Foundations’ Failure to Give More Is Inexcusable

While taxpayers, investors, homeowners, consumers, and working people are suffering from the near collapse of the financial system, foundations seem unwilling to play their part in maintaining America’s social fabric and mitigating the impact of the global economic downturn.

Only a handful of foundations, mostly community funds and the rare private grant maker, have made emergency grants to charities or shown any indication that they plan to step up their grant making to charities suffering in the economic downturn. Instead, many are planning to give less and make reductions in long-term grants, largely because foundation investment portfolios have been hard hit in recent months.

Foundations have felt little pressure to increase their giving.

The Council on Foundations recently sent a letter to its 2,000 members about the economy’s crisis, and it studiously avoided the issue of grant makers’ increasing the amount they give. All that the council recommended was that foundations ensure charities understand the scope of the problems they face, and that they work with their grantees on creative solutions to their financing troubles, in part by bringing key institutions together to tackle economic issues. The council’s advice was mumbo jumbo, a diversion from the real problems.

What nonprofit groups need is not analytical advice but more money. No amount of wordsmithing can cushion that fact. America’s most elite institutions, in the manner of Marie Antoinette, are saying to charities, “Let’s give them education, not bread.”

That attitude is an affront to the nonprofit staff members and volunteers who keep the nation’s charities running, and indeed, to democracy itself.

In exchange for the substantial tax breaks that foundations and their wealthy donors receive at great cost to America’s taxpayers, foundations are required by law to distribute annually at least 5 percent of their net assets. Since they are permitted to include the costs of managing charitable grants to meet that goal, many foundations donate substantially less than 5 percent to nonprofit institutions.

Although foundation assets have skyrocketed to more than $600-billion, according to the latest Foundation Center tally, the payout requirement has stayed the same since it was adopted in 1969. Foundations, and especially their trade associations, have fought vigorously to retain their 11th commandment, “Thou shall not raise the payout.”

It is time to put an end to this state of affairs and raise the minimum amount foundations must distribute annually to at least 6 percent in grants. That change alone would add more than $6-billion a year to nonprofit organizations.

The Obama administration should urge Congress to pass such a change immediately, as part of its efforts to stimulate the economy.

Proposing that change would provoke serious opposition.

Leaders of the nation’s largest foundations have long argued that raising the payout rate would inevitably lead to a reduction in their endowments and, eventually, to their demise. Even Susan V. Berresford, who retired this year as head of the Ford Foundation, told me that an increase in the payout rate would eventually lead to the dissolution of her foundation. At the time, her foundation was worth $12-billion. It makes no sense to think that sum can just be wiped away with a gradual increase in giving.

Numerous studies have concluded that foundations could maintain the basic size of their endowments even if they distributed 7 percent or 8 percent a year. A report issued last year by the French American Charitable Trust and regional associations of grant makers in Northern California and New York provided case studies of foundations that had given more than 5 percent and maintained and even increased their assets.

Foundation officials often note that the donors who created their organizations expressed a desire to maintain their assets in perpetuity, and, therefore, forcing them to give more would mean they would be put in the position of violating a donor’s intentions.

The definition of perpetuity used by people at foundations seems to imply a constantly growing pool of assets, while the dictionary definition states that perpetuity is the continued existence of an organization or process over time. A foundation that is worth $100-million today will exist in perpetuity 50 years from now even if its value has shrunk to $50-million.

Curiously, foundation donors have made their wealth through the stock market where there is no assurance that the price of their stocks will continually grow, impervious to the ups and downs of the market. Why should it be any different with foundation assets?

While the perpetuity argument cannot withstand serious scrutiny, it is also irrelevant.

Even if the perpetuity of a few foundations were threatened by an increase in the required annual distribution, why should the American public, which subsidizes foundation tax breaks, care whether these organizations exist forever? What is so sacrosanct about perpetuity?

While some foundation donors may have stated in governing documents that their philanthropy must exist in perpetuity, those requirements cannot be permitted to override the national interest and the needs of the entire nonprofit world. National concerns and requirements should pre-empt the wishes of a few foundations and their donors.

The number of foundations that oppose an increase in payouts is probably much smaller than it might seem when lawmakers hear the views of the Council on Foundations and other groups. Many leaders of small and midsize foundations think it’s fine to increase the required distribution level.

So do nonprofit leaders, but almost none of them have the courage to push for an increase — in part because some charity executives have been threatened with the loss of grants for speaking out in favor of increasing the federal minimum distribution rate. Still, one would expect that their inability to provide services to those in need might lead to greater courage in pushing for an increase in grant making.

Even if Congress forces foundations to give more, that will not provide the much-needed transformation in how grant makers do their jobs. They operate with no sense of urgency. Their boards meet a few times a year to award grants, regardless of the budget requirements of their grantees. The majority of foundations still refuse to provide general operating support, though this is the type of money nonprofit groups view as their life’s blood.

Foundation boards, composed of the wealthiest people and most highly paid professionals in the country, are fixated on such issues as whether their investments are doing well enough to ensure their perpetuity, rather than on the needs of the nonprofit groups and constituents they are supposed to serve. Their institutional interests often seem to pre-empt those of their grantees, whose lives are based on a sense of urgency to meet budgets, serve clients, retain key staff members, or start important efforts to influence public policies.

Even more distressing than the emphasis on self-preservation is the fact that foundation board members are often paid for the ostensibly charitable work they do. Some $300million is probably allocated for this purpose. That means foundations are diverting to their trustees money that charities could have used to sustain their operations.

Foundations’ adamant refusal to change their ways was perhaps understandable, if not excusable, in more normal economic times.

But the crash of the nation’s financial institutions and an economic recession that has the potential become a depression make it a reprehensible position. Thousands of important chariities are in danger of going out of business or severely reducing their services to needy people. Foundations are one of the few resources that those nonprofit groups can look to for help.

The reluctance of foundations to give more is a sad reflection of their priorities and their lackluster commitment to charitable organizations. They are, in a real sense, tilting against the national interest. Are there no foundation leaders willing to push to change the requirements on how much foundations should give? Are there no foundation trustees who have the courage to support an increase in giving? And where are the average citizens and leaders of nonprofit groups who have a great deal to gain by a substantial increase in grant making? Will charity executives finally rise to the occasion?

It is up to President-elect Barack Obama and Congress to take action to raise the payout rate and either abolish or severely limit the practice of trustee fees. Let us hope that such an effort will not be met once again by the full-blown resistance of insensitive and unreasonable foundations.

Pablo Eisenberg, a regular contributor to these pages, is senior fellow at the Georgetown University Public Policy Institute. His e-mail address is pseisenberg@verizon.net.