Community Foundations Urged to Fight Charitable Abuses

Community foundations and other grant makers need to take aggressive steps to fight efforts by donors and charities to abuse the tax code, a key Senate aide told a meeting of foundation leaders here last month.

Dean Zerbe, senior counsel to Sen. Charles Grassley of Iowa, the senior Republican on the Senate Finance Committee, told the 1,800 grant makers gathered for the Council on Foundations’ annual meeting for community foundations that they should unite behind a strategy of seeking to expand a key giving incentive while also supporting measures to crack down on charitable abuses.

Congress is considering legislation to extend and expand a provision that allows people to transfer money from their individual retirement accounts to a charity without paying taxes.

Most important to community foundations, the bill would extend the rule to cover donor-advised funds, which allow people to place their assets in special accounts, earn a tax deduction, and recommend which charities the money should support. The funds are a key source of revenue for many community foundations.

Sen. Byron Dorgan, Democrat of North Dakota and a lead sponsor of the legislation, told the conference participants he would push to get it adopted by the end of the year.

However, its chances are still unclear, partly because of Congress’s current emphasis on fiscal restraint. Mr. Zerbe also noted that the Internal Revenue Service had named abuse of donor-advised funds and supporting organizations, which are set up to provide money to specific charities, as one of its 2007 “dirty dozen” tax scams — citing people who earn tax deductions for their money without transferring it to charity.

“We would like to be in a position where we can be comfortable that donor-advised funds have been cleaned up so we’re comfortable encouraging money to go to them,” he said.

Mr. Zerbe said the Council on Foundations should show more leadership in fighting such abuses. “The council needs to be engaged,” he said. “It cannot just whistle by the graveyard, saying that’s fine.”

Steve Gunderson, president of the council, said after Mr. Zerbe’s talk that the council would work to answer the IRS’s concerns and find out what it can do to “allow us to put this discussion behind us and move forward.”

Mr. Zerbe, who said he was speaking for himself and not Senator Grassley, also urged community foundations to show leadership on issues that are of concern to lawmakers such as nonprofit hospitals, university endowments, and the proliferation of charities.

“We would like to see community foundations being placed in a stronger role, as a leading role in their communities,” he said. “There seems to be a never-ending stream of books about getting government to do more for charities, advocating for government. That’s fine, but what seems to be completely lost is charities actually trying to get other charities to do good deeds.”

He said community foundations could, for example, urge nonprofit hospitals to devote more money to care for low-income people. That, he said, “will do more than all the grants that folks can give out,” he said.

Mr. Zerbe said scandals that have hit big charities like the Nature Conservancy, the American Red Cross, and the Smithsonian Institution in recent years resulted from bad governance and urged the foundations to “look in the mirror.” Too many groups are willing to condone practices simply because they were blessed by a lawyer, he said. “Stop thinking about what the lawyer says is okay; this is the beginning of trouble,” he said. “Start thinking: How will this really look? How do I feel about this? How am I going to explain this to the local paper?”

The multitude of community foundations that have emerged in the past 10 years should be wary of defining success simply in terms of increasing assets, warns a new report that was released during the conference.

While conventional wisdom suggests foundations should try to build their assets as quickly as possible to erase the deficits of their early years, in fact they can end up with worse financial problems if they do not grow in a strategic way, the report says.

“Although this question — how fast can we grow? — may keep new community foundation CEO’s up at night, it is not the most important question to ask,” says the report, which was prepared by the James Irvine Foundation, in San Francisco, and FSG Social Impact Advisors, a consulting firm.

Instead, foundations should analyze how to grow in a way that will keep them effective far into the future, it says.

The researchers studied the experiences of nine organizations that receive money from Irvine under a project to develop community foundations in California and interviewed people at 15 other fast-growing community foundations across the United States.

Of the country’s community foundations, more than 50 percent are less than 10 years old and two-thirds have less than $25-million in assets, the report notes. As they grow, it says, these foundations will have a chance to explore innovative operating models. Lesson number one, it says: “All assets are not equal.”

The report, “Growing Smarter: Achieving Stability in Emerging Community Foundations,” says some foundations pile up budget deficits by taking on a proliferation of high-cost, low-revenue funds that add to the operating costs by requiring additional staff or technology to maintain.

From 2000 to 2005, it adds, community foundations of all sizes faced operating deficits, but larger foundations — those with $100-million to $250-million in assets — reported more deficits than those of any other size.

The John S. and James L. Knight Foundation, in Miami, is seriously considering creating a major grant-making project to help community foundations take leadership roles on issues that are important to their towns, the foundation’s president, Alberto Ibargüen, told conference participants.

“We’ve begun to explore how we might offer major support to community foundations in the role of civic leader, community foundations as innovators, knowledge hubs, agenda setters,” he said.

Mr. Ibargüen, who said Knight hopes to announce the project by the end of the year, invited community foundations to give their ideas about how it might work. “It’s a recognition that you’re often limited in the kind of innovative work you might do if you’re too dependent on donor-advised funds,” he said.

Knight is also considering ways to get community foundations more involved in bolstering local journalism, Mr. Ibargüen said. As market forces and technology create a “tsunami of change” in the news-media world, he said, community foundations can play a critical role in ensuring that citizens get information.

Mr. Ibargüen said that Knight would consider organizing a conference on community foundations and the media in Miami early next year. “I know there’s a big knowledge gap,” he said. “So we’re willing to step in and help fill that.”

Linda Reed, president of the Montana Community Foundation, told the foundations she’s glad that Sen. Max Baucus, the Democrat from her state who chairs the Senate Finance Committee, “got the elephant out of the closet” by giving a speech last year highlighting the need for more rural philanthropy.

But Ms. Reed said she’s troubled that the senator challenged foundations to double their giving to rural areas.

“I personally do not like the fact that foundations may now feel obligated to meet this challenge only because the Senate Finance Committee is lurking over our shoulders,” she said. “Grants made from sentiments of obligation will not lead to long-term relationships and that’s what we need if we are going to really solve problems.”

Ms. Reed also warned that there is no “silver bullet” that will solve the problems of all rural communities. For example, she said, many community foundations are conducting “transfer of wealth” studies to determine ways to tap into some of the money that people will leave behind when they die over the next 50 years. “Some communities and states are going to find there is no wealth to transfer,” she said.

But community foundations need to emphasize to potential donors the importance of creating wills and of leaving unrestricted money to their home towns, Ms. Reed added. “We have too many funds that support nursing homes and scholarships — the services that are helping people leave communities.”