‘New York Review of Books’: Foundation Spending

As government support of nonprofit organizations is being cut back, wealthy donors should be

doing more to ensure that their money goes to direct services, writes the philanthropist Lewis B. Cullman in The New York Review of Books (September 25).

However, the opposite is happening at most foundations wealthy donors create, he says.

“It seems clear that some of the families that set up foundations and the executives hired to run them are more concerned to protect their assets and preserve their bonuses than to improve the public good and carry out the purposes for which the foundations were ostensibly created.”

Mr. Cullman, who has donated more than $30-million to the New York Public Library and made numerous other big gifts to major New York cultural organizations, suggests that Congress has not gone far enough as it debates changes in the rules governing how much foundations must give to charity annually.

While foundations are required to distribute at least 5 percent of their assets annually for charitable purposes, they are allowed to include overhead expenses, such as salaries and office rent, in that figure.

As a result, “some large foundations typically pay out about 3 percent of their assets each year in the form of charitable gifts and divert 2 percent to administrative expenses and the like,” Mr. Cullman writes.

“Since even a mediocre money manager should be able to average a 5-percent return on a foundation’s principal, the IRS is in effect requiring that the foundation spend only its income plus capital gains. None of the principal need go to an active charity that provides services.” He adds: “The donor will be taking the full charitable deduction.”

Mr. Cullman says he believes “private foundations should be required to pay out not just their yearly gains, but part of the principal that made their tax deduction possible in the first place. Otherwise, what is the deduction for?”

The article is available online at http://www.nybooks.com.