Foundations Roiled by Measure to Spur Increase in Charity

By STEPHANIE STROM

he House is considering a bill that could force the nation's foundations to give away more of their money to charity each year, creating a potential windfall of billions of dollars for nonprofit groups.

The bill has created a furor in the philanthropic world, with foundations warning that they could be forced to squander their assets and spend themselves out of existence. Its supporters, however, say it will actually rein in wasteful spending — on salaries and overhead — as it gives charities needed help in a time of withering government budgets and growing economic pain.

The legislation is the House version of a bill passed last month in the Senate intended to create incentives to charitable giving. The House bill, unlike the Senate one, would modify an existing law that requires foundations to give at least 5 percent of their assets to charities every year in order to maintain their tax-exempt status.

The current law allows foundations to include administrative expenses like rent, accounting fees and salaries in that 5 percent target. The new bill would require that all 5 percent go to charity.

Hence the uproar. "If we are consistently required to pay out more than we already do, it will eat into capital and the country will lose these resources, these public assets for the common good," said Susan V. Berresford, the president of the Ford Foundation, who is one of the most vocal opponents of the proposed changes to the tax law.

Roy Blunt, the Missouri Republican who introduced the bill with Harold E. Ford Jr., a Tennessee Democrat, said he was surprised at its hostile reception in the foundation world. "Frankly, I'm concerned about that, and as a matter of fact, that convinces me there may be even more of a need for this than I thought there was," Mr. Blunt said.

Mr. Blunt, the House majority whip, said he and other representatives had added the provision to the House bill because they thought some foundations were spending too much on compensation, rent and other expenses. Several foundations have recently come under scrutiny for spending lavishly on offices and payments to board members, even as the economy has soured.

Last month, for instance, The San Jose Mercury News reported that the James Irvine Foundation's assets had fallen 25 percent, to $1.2 billion, since June 2000. That is not surprising, given the fall in the stock market. But during that decline, the newspaper reported, Dennis Collins, the foundation's president until early last year, received compensation totaling about $600,000 annually. The foundation's offices have a wrap-around view of the San Francisco Bay.

Mr. Blunt noted that foundations were required to pay out at least 6 percent of their assets until the early 1980's. "I'm told that their average cost of administration is four-tenths of one percent," he said, citing a widely accepted figure, "so all this bill does is increase the amount they would have to spend to 5.4 percent."

The bill would also give foundations a tax break, since it includes a provision that would lower the excise taxes they pay to 1 percent from 2 percent.

Rick Cohen, executive director of the National Committee for Responsive Philanthropy, said that according to data from the National Center for Charitable Statistics at the Urban Institute, the country's roughly 64,000 foundations paid out $27.3 billion in 2001, $4.3 billion of which went to cover operating and administrative expenses.

Foundation leaders and others insist that the new bill, by effectively forcing them to increase spending, could put an end to foundations that have endured across generations.

"It's a legitimate concern," said Michael Klausner, a professor at the Stanford Law School who teaches nonprofit law. "They would still be around over a longer time than you or I will exist, but they will with reasonable certainty spend themselves out of business eventually."

The only alternative, Dr. Klausner said, would be to try to increase their endowments through riskier investments, which would probably also incite criticism. The Council on Foundations, a trade group, estimates that foundations must make a 9.5 percent return on their investments just to maintain their endowments.

The Senate considered adding similar provisions about foundation giving to its version of the bill, known as the CARE Act (the letters stand for Charity, Aid, Recovery and Empowerment), but did not include it in the end. Mr. Blunt conceded that he did not know how the provisions would fare in the House.

How much of their assets foundations should be required to spend has long been a contentious issue in the philanthropic world. But the debate has become increasingly heated in the last two years, as academics and business consultants have joined it.

McKinsey & Company's Institute on the Nonprofit Sector raised hackles last year with an analysis suggesting that foundation assets spent to address today's problems had more value than assets held for future use. That argument was recently rebutted by Dr. Klausner.

While some foundations spend more than the required minimum, the vast majority pay out no more than 5 percent of their assets each year — although Congress set that rate as a minimum, not a ceiling.

"Foundations are acting like investment bankers and not grant makers," said Pablo Eisenberg, a senior fellow at the Center for the Study of Volunteer Organizations and Service at Georgetown University and a longtime advocate of raising foundation payout rates. "They have no sense of responsibility to communities at a time when government funding and private funding are being cut."

Dorothy S. Ridings, president of the Council on Foundations, said that examples of wasteful spending, while embarrassing, were few and far between. Mr. Blunt and other members of Congress "are concerned about allegations of excess in salaries and rents and so forth, and we know we have problems in that area," she said. "But unfortunately, this legislation is taking a baseball bat to kill a bee."

Ms. Ridings, other foundation leaders and even some regulators said they were concerned that the bill would shift too much focus to expenses and discourage foundations from spending on things like accounting, oversight and legal matters at a time when the public is demanding greater transparency.

"This unfairly punishes the institutional, established foundations that have professional staff and management and with whom we don't have compliance problems, and it supports smaller foundations, which tend not to have that infrastructure and where we find many of the problems," said William Josephson, the assistant New York State attorney general in charge of charity oversight.

Karl Stauber, president of the Northwest Area Foundation in St. Paul, said that in its current form, the proposed legislation would increase the foundation's payout in some years to as much as 8 percent, depending on fluctuations in staff and other expenses.

That would almost certainly put the $420 million Northwest Area Foundation out of business over time, he said, which would violate the intentions expressed by its founder, Louis W. Hill, who directed that it exist in perpetuity.

Mr. Stauber and others said the proposed legislation might even reduce income at smaller, grass-roots nonprofit organizations. One way foundations could cut costs is by funneling contributions through larger, more established organizations like the March of Dimes or the Red Cross, which have more sophisticated infrastructures and thus require less oversight by donors.

Another way to escape the provisions of the bill would be to change into a so-called operating foundation, which directly runs its own programs and services rather than making grants to third parties. Operating foundations are excluded from the bill's provisions relating to private foundations and are required to spend only 3.5 percent of their assets annually.

Mr. Stauber said Northwest Area would consider such a move. Ms. Ridings said she had talked to "quite a few, but not a bunch" of other foundations that had raised the same possibility.

Mr. Stauber added, "The perverse effect of this attempt to increase charitable giving could be to actually decrease charitable giving to nonprofits."

Mr. Blunt dismissed the possibility of a potential negative impact on the nonprofit sector as bluster.

"I think that's what I call the Washington Monument strategy," he said. "You see it typically when the government tries to cut something and those opposed to the cut find the biggest and most visible thing people will be offended by and affected by the most and say it's threatened — something the size of the Washington Monument."