Keeping Greed Out of Philanthropy

Foundation donors, trustees, and managers are collecting hundreds of millions of dollars a year for services they provide to their foundations, even though Congress passed a law in 1969 specifically designed to make sure such foundation donors, their relatives, associates, and other “insiders” didn’t use their philanthropies for private gain.

As more and more abuses of foundations are being uncovered, lawmakers need to take action to ensure that their intentions will be followed. They also need to ensure that nonprofit groups don’t fall into the same greedy mentality that foundations have.

The reason that so much of the money contributed to foundations has instead ended up lining the pockets of the wealthy is a big loophole left by the Internal Revenue Service when it wrote regulations to carry out the 1969 law. While the regulations prohibit many types of financial transactions that are known in legal jargon as self-dealing, the regulations say that donors and their associates are allowed to receive payments when they provide services to their foundations that are “reasonable, necessary, and…not excessive.”

Under the regulations, foundation trustees can be paid for their board service, but the IRS has never set any limits to show foundations what level of payments is reasonable and necessary. Nor has the IRS provided any clear standards or criteria for how to determine what is appropriate to pay trustees and other insiders who provide financial, legal, and other services to their foundations. Since the standards are so unclear, the judgment of what is reasonable, necessary, and not excessive has been left to foundations themselves.

Aside from the lack of clarity in the regulations, neither the IRS nor the state attorneys general have done much to penalize foundation donors and others who are reaping undue financial gains from their philanthropies.

Not only have enforcement agents failed to detect these practices, but they also have often been cavalier about curtailing abuses that have been reported by the news media and other sources. Too often, they seem to view the spending habits at foundations as normal activities of the rich and powerful.

For example, when told that the Kimbell Art Foundation, in Fort Worth, had paid its founders big sums — Kay Fortson received $750,000 and Ben Fortson received $747,000 in 1998 — a spokesman from the Internal Revenue Service’s Dallas office told the Star-Telegram newspaper, in Fort Worth: “Just like private companies, they’ve got to pay the bucks for quality people. Just because it is a tax-exempt organization doesn’t mean that these people have to lead a pauper life-style.”

The foundation says the money was for the services the Fortsons rendered as top executives of the organization, not for their role as trustees, but soon after the payments were widely reported in local newspapers, the couple announced they would no longer receive any money from Kimbell.

The news media have uncovered many other situations where questions can be raised about the propriety of payments and perquisites provided to foundation donors and their friends and relatives:

• The Bielfeldt Foundation, in Peoria, Ill., paid the foundation’s founder, his son, and their investment business $21.6-million over the past two decades for services they provided to invest the assets of the foundation, which has distributed $26.2-million over the same time. After the Peoria Journal Star reported the payments a year ago, and the state attorney general started an investigation, Gary Bielfeldt, a commodities trader who started the foundation, told the newspaper that he plans to get the family off the organization’s payroll, but said he believed the foundation has complied with the law as he understands it.
• Ronald M. Auen, a trustee of the $462-million H.N. and Frances C. Berger Foundation, in Palm Desert, Calif., received $457,556 in salaries and benefits in 2001, as well as a bonus of $1.5-million, from the fund, which was created by his first wife’s parents, according to tax records examined by The Boston Globe. Mr. Auen told the Globe that he needed to be compensated for services he provided to the foundation. “We have to take a salary,” he told the newspaper.
• Members of the DeMoss family periodically take personal trips on a $36-million transoceanic airplane purchased by the Arthur S. DeMoss Foundation, in West Palm Beach, Fla., according to the Globe. (The newspaper said that DeMoss family members refused to answer questions about their use of the jet, but that a foundation official said the jet was mainly used for overseas trips to check on grant recipients.)

The Senate Finance Committee, which is considering legislation to tighten regulation of nonprofit groups, has made clear it is concerned by situations where donors and their friends are getting such generous financial benefits from the foundations to which they are connected. But the committee, and several leading nonprofit groups, have miscalculated how best to crack down on abuses at foundations and other nonprofit groups.

Staff members of the committee have not yet suggested closing the loophole that permits foundation donors, board members, and others to be paid. They could take an even simpler approach: Congress should place an $8,000 limit on the total amount a trustee can receive each year for his or her services to a foundation. Such payments would allow foundations to diversify their boards by recruiting members who can’t afford to take time off from their paid jobs. Those sums would be too small to lead to widespread abuses, thereby solving most of the problems with self-dealing. The financial, legal, management, and other services that trustees and foundation managers now provide could be handled by outsiders.

The aides to the Finance Committee have also suggested that the rules to prohibit self-dealing at foundations be extended to cover all nonprofit groups. The primary goal would be to make sure that nonprofit trustees are not making money or getting other inappropriate financial benefits. While that may be a step in the right direction, lawmakers should take a harder line when considering whether nonprofit board members should ever be paid by the organizations they oversee.

Unfortunately, some of the leading nonprofit coalitions don’t take that view. In fact, some think applying the self-dealing rules to charities would be too restrictive.

Independent Sector, which represents nearly 600 charities and foundations, and the National Council of Nonprofit Associations, as well as several other national groups, say that applying the foundation rules to other nonprofit groups would discourage board members from providing charities with paid services at below-market rates, which saves their organizations a great deal of money. They cite the possibility that a board member who owns real estate might be prohibited from leasing a property to his nonprofit group at below prevailing rates, or that a lawyer could not provide paid legal assistance at a reduced cost.

While it may be legal to pay board members for such services, charities would flout the spirit and tradition of nonprofit organizations by doing so.

The overwhelming number of nonprofit groups do not pay their board members for services they provide. When trustees do give legal, accounting, investment, and other types of assistance to the groups they oversee, they traditionally have done so at no charge. That, in large part, is the reason that nonprofit groups have maintained the public confidence and trust. Their board members are viewed as volunteers who oversee and guarantee the integrity of their organizations without any self-interest or desire for financial gain.

It is that role, as independent overseers of nonprofit groups, that the Wise Giving Alliance, a major charity watchdog group, had in mind when it designed one of its standards to limit a nonprofit group’s employees from serving on its board. Under one of the standards, no more than one board member — or 10 percent of a charity’s board members, in the case of bigger boards — can be a person who is paid by the charity.

Independent Sector, the National Council of Nonprofit Associations, and other nonprofit groups have taken a misdirected and harmful position by sanctioning and promoting the idea that some nonprofit trustees deserve to be paid.

Even if it were a wise idea, it would be difficult to figure out a fair way to compensate board members. How much of a “below market” discount would a board member have to offer a nonprofit group — 5, 10, 25 percent below market or more? Who would make those judgments: board members or outside experts? If a lawyer on a nonprofit board is paid for his legal services to the group, why wouldn’t the board member who is an accountant or an investment counselor also deserve to be compensated for whatever assistance he gives or could give? Where would a charity draw the line? It would be extremely difficult, if not impossible, to make those choices.

As governments and foundations have tightened their budgets for supporting nonprofit groups, many organizations have faced pressure in meeting their budgets. But that is no excuse for nonprofit groups to sacrifice their integrity by trying to save a little money by paying board members for their services. If their board members want to provide such services for pay, let them get off the boards and thereby eliminate conflicts of interest. No charity will go out of business because it loses discounted services offered by professional board members.

In their quest for money, too many nonprofit groups are already blurring the lines between what is nonprofit and for-profit, refusing to pay taxes on earnings from businesses unrelated to their missions, selling their mailing lists, offering naming rights to big donors, and stretching already thin ethical boundaries.

If nonprofit groups are serious about raising more money, they should spend their energies lobbying Congress to increase the percentage of assets that foundations are required to distribute each year, which would add billions of dollars to charity coffers. Or they could fight to maintain the estate tax, since keeping it intact will add many billions of dollars a year to foundations and charities and keep the federal treasury healthy so that money is available for government-financed social programs for the needy.

The health and viability of foundations and charities depend on ethical behavior. It is time now for Congress to make sure that the greed of some donors and the pecuniary interests of nonprofit groups don’t impede the ability of charitable organizations to serve society. Self-dealing practices, whether among foundation or nonprofit groups, must be abolished.

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