Big Change Afoot at Pew Trusts

The Philadelphia foundation transforms its legal structure

The Pew Charitable Trusts, one of America’s richest private foundations, has gained approval from the Internal Revenue Service and two Pennsylvania courts to transform itself into a charity.

The move, a change in legal and tax status, is extraordinarily rare for big grant makers, and was made possible by an unusual set of historical and financial circumstances that allowed Pew to qualify as a charity.

Pew officials said the Philadelphia-based organization will continue to give away at least 5 percent of its assets, a requirement for private foundations, though not for charities. And next year’s grants budget will be about the same as this year’s, $140-million. But as a charity, which operates under more favorable IRS rules than private foundations do, Pew officials said the group will be able to do much more. It will have an easier time attracting big donations for the organizations it supports and running its own charitable programs, they said. It will also be able to devote more time and money to lobbying and advocacy once it is freed from the prohibitions on private foundations that limit such activities.

Pew planned last week to alert its roughly 600 grant recipients about its change in status. Some observers who had already learned of Pew’s decision said the announcement could trigger worries about future Pew grants, and the status of other private foundations. Other observers predicted much less fuss. In any case, the news is expected to be met with excitement, and much anticipation about what happens next.

“Nobody is going to say ho-hum when they hear this,” says Dorothy S. Ridings, chief executive officer of the Council on Foundations, in Washington. “It’s big, and it’s new, and any time there’s a new approach to something in the foundation world, everyone wants to watch and learn.”

But Pew’s transformation is likely to raise some thorny questions, too. Among them: For how many years will Pew follow the 5-percent rule after it is no longer bound by federal law to do so? Will the appointment of additional board members sufficiently balance Pew family involvement in governance? Will its fund-raising plans put Pew in competition with other charities?

Rebecca W. Rimel, Pew’s chief executive officer, tried to put the issues in perspective during an interview last week. She was especially careful to say that grant recipients can expect their regular checks from Pew.

“We’re telling grantees it will be business as usual,” said Ms. Rimel. “We’re not looking for any radical change in the short term, but we are always searching for more efficiency, more flexibility, and that’s what this offers.”

Making the Transformation

Among Pew’s first acts as a charity, according to Ms. Rimel, will be to set up a fund to attract donations for the Barnes Foundation, a financially troubled museum with a world-class art collection that is seeking money and court approval to move to a more visible location in Philadelphia. As a charity, Pew will have far fewer restrictions than it does as a foundation on its ability to accept and administer donations from other sources.

Another move will be to consider combining the six policy-research centers Pew supports in Washington into a single, Pew-run organization. Each of the groups, including the well-known pollsters, the Pew Research Center for the People and the Press, is a separate charity supported by Pew grants. Ms. Rimel said that bringing the groups together, to share administrative and technology support, for example, would be more efficient and save money. As a charity, it will be much less tricky for Pew to run its own programs or set up subsidiary charitable organizations.

“Private foundations are subject to a special regime that is much more strict and limiting, starting with a 1- or 2-percent tax on income that is eliminated if you are a public charity,” says Harvey P. Dale, director of the National Center on Philanthropy and the Law at New York University School of Law. “Any private foundation would prefer the flexibility and relative freedom that comes with being a public charity.”

But, he cautioned, Pew’s transformation is not a model most other foundations can follow. Charity experts can point to only one other time a sizable private grant maker has made such a switch: the Rockefeller Family Fund in 1996. In that case, the foundation was able to clear the biggest hurdle between private foundations and charity status — what is known as the public-support test — in part because it was backed by a group of Rockefeller cousins who qualified as separate donors.

Rockefeller Family Fund officials say the organization still runs largely as a grant maker — giving away at least 5 percent of its assets each year — but has also been able to run its own programs, such as a project it started last year to examine enforcement at the Environmental Protection Agency. Rockefeller may eventually spin off the project as an independent charity, as it did with TechRocks, which got its start at Rockefeller but is now a separate San Francisco nonprofit group providing technology assistance to other charities.

Pew was able to meet the IRS’s public-support test because of its own unusual composition. The Pew Charitable Trusts is not a single entity, but an amalgam of seven separate trusts created from 1948 to 1979 by two sons and two daughters of Joseph N. Pew, founder of Sun Oil Company, and his wife, Mary Anderson Pew. In that way, Pew, unlike other big grant makers, like the Bill & Melinda Gates or Ford Foundations, is made up of a number of trusts that each count, in the eyes of the IRS, as a distinct donor. That circumstance, coupled with Pew’s promise to raise more money from other donors (such as through the Barnes fund), and to add up to four new members to its governing board to loosen the majority hold of Pew family members, qualified Pew as a charity.

Until April, when the IRS approved Pew’s application for tax-exempt status, the Pew Charitable Trusts was not its own legal entity, just the commonly used name for the group of seven trusts, which in most ways behaved like a single private foundation.

Starting January 1, the legal status of each of the seven trusts will shift from that of private foundation to that of supporting organization, charitable groups designed to funnel all their support typically to one charity — in this instance, the newly created entity formalizing the name Pew Charitable Trusts.

Taken together, the assets of the seven trusts have made Pew perennially one of the country’s wealthiest grant makers. Total assets are now valued at nearly $4-billion, down about $1-billion from its high in 2000 before stock-market woes took their toll.

With its new designation, the Pew Charitable Trusts will be one of the nation’s biggest charities, earning roughly $200-million each year from its supporting organizations, the seven trusts. Had the new structure been in effect last year, the projected payments would have made it the 50th largest charity in the United States — according to The Chronicle‘s annual list of nonprofit groups based on how much money they receive from private sources — ranking just ahead of Vanderbilt University, and just below the United States Fund for Unicef.

And while the trusts’ assets are not technically the assets of the new charity, the billions of dollars the trusts hold to benefit the new Pew will make the organization one of the best-endowed charities in the country.

But despite the remarkable figures, little will change in the inner workings at Pew, Ms. Rimel said. The new charity will take over all the grant-making and administrative functions now handled by Glenmede Trust, the money-management company created in 1956 to administer the Pew family’s fortune and its charities. All that means, however, is that the 130 employees, including Ms. Rimel, who run Glenmede’s grant-making division for the Pew trusts will continue to do their very same jobs, except that they will work for the new charity, not Glenmede.

Ms. Rimel will still be Pew’s chief executive officer. J. Howard Pew II, grandson of one of the trusts’ founders, will still be the chairman of its board.

Reorganizing Grant Making

Other changes are occurring at Pew, though.

While the causes it supports will stay the same, Pew is revamping the way it will consider and handle its grant-making program areas. It is abolishing its seven grant-making issue areas, such as the environment and health and human services, in favor of three clusters, called information, policy, and civic life.

Ms. Rimel said the changes were made to increase communication and cooperation among Pew officials working in different segments of the nonprofit world. For example, she said she hoped Pew staff members who specialize in education can work more closely with staff members who handle environment grants as part of the “policy” cluster.

Another reason for the move, Ms. Rimel said, was to better separate Pew’s advocacy work from the rest of its grant making.

“We already engage in a whole lot of advocacy work and have never felt we’ve had to hold back,” Ms. Rimel said. “That’s not going to change. We’ll just be more free, and our grantees will be more free to jump in on timely policy issues.”