Inside Philanthropy

A blog on philanthropy and nonprofit news and issues. A publication of Philanthropy Journal.

March 21, 2007

The wolf at foundations’ door

Foundations claim they are at risk of going out of business, but they actually must be laughing all the way to the bank and the country club.

Screaming and kicking over proposals for a tiny increase – from 5 percent to 6 percent – in the share of their assets they must pay out in grants each year, foundations have misrepresented the proposed payout increase as one that will doom them.

Critics argue, rightly, that current law gives foundations an unfair edge in the charitable marketplace: Their donors get big tax breaks up front; the foundations have to spend only 5 percent of their assets each year, and can count overhead costs as part of their payout; and the assets they hoard give the donors and their successors unbridled power and influence.

What’s more, foundations typically count on an annual return of 5 percent on the investment of their assets to meet their payout requirement, keeping their assets safe and unspoiled.

And the grants that foundations do make do little to address nonprofits’ critical need for operating support.

Yet in fighting modest proposals for an increase in the payout rate, foundations argue that being forced to give away more money each year will put them out of business.

Foundations, in short, are reframing the issue, misrepresenting the modest proposal that they be required to be only slightly less greedy to an apocalyptic ultimatum that will force them to close their doors.

In his new book, The Foundation: A Great American Secret, Joel Fleishman of Duke University argues that "perpetual foundations" are critical to American democracy.

Fleishman says foundations constitute a “polyarchy,” a term he says refers to “the existence of many separate, independent power centers in society.”

In our civic sector, he argues, “it is the foundations that put the power of concentrated money behind individuals and the associations they form, thereby transforming American pluralism into a polyarchy with effective firepower.”

And it is perpetual foundations that “introduce a multigenerational polyarchy,” Fleishman says. “Without such perpetual foundations, America’s civic sector would be greatly impoverished.”

The “accumulated capital held by perpetual foundations plays a critical balancing role in another broader sense,” Fleishman writes. “Thanks to their power and the slow, steady pressure they exert on behalf of the causes they champion over time, the foundations serve as both a prod and a counterweight to the government. Perpetual foundations are much better able to criticize and stand up to politicians and administrations, if they exercise the courage to do so, than are life-limited foundations.”

Not only does Fleishman’s argument by implication discount the role that any individual or group without perpetual wealth can play in a democracy, but it overstates the role that "perpetual" foundations actually do play.

Donors who create foundations get tax breaks, and foundations’ charitable assets are tax-exempt, because our lawmakers concluded it is good public policy to encourage the operation of a charitable marketplace that will address critical social, economic, environmental and cultural issues.

The special tax treatment foundations enjoy is not a license to hoard money, and proposals to increase the payout rate and tighten the regulation of foundations are more than justified and long overdue in the face of foundation excess, wrongdoing, greed and arrogance that undermine the fair and efficient working of the charitable marketplace.

As for perpetual foundations acting as more muscular government watchdogs and gadflies, the reverse seems to be the rule.

Too many foundations are smug, fat and lazy, and their main interest in dealing with government these days seems to be to preserve and protect their assets and power, not to push government to fix flawed public policies that underlie our most urgent problems.

And precious few foundations are willing to use their role as shareholders to push corporations to adopt business strategies to better address those same critical problems.

Foundations also have been pushing nonprofits to be more effective and measure the impact of the grants they receive, but only a handful of foundations have been willing to invest in nonprofit operations.

Warren Buffett, who last year announced he was giving the bulk of his wealth, or $31 billion, to the $30 billion Bill & Melinda Gates Foundation, recently announced he had stipulated in his will that the proceeds from all the shares in Berkshire Hathaway he owns at his death must be used for “philanthropic purposes within 10 years after my estate is closed,” and he estimated his estate would be settled within three years of his death.

That is philanthropy.

Too many foundations, in stark contrast, spend their time crying wolf.

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