August 21, 2003 | Read Time: 3 minutes
An influential Republican senator has introduced a bill that would require grant makers to exclude some — but not all — administrative expenses when they calculate whether they have met the federal requirement that they give away at least 5 percent of their assets to charity each year.
The measure comes after members of the House of Representatives in May proposed forbidding foundations from counting any of their administrative expenses in the calculation, a plan that many foundation officials have strongly opposed.
Sen. Kay Bailey Hutchison, of Texas, the fifth-ranking Republican, wants to prohibit foundations from counting items such as the salaries of chief executives, payments to trustees, and international and first-class travel by staff members when they determine whether they have met the 5-percent payout. The proposal by Ms. Hutchison would have the effect of forcing many foundations to distribute more of their assets for charitable programs each year.
Ms. Hutchison’s bill, the Philanthropy Expansion and Responsibility Act of 2003, would allow foundations to include “reasonable and necessary administrative expenses which are directly attributable to direct charitable activities, grant-selection activities, grant-monitoring and -administrative activities” in the 5 percent that they must give every year, according to the bill.
The bill also proposes reducing to 1 percent the excise tax that foundations must pay on their net investment income. Foundations now must pay 1 to 2 percent of such income in excise taxes.
‘A Few Bad Apples’
A few foundations have “abused” the rule allowing them to count administrative expenses toward their annual distribution requirements, said Senator Hutchison in a statement.
“My bill will allow charities to help those in need without fearing punitive repercussions due to the actions of a few bad apples,” she said. “It improves accountability and assures more funds go to charity.”
Senator Hutchison believes that her bill “strikes a balance” with the Charitable Giving Act of 2003, a bipartisan bill introduced in the House of Representatives, which is scheduled to be considered by the House Ways and Means Committee in September, according to a staff member in her office.
Instead of forcing foundations to exclude all administrative expenses from their payout requirement, as the Charitable Giving Act proposes, Ms. Hutchison’s bill would allow foundations to count many of the expenses that they currently are allowed to include. For instance, it would allow foundations to consider as a charitable expense the money they spend holding conferences for charities and hiring consultants to help nonprofit groups manage their operations.
“The salary part of this bill is a plausible middle ground compared to the House legislation,” said Paul Brest, president of the William and Flora Hewlett Foundation. “But it’s not clear from the bill whether foundations would be allowed to include overhead expenses like rent in their payout requirement. If they couldn’t include overhead, this bill seems to me like it would be requiring a very high payout.”
Mr. Brest and other foundation executives say they are worried that changes in the payout calculations could erode foundation assets more quickly than the current law does, and cause some grant makers to shut down.
The Council on Foundations, in Washington, which represents more than 2,000 foundations, praised Ms. Hutchison’s bill.
“It looks good to us because it more precisely addresses the troubling issues with administrative expenses, without sending the message to foundations that they’re only supposed to write checks,” said Ellen Dadisman, the council’s vice president for government relations. “There is obviously a consensus that Congress wants to send a message that waste or excess or inappropriate use of charitable money is not going to be tolerated. But this bill seems to be saying to the Senate Finance Committee and the House Ways and Means Committee, ‘Slow down. The issue of foundation payout deserves a more careful approach.’”
