Posts Tagged ‘Endowment’

Existing forever versus doing some good

March 28, 2012

An op-ed piece a few weeks ago in the Wall Street Journal (behind a paywall)  argued that donors should construct their foundations to spend down assets as rapidly as possible, lest the foundations end up supporting causes their donors would revile.  This familiar argument comes with a familiar whipping-boy: the Ford Foundation, whose enthusiasm for assisting the poor and marginalized was certainly not shared by its eponymous founder Henry.  The op-ed piece, like many of its kind, focuses on the question of donor intent, arguing that only a brief payout period can assure that the donor’s intent is served.

The Nonprofiteer has never cared particularly about the intent of dead donors.  First of all, they’re dead, and while death may not extinguish intent as a matter of law it certainly does as a matter of common sense.   Second, how much better off do we really think the world would be if Ford’s foundation had spent all its money on Ford’s enthusiasms, such as promoting publication of the scurrilous anti-Semitic tract The Learned Protocols of the Elders of Zion?   Third and most important, the  tax-free status of foundations is supposed to encourage philanthropy, not the accumulation of permanently idle tax-free money.

The Nonprofiteer has long argued that the minimum expenditure required of foundations is way too minimum, and that setting up a structure to give away 5% of income shouldn’t entitle a donor to a 100% tax shelter–whatever his/her intent.  Most likely that intent was to escape from taxation, without too much more thought than that.

So let’s think about the issue not from the standpoint of donor intent but from the standpoint of social good.  Which is more useful for a philanthropy: remaining around in perpetuity, to grapple with issues that may arise a generation or three from now, or spending down in the present and relatively short-term future on issues the donor understands and cares about and which in any case are currently urgent?  From the phrasing you can tell the Nonprofiteer’s position: spend it down.

Julius Rosenwald saw the wisdom of this approach when he created a program of fellowships for African-American artists for their professional development.  Rather than keep the fellowships around in perpetuity, he ordered that the principal be awarded completely within 5 years of his death.  As a result, virtually every mid-20th-Century African-American artist you’ve ever heard of received a Rosenwald Fellowship: Ralph Ellison and Romare Beardon and Katherine Dunham and Gordon Parks and many others.   The value of what Rosenwald did, giving artists enough money so they could work without fear or distraction, is literally incalculable.

But also as a result, virtually no one remembers Julius Rosenwald, or at least not his fellowship program.  So that presents the question: are we in the business of fostering greatness, or memorializing it?  Is remembering a donor as important as creating work through a donor’s generosity?  Again, to the Nonprofiteer the answer is self-evident.  She’d rather be grateful for Ralph Ellison than to Julius Rosenwald.

Look, here’s the deal: people will make money in every generation, and in every generation some people will make a lot of money.  If we tax them properly they’ll look for the opportunity to shelter their money in philanthropy.  Why shouldn’t we tax them so that they’re motivated to spend it philanthropically, too?  Like the proverbial Fifth Avenue bus, another chunk of  money will be along any minute.

Sure, there’s a risk of spending too rapidly and with insufficient research (or “due diligence,” as people are fond of saying when they want to pretend that the nonprofit sector is really just like a business).  But the greater risk is the situation in which we find ourselves now, where philanthropies give out amounts insufficient to make any significant change.  No, philanthropy isn’t supposed to be society’s primary source of support, but while people are busy starving government so they can drown it in the bathtub, private wealth can and should step into the breach.

Consider the contributions of the Gates Foundations to the Global Fund to Fight AIDS, TB and Malaria. Can anyone really argue it would be better to hold back on eradicating those diseases, in case there’s some bigger plague later on?  If there is, as AIDS itself demonstrates, we’ll mobilize and raise money for it.  Meanwhile, in case of every ailment, time is our enemy: the later we provide resources, the harder it will be for those resources to have impact.  Thus wasting money is a less significant risk than failing to spend enough to make a difference.

Two things need to happen: philanthropists themselves need to organize their giving so that it ends within a reasonable time after their death, and Congress needs to modify the tax code to require philanthropies to pay out more each year to retain their tax-favored status.  A 10% annual payout–double the current rate–may end up causing philanthropies to dip into principal, maybe even until they’re empty.  But remember the words of Citizen Kane as he contemplated the financial difficulties of his newspaper empire: ” I did lose a million dollars last year. I expect to lose a million dollars this year. I expect to lose a million dollars *next* year. You know, Mr. Thatcher, at the rate of a million dollars a year, I’ll have to close this place in… 60 years. ”  Let’s take a Kane-like risk of running out of money.

One more story: Some time in the ’90s Joan Kroc stood up at a Ronald McDonald House benefit to announce her annual gift.  Rumor had it she was actually going to make a five-year pledge, and the Nonprofiteer’s table indulged in the parlor game of trying to figure out just how much that would be.   We figured the previous year’s gift ($5M) plus a little bump (so $6M) for each of 5 years, and settled on $30 million.  And then she rose to speak, a little woman holding a torn-off piece of yellow legal paper in her hand.  And she said, “I was going to make a 5-year gift, but then I thought: ‘The need is now.’  So tonight I’m giving $50 million to Ronald McDonald Children’s Charities.”  Everyone at the table fell back in her seat, literally knocked over by her generosity, and also by her insight: The need is now.

Aside from Ronald McDonald, Mrs. Kroc mostly supported causes her late husband disapproved of.  If only he’d given more in the present, he wouldn’t have had to contemplate a future in which his money went to places he despised.  So the donor’s intention and the sector’s need are in sync:

Spend it now.

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The Joyce Foundation, the Independent Sector and the facts

November 2, 2011

Ellen Alberding’s interview with the Chicago Tribune in advance of the Independent Sector‘s meeting in Chicago earlier this week pressed nearly every one of the Nonprofiteer’s buttons.  Ms. Alberding, head of the Joyce Foundation, described the Foundation’s approach to what even she characterizes as a perfect storm of increased need and reduced resources in the nonprofit sector:

We do what any good business person would do when faced with reduced resources. We have become very focused on first maintaining support of our core grantees. Foundations are required to spend a minimum amount — 5 percent of our assets. On occasion, we will overspend that in order to keep our grantees whole.

In other words, business as usual.  Most likely the Joyce Foundation’s governing documents prevent its Board from spending its assets down to zero, but there’s no reason why the Foundation shouldn’t use more than the statutory minimum 5% of its $800 million in assets to sustain the work it exists to support.  Foundations are NOT businesses; they exist to give their money away, and only in some vague theoretical sense is an institution with $800 million facing constraints preventing it from giving away more than $40 million.

If Joyce gave only 6% instead, that would be another $8 million available to nonprofits in its areas of concern—a not-insubstantial 20% increase.   What is stopping the Foundation from doing this, other than a misguided sense that preserving its capital is more important than doing its job?

And then the cherry on the sundae:

It’s the position of the Independent Sector that a cap [on charitable deductions] will reduce charitable contributions across the board and diminish support for nonprofit organizations. I believe it’s the administration’s view that the 28 percent cap might have some impact, but it wouldn’t have a dire impact. (But) I think we have to listen to the organizations themselves, who feel otherwise.

In other words, notwithstanding reality, the prejudices of self-interested parties will dictate the organization’s behavior.    Their minds are made up—don’t confuse them with the facts.  But as President of the organization, doesn’t it behoove Ms. Alberding to make sure her members don’t make their decisions based on fantasy?

Grrrr.

Are you a tax-exempt charity? Sure about that?

August 18, 2010

While it’s not yet true that “Illinois Does A Few Adult Films To Make Ends Meet”, the state has begun to cast lascivious glances at its nonprofits.  Those property-tax exemptions look mighty comfortable.  Why don’t you push that  cushion over to my side of the bed? And with most interactions taking place behind closed doors, don’t expect a warning before the moment of truth arrives—or to be kissed while you’re getting screwed.

Unlike other localities re-evaluating nonprofit tax exemptions, Illinois has bypassed the legislative process, allowing county assessors and the Department of Revenue to take the initiative.  And this spring the Illinois Supreme Court decided that the state’s constitutional provision exempting charities from property taxes applied not to all nonprofits but only to genuine charities.

When the Court ruled that Provena Covenant Hospital didn’t merit a property tax exemption because it failed to provide adequate charity care, there was a brief frenzy of press speculation about the decision’s impact on hospitals—but hospitals only.  Rarely do the media connect the dots between the budget crises of state and local governments and their relationships with nonprofits, and then generally the focus is on the governments’ failure to pay nonprofits for contracts they’ve already performed.

But revocation of property tax exemptions poses an even bigger and longer-term threat than governments’ failure to pay.  And it’s a threat of which few nonprofit executives—let alone members of the public—are aware.

Two cases of denied exemption, one in nearly-bankrupt Chicago and the other in one of its suburban counties, are now working their way through the Illinois courts.  Each concerns a luxury retirement community, and either could break new ground by clarifying what qualifies as “charity” and how much of it a nonprofit has to provide.

The state legislature hasn’t specified a percentage of charitable services required to support continued property-tax exemption.  And though the Provena court ruled that the hospital’s practice of charging fees for nearly all patient care meant it could not be considered a charity, it too stopped short of prescribing when enough charity will be enough.

“The property-tax assessors out there are going to be aggressive, because they need you back on their rolls,” said Elaine Waterhouse Wilson, a partner at the Quarles & Brady law firm. “They’re going to make you come in and prove” charitable work.  Ms. Wilson said the charities that may be at risk “include organizations that are supported primarily by fees . . . . It was very clear [under the ruling] that you had to be giving things away rather than providing general charitable benefits,” she said.

It’s not a tragedy that people are asking whether Illinois nonprofits are worthy of favored tax treatment.  What would be a tragedy is if the challenge came as a complete shock, catching agencies unaware with the sudden need to prove their charitable nature.  Yet that’s what seems likely to happen.

Executives at several Chicago-area nonprofits seemed incredulous at the idea that Provena would be applied to them.  “We provide human services and all our activities are nonprofit,” said Karen  Singer, Executive Director of the Evanston/North Shore YWCA.  “So it’s not on my radar screen at the moment.  It probably should be, but there are only so many things I can think about.”  William Ratner, Executive Director of Lawyers for the Creative Arts, and Alvin Katz of Mayer Brown LLP, the attorney for Victory Gardens Theater and the Chicago Architecture Foundation, both expressed confidence that the organizations they represent are secure in their exemptions.  “They’ll keep going after the hospitals because it’s easy, and because that’s where the money is,” Mr. Ratner said.

But there’s also money in, or rather under, many other nonprofits.  The Chicago retirement development sits on prime Gold Coast real estate.  Can YMCAs in gentrifying neighborhoods withstand challenges to their exemptions when they look and feel—and charge—so much like for-profit health clubs?  Can settlement houses be considered charities if they get paid, by government or clients, for all the services they provide?  Can arts organizations be considered “charitable” just by offering art, or do they have to give out a certain number of free admissions?  (Churches and schools are immune from this calculus because the Illinois constitution separately exempts them; but the educational programs of arts groups aren’t considered “schools.”)

Perhaps the charities will organize and persuade the Illinois legislature to clarify the amount of “charity” necessary to retain tax exemption.  But Professor Phillip Hablutzel of IIT Chicago-Kent College of Law, co-author of the Illinois Not-for-Profit Corporation Act, doubts it.  Though he predicted Illinois nonprofits other than hospitals will soon find themselves battling efforts to withdraw their exemptions, “In the twenty years I’ve been involved, there hasn’t been a coherent front among charities in facing the legislature.  It’s hard to get these people to make common cause–the museum people don’t see what they have in common with the churches.”  Nor, apparently, do many human services agencies or arts groups see what they have in common with the hospitals.

If and when a Provena-style loss of exemption hits another nonprofit, the impact on its operation will be substantial.  “In the current economy,” said Professor Hablutzel, “it would be hard to do fundraising for another one-third of your budget so the taxes could be paid.”

Maybe there’s something to be said for making adult films after all.

Buy land. They’re not making any more of it. But on second thought . . .

May 28, 2010

Everyone in the sector–no kidding, everyone!–should read this Nonprofit Quarterly piece by Clara Miller of the Nonprofit Finance Fund about the practices most likely to make nonprofits vulnerable to financial disaster.  Pay particular attention to Ms. Miller’s skepticism about the value of owning one’s own building.

The Nonprofiteer has argued for years that the likelihood of a building’s being a good investment is significantly smaller than the likelihood of its being a money pit, particularly for arts organizations who make over-optimistic estimates of their likely rental revenue.  But now someone who actually knows what she’s talking about is saying the same thing.

So listen up!  Please.

Where’s the beef?: Revenge of the math nerds

April 20, 2009

Hey, Nonprofiteer, here’s my beef:

The Board treasurer, who’s the only accountant on the Board and also happens to be the only man, brings in financial reports that might as well be in Chinese for all the information I can glean from them.  There’s something he calls the “cash flow analysis,” which goes on for pages and seems intended to follow every penny from its origin to its ultimate destiny, and then there’s the “balance sheet” which contains mysterious designations like “fund balance” and “loss carry-forward.”

What I want is something that shows me at every Board meeting whether we’re on budget or overspending, on track with fundraising or lagging behind.  What I want, in other words, is information I can act on; this seems to be information I’m supposed to sleep on, or file.  But I hesitate to ask the questions for fear of appearing to be just a dumb chick.  How to proceed?

Signed, Numerically Challenged

Hey, Challenged:

I understand your reluctance to play into stereotypes by being “the woman who doesn’t understand math;” but as a woman who doesn’t understand math I can assure you that it’s worse to be “the woman who doesn’t understand math whose nonprofit runs out of money,” and that–as you’ve so clearly perceived–is the point of reviewing financial statements at Board meetings.  Moreover, since you’re in a veritable crowd of women, the only person whose stereotypes you need to fear is one who’s completely outnumbered–so what have you got to lose?  It may be, in fact, that the Treasurer himself is the one playing “dumb chicks don’t understand numbers” games by providing you with elaborate but uninformative materials; it’s a way to keep all the power in that knowledge to himself.

So take one for the [girl] team, and say at the start of the next financial report, “Listen, I’m not sure I’m getting as much out of these reports as I should be.  Where does it say how we’re doing against our expense budget, or our revenue budget?  I want to make sure we’re on track.”  What you may discover is that as an accountant he knows how to prepare a corporate financial report but doesn’t actually know what a nonprofit needs, and so his response will be, “I haven’t been providing those figures but I can in the future if you like.”

If he seems respectful and responsive when you ask how to satisfy your clearly-articulated and reasonable curiosity, then you may want to return the favor by asking, “When you look at this month’s cash flow statement, what really stands out to you?” and then listen to what he says.  I learned to READ a cash-flow statement when I had to CREATE one, showing how many categories in my agency’s budget had to be shrunk to zero before our income would be sufficient.  By the same token, as your treasurer enters all these numbers every month, he may be saying to himself, “If we didn’t spend $800 a month on staff lunches we’d be able to pay for another staff person!”–so ask him for that kind of insight.

As for the balance sheet: the key questions for any nonprofit are, “Do you have cash on hand to pay the bills coming due this month?” and “Do you have a reserve–ideally 6 months’ to a year’s worth of operating expenses–on which to draw in the event of catastrophe?”  So you’re most concerned with “Cash on Hand” and something marked “Reserve,” “Endowment,” or “Fund Balance” (if the balance is provided separate from cash on hand).  Again, ask the question: “If our cash on hand is $2200, is that enough to pay the expenses shown in the cash flow analysis?  Where on the analysis should I be looking to find the expense figure to compare with cash on hand?”

If the Treasurer seems hostile to your requests for different or additional information, give him a month or so to comply in some way: he may simply need to get used to the idea and to figure out how to adapt his usual system to the agency’s needs.  If, however, he belittles your questions and/or ignores your requests, persist in them for three months and then go to the Board President and say, “As you’ve seen, I’ve been trying to get financial information we can all understand, but Tom seems reluctant to provide it.  Will you talk to him about making modifications?” and leave it in her hands.  This is a Board president’s job–to make sure the rest of the Board is equipped with the necessary resources and information to do its job, and to crack the whip on the resource- and information-providers to secure what everyone else needs.  Let her handle it.

If she wants to know how, let her write to me!

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Readers: What’s your beef?  What drives you craziest about life at your nonprofit?  Is it the Board member who talks big and then disappears?  The program officer who tells you to write your proposal a certain way and then berates you for its content?

E-mail your problems to the Nonprofiteer, subject line “Where’s the beef?” and she’ll solve them for all the world to see.

Hospitals get more in tax breaks than they give in charity care

April 17, 2009

according to Crain’s.

The Nonprofiteer is always eager to trash the big corporate nonprofits, the hospitals and universities, while racing to the defense of the scrappy little social service, arts, environmental and advocacy groups.  But she wonders what this same analysis would produce if the smaller agencies were under the microscope.  Though probably social service agencies give away most of their services (if only through being desperately underpaid for providing them), surely most arts organizations get more in tax breaks than they give away in tickets.  And groups whose focus is policy or advocacy are not in the business of doing services, much less giving them away.

Anyone in the health care industry is a tempting target these days, and for good reason: we have a system that enriches very few at the expense of many.  And at least the best-known and most selective of American private universities seem content to sit on a lot of capital while asking teenagers and their families to fork over huge amounts more.

But let’s make sure we’re measuring nonprofits by what society and the tax code actually expect them to do, which is to contribute to the public interest by advancing knowledge and producing beauty as well as by offering services.  Research hospitals produce cures for diseases; we get our money’s worth from the tax breaks they receive even if they never give out a dime of care.

Providing patients with the health-care they need is a social responsibility.  Hospitals surely have a special role in making sure this is done, but it’s not their responsibility exclusively and their social worth (meaning, the tax freedom they deserve) shouldn’t be measured exclusively on that dimension.

Social Innovation in the White House

April 7, 2009

In the midst of a thoughtful discussion at the Wagner Center of the competing demands on philanthropies for funding of overtaxed social services and of social-change advocacy, big news: the White House is about to announce creation of the long-proposed Office of Social Innovation to bring together government responses and resources to the concerns of the philanthropic and charitable sectors.

Bureaucratic-style confirmation: the office appears on the list at whitehouse.govSpeculation about possible leadership has begun.

Foundation Friday: Glub glub

March 13, 2009

Here’s a story about endowments that can’t be touched because they’re “underwater,” that is, now worth less than the contribution(s) that established them, and state law prohibits endowed nonprofits from touching the principal.  Though the Nonprofiteer is ordinarily a big fan of regulation, she notes that this statutory scheme harms the very agencies it intends to protect.

But more troubling still is the organization described in the article whose concern for the size of its endowment causes it to fire staff rather than dip into principal to pay their salaries.  Why is the perpetual existence of an organization more important than its ability to perform its mission now?

Nonprofits–whether operating charities or foundations–are not for perpetual existence; they’re for accomplishing their mission.  When perpetuity gets in the way of mission, it’s perpetuity that ought to give way.  And the Nonprofiteer would be willing to risk any unintended consequences of a regulatory scheme embodying that idea.

Foundation Friday: People unclear on the concept

January 30, 2009

The Nonprofiteer rarely agrees with Jack Siegel of Charity Governance; but this is the exception.   Noting the Dodge Foundation’s recent decision to cancel its poetry festival because of a decline in its endowment, he describes in one well-turned paragraph what’s wrong with that picture:

At the most elemental level, an endowment is a rainy day fund. As President Obama pointed out yesterday, the rainy day has come. Yet, many institutions are not using the endowment as it is intended to be used: As a source to stabilize the ebbs and flows in operating revenue so that vital programs can go on despite temporary economic downturns. That suggests that endowments—and we can’t speak specifically to the Dodge Foundation’s practices—during the last decade endowments were mismanaged by directors and trustees. Our hypothesis: Directors and trustees focused on maximizing investment return, forgetting to link return to the purpose served by endowments—smoothing out the ups and downs in the economy to provide stability to charitable programs.

Siegel describes his own post as “speculative,” based not on any inside knowledge of foundation investing practices but simply on inferences reasonably to be drawn from the results.  The Nonprofiteer would argue that his discussion is instead theoretical, in the highest and best use of that term.  And instead of merely railing (as she does) against the failure of foundation executives and Boards to respond with open-handedness to conditions requiring that response, Siegel analyzes what brought them to these straitened circumstances, and proposes how to prevent its happening again.

And she salutes him.

Foundation Friday: Giveth/taketh away

January 23, 2009

Kudos to The George Gund Foundation for its decision to respond to the current financial crisis by increasing the percentage of its assets it will give away.  The Nonprofiteer views this as the only defensible position for those who hold accumulated assets tax-free, and is always happy to welcome another participant to the fold.

She’s disappointed, though, at Gund’s failure to describe publicly the magnitude of the increase it intends.  The Foundation’s language on the subject can almost be described as “weaselly.”

Federal tax law requires that we spend 5% of our assets every year, and we always exceed that minimum. But in 2009 we will go substantially beyond that. However, because our portfolio is diminished, the dollars available for grants still will likely decline in 2009. Thus, we do not expect to make any large new commitments.

The Foundation obviously knows how deeply it’s digging into its assets or it wouldn’t know how much money it has available for grants.  So why hide the ball?

The Nonprofiteer wishes to suggest that a public statement by a leading foundation about what size chunk it believes can prudently be removed from its asset base would set an example for the rest of the foundation community–not to mention providing enough of a whiff of self-regulation to keep the Congress from upping the legally required ante.

So how about it?  Will foundations expressing a willingness to increase their payout rates (and, again, thanks and praise be to them) also make public the new rates, and thereby Give A Lead (as the British say) to all the rest?