trustee fees, either by recommending their elimination or urging reasonable limits on their amounts.

The Council on Foundations and the regional associations of grant makers, not to mention the leaders of the nation’s foundations, must do far more. They have been too slow to blow the whistle on their colleagues who abuse the public trust.

At the annual meeting of the council in Dallas last month, Dorothy S. Ridings, president of the council, and Emmett Carson, president of the Minneapolis Foundation, expressed concern about recent foundation scandals and urged members to take more effective action in assuring public accountability. The council and the regional associations should discuss these concerns more regularly and candidly in their publications and public statements. They should highlight examples of bad behavior as a lesson that foundations need to learn.

It should be clear by now that self regulation by foundations has not worked. Public accountability and the eradication of abuses will be achieved only if state and federal governments do an adequate job of oversight. Although the council has stated that the Internal Revenue Service needs more resources to do its job, it has not forcefully pressed Congress to provide those resources.

Aggressive lobbying by foundations and nonprofit groups could prompt Congress to earmark the excise taxes that foundations pay to be used for stepped-up state and federal oversight of nonprofit groups. That would be a far better use of foundations’ political capital than the effort now under way to beat back the change in the payout formula.

Foundations need to deal with a wide array of issues if they want to become more accountable and worthy of the public trust. Trying to maintain a tightfisted approach to grant making at a time of national need is not one of them. Swarming over members of Congress and invoking the specter of extinction is not only fraudulent, but a disservice to our needy and hardworking nonprofit organizations. The American people expect, and deserve, more from the foundations they subsidize.

Pablo Eisenberg is senior fellow at the Georgetown University Public Policy Institute and a member of the executive committee of the National Committee for Responsive Philanthropy. He is a regular contributor to these pages. His e-mail address is pseisenberg@erols.com.