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Billions for Charity

Filed under: Imported

The Pioneer Press ran a story on Sunday headlined "Nonprofit Boom Goes Bust." The piece, written by Kermit Pattison, detailed how Minnesota charities are struggling to stay afloat in the midst of government cutbacks, a drop-off in individual contributions, and an increase in demand for social services. Here's the nut:

As a result, the face of the state's community of more than 4,600 nonprofit groups is being reshaped through program cuts, staff reductions, mergers and closures. Catholic Charities has trimmed jobs, and Boys and Girls Clubs have cut hours; the Science Museum of Minnesota has laid off people, and the St. Paul Chamber Orchestra has shortened its season.

"There's nothing like this that's ever hit, at least in my time," said Nancy LeTourneau, executive director of St. Paul Youth Services who has 25 years of experience in the nonprofit field. "It's not just a scare. The cuts are real. It's already happening, and the worst hasn't even hit."

Pretty sobering stuff. But what if there was an additional $4.3 billion that could be doled out to nonprofit groups each year without raising taxes one penny?

I'll explain this potential windfall momentarily, but first you have to suffer through a little background information. Under current law, private foundations are required to spend, on average, five percent of their assets on charitable purposes each year. However, under existing regulations, grantmakers have wide leeway as to what they can count as charitable expenses. Salaries, legal bills, rent, and travel costs are all routinely booked as charitable disbursements. (For a particularly blatant example of this practice see my recent City Pages cover story about the Northwest Area Foundation), 

Legislation currently pending in the U.S. House of Representatives, however, would eliminate this dubious accounting practice. Under a bill sponsored by Republican Roy Blunt and Democrat Harold Ford, Jr., foundations would only be able to count grants to nonprofit organizations towards their five percent payout requirement. In addition, the legislation would drop the current excise tax on investment income earned by foundations from 2 percent to 1 percent.

Now about that $4.3 billion. In anticipation of this proposed change to the tax laws, the National Committee for Responsive Philanthropy--a Washington-based watchdog group--undertook a study to examine exactly how it would impact foundations. The NCRP determined that in 2001 private grantmakers counted approximately $4.3 billion in administrative costs as charitable expenses. In other words, if that money had been been dispensed to charities it could have provided grants of $100,000 to 43,000 organizations. Furthermore, the NCRP determined that in 2001 the 100 largest grantmakers in the country spent, on average, 8.2 percent of their charitable payouts on administrative costs.

Private foundations--through their lobbying mouthpiece the Council on Foundations--have long maintained that any changes to the tax laws would threaten their future existence. (Council president Dot Ridings recently began a letter to the organization's members about the pending legislation with this ominous warning: "Our field is in danger.")

However, the NCRP report points out two recent studies that clearly show these doomsday predictions to be unwarranted. A 1999 analysis by DeMarche Associates, Inc, found that grantmakers could have paid out 6.5 percent of their assets annually from 1950 to 1998 and still grown their assets by 24 percent. This heretical report was commissioned by ...The Council on Foundations.

In another study, conducted in 2001, Harvard University researchers Akash Deep and Peter Frumkin examined the finances of 290 of the largest foundations over a 25-year period. They found that, on average, the foundations paid out 4.97 percent of their assets annually, while receiving an average investment return of 7.62 percent. In other words, over the long haul, foundations steadily increased the size of their asset base.

Sloan Wiesen, communications director for the NCRP, says that the study clearly supports the changes sought by Reps. Ford and Blunt. "It seems that all the handwringing over this, that the sky is falling, is misplaced," he says. Wiesen emphasizes that foundations will never be able to compensate for the steadily eroding government social safety net at both the state and federal levels--but that they could soften the blow. "The upshot is that it can make a significant difference to America's charities that are really struggling at this time." 

Posted by Paul Demko at June 9, 2003 5:29 PM

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