August 7, 2003 | Read Time: 5 minutes
Soon after Labor Day, lawmakers will consider one of the most sweeping pieces of philanthropy legislation in years, the Charitable Giving Act of 2003. Amid the rancorous debate that has erupted over that bill’s attempt to change the rules governing how much foundations give away, a key question has been ignored: Will the legislation end up stifling giving by big donors?
While focusing on this question, it’s important that we shift the tone of the debate away from the shrill comments that have pierced the nonprofit world. Philanthropy critics seeking to pry more dollars loose for immediate needs should think twice about demonizing foundations. At the same time, foundation defenders should show a sense of perspective and humor. A small change in payout rules will not destroy philanthropy over-night, and grant makers’ defense of ever-growing endowments amid the needs of charities can easily seem callous and unresponsive.
The Charitable Giving Act contains many proposals to spur giving, such as making it easier for people to give money in their individual retirement accounts to charity and extending write-offs to large numbers of donors of modest means.
The part of the legislation that has prompted so much vituperation sounds like a technicality but is a major change of policy. It would prohibit foundations from counting any administrative costs when they are calculating whether they have met the federal requirement that they distribute at least 5 percent of their assets for charitable purposes each year. That means foundations could no longer include salaries, rent, or other overhead expenses incurred in grant making.
The result would be that most foundations would have to give away more each year, and could cause endowments to shrink at a faster pace. That would put at risk the right of foundations to exist in perpetuity, according to the intentions of donors who freely give their wealth to improve society.
To be certain, donors now have the right to set limits on the life span of their foundations, but they also have the liberty to let them operate forever. Changing the rules of the game could be a serious disincentive to wealthy Americans considering whether to create a philanthropy.
What’s especially disturbing about the current push to force foundations to give more is that it comes at a time when Washington is greatly reducing the obligations of the wealthiest Americans to give back to society in the form of taxes.
It would be very unfortunate indeed if the incentives to give voluntarily are reduced at the same time that cuts in estate taxes, dividend taxes, and capital-gains taxes are enacted. The point of the Charitable Giving Act is to make philanthropy flourish, especially at a time when tax cuts are putting more money into the hands of the country’s most affluent citizens.
For many wealthy people, the decision to set up a foundation is based entirely on the idea that it will be a lasting legacy. Donors who want to focus on the immediate needs of society often give their money directly to the charitable organizations they are most passionate about. Some of those people also set up foundations so that both short-term and long-term needs are taken care of.
Setting up a foundation to last forever is an ego trip for some donors, but for most philanthropists, it is done mainly out of recognition of the dangers of focusing only on short-term results.
Philanthropy has traditionally been a field concerned with persistent problems that will not go away anytime soon. And most foundations are geared to stay in business to tackle problems for generations.
The nonprofit world — and particularly foundations — represent an island of long-term thinking in a turbulent sea of short-term culture.
At publicly held companies, corporate executives often squeeze their operations to maximize immediate shareholder value. And in Washington, lawmakers are creating deficits that will need to be paid off by the next generation.
The focus on the next election cycle and the next financial quarter has become an ingrained part of our culture. That in part explains why it seems logical to many politicians to force foundations to spend more money today and not worry about whether any money is left to help deal with problems we can’t even foresee.
Some observers — most prominently the former senator Bill Bradley and his associates at the McKinsey & Company management-consulting company — have argued that if foundations spend more now on social problems it will mean that less will have to be spent tomorrow. The concept, known as the “time value of money,” is a familiar idea in for-profit business affairs, and at first blush, it is very appealing. Ask nonprofit executives if they would prefer a grant today or the chance to obtain a grant in the future and they will unfailingly say today.
But the time-value concept does not easily translate to the nonprofit sphere. As Michael Klausner, a professor at Stanford Law School, writes in the inaugural issue of the Stanford Social Innovation Review, “Foundation payout rates come down to a tradeoff between charity for the current generation and charity for future generations.”
Until now, the nonprofit world’s culture of stewardship has been strong enough that it has been able to preserve a small portion of society’s resources for problems that can’t be solved on the timetable of a quarterly report.
Given the prevailing ethos, however, it’s surprising that foundations and nonprofit groups have been able to withstand the calls for increased payouts. And it’s not even clear why they do. Every foundation program officer, president, or even board member would gain greater personal satisfaction by overseeing larger disbursements today and would achieve greater influence over the causes we support, rather than leaving funds for future generations.
But most foundation officials resist the temptation because we know that we wouldn’t have any money to give away at all if it was not for the generous men and women who started the philanthropies we now manage. And we understand that we have an obligation to give money away at a pace that suits donors’ desires to operate over the long haul.
Let’s hope members of Congress who are concerned about their own re-election results in the near term don’t set new payout rules that will erode the health of philanthropy for many years to come.
Vincent Stehle is program officer for nonprofit-sector support at the Surdna Foundation, in New York
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