Pew’s Shift to Charity Status Goes Against What Is Best for the Public

The Pew Charitable Trusts, one of the nation’s largest private foundations, will become a charity on January 1. The switch is a bad precedent for foundations, and it could have adverse consequences for other charities and the public at large.

The Internal Revenue Service’s decision allowing Pew to switch to charity status is nothing short of legal gimmickry.

The IRS requires any group that wants to become and remain a charity to meet what is called a public-support test. That means the group must receive funds from a variety of sources. Although Pew is one entity, it manages seven trusts left by the children of the founder of the Sun Oil Company. Incredibly, the IRS accepted Pew’s contention that this arrangement meets the public-support test. Who is fooling whom?

Consider the implications. What if a husband and wife, both individually wealthy, and one of their children with inherited money together contributed funds to a family foundation, then later decided to convert the foundation to a charity. Would it have met the IRS’s public-support test? Probably not. But had the family members established three trusts under a single umbrella foundation, would the foundation have been declared a charity under the IRS’s reasoning? Probably. Would the money be more “public” under the latter setup than the former? Of course not. The money would have come from the same source.

Using the IRS’s absurd logic, maybe a foundation with two trusts could become a charity. Or, if not two trusts, perhaps three or five would do it. It’s hard to tell.

While Pew may become a charity on a legal technicality, there is nothing in its nature that qualifies the foundation for what the law calls “public charity” status. The IRS’s decision could open the way to other donors, especially new ones, who might see Pew as the model for gaining charity status.

Under its new guise, Pew will gain several advantages it does not now enjoy. It will avoid having to pay an annual federal excise tax of about $4-million on an endowment of approximately $4-billion, and it will be exempt from paying state sales taxes on its purchases.

More significantly, it will no longer be subject to rules on “self-dealing,” which happens when people make improper financial gains through their ties to nonprofit groups. Nor will Pew be subject to restrictions on outside business holdings or to limits on grants to individuals and government officials. And it won’t have to pay out the minimum 5 percent of net assets to charities that it now is required to distribute.

Although Rebecca W. Rimel, Pew’s chief executive, has promised that the fund will continue its current level of grant making, no assurance exists that future executives will honor this pledge. In the absence of strict rules, the foundation’s board will have an added responsibility in overseeing the institution’s operations.

And that board is controlled by members of the Pew family. The foundation plans to add three or four outside members, but family members will still constitute a majority of the board and, therefore, retain control of the foundation. The question of governance will and should be raised by those who believe that a charity should not be controlled by members of one wealthy family, no matter how publicly spirited they may be. Shouldn’t a substantial majority of the board be “public” members as a condition of the foundation’s designation as a “public charity”?

Evidently, neither the IRS nor the Pennsylvania attorney general viewed Pew’s governance as an important issue. Nor did either feel it necessary to consult the public. In the three years Pew was planning this change, it did not do enough, if it did anything, to ask its grantees or the public for their opinions.

Pew’s apparent unwillingness to seek feedback points up another troubling aspect of its switch to charity status. Already regarded by many nonprofit groups as a bully that tries to impose its priorities on other organizations, especially in the area of environmental grant making, Pew will be able to wield even more power and influence than it previously did.

Indeed, as a charity Pew will find it easier to bring many of its programs in-house and become less dependent on nonprofit organizations to run its programs and carry out its mission.

As a foundation, Pew was proscribed from lobbying either directly or through grants made to nonprofit groups specifically for lobbying purposes. Now, as a charity, it will be able to devote a substantial amount of money to lobbying governments on behalf of its favorite issues. Ms. Rimel promises that these new activities will be used to “better serve the public interest,” but who says Pew always represents the public interest?

To maintain its charity status, Pew will have to raise substantial sums of money each year. Such funds will not have to go directly to Pew programs or its endowment, however. They can simply pass through Pew’s hands to other organizations and their causes.

In fact, most of the funds that Pew accepts will probably be channeled to others. A big case in point is one that helped Pew gain its charity status: Pew is helping to raise $150-million for the relocation of the Barnes Foundation’s art collection from a Philadelphia suburb to the city. That money will flow through Pew to Barnes and a variety of builders and other companies, but Pew will be able to count it as part of its public support. Not a bad quid pro quo for both Pew and Barnes.

Pew’s unlimited potential for fund raising raises other questions. Because money begets money, a giant like Pew, with its connections to the wealthy, should have no trouble finding loads of money for charitable causes, many of them, no doubt, its pet projects.

As it grows more powerful in the world of charitable fund raising, Pew will be competing against other groups that are desperately trying to find resources to stay alive and productive in hard financial times. It’s not difficult to predict which group will have the better chance of procuring funds.

The IRS and the Pennsylvania attorney general may have unleashed a financial behemoth that the public will not be able to control, even though it is a charity that ostensibly will be working for the public good. Who will provide the checks and balances that may ensure that Pew will be an institution of integrity working to help the public? The key issue will be not whether the foundation can pass the public-support requirement but whether it can meet the more serious public-interest test.

Pablo Eisenberg is senior fellow at the Georgetown University Public Policy Institute and a member of the executive committee of the National Committee for Responsive Philanthropy. He is a regular contributor to these pages. His e-mail address is pseisenberg@erols.com.