Pushing Grant Makers

By Ian Wilhelm and Brad Wolverton

In what could be the most significant federal legislative proposal affecting foundations in decades, a bipartisan pair of lawmakers wants to require grant makers to give a larger share of their assets to charities every year.

U.S. Representatives Roy Blunt, an influential Republican from Missouri, and Harold Ford Jr., a Democrat from Tennessee, last week introduced a bill designed to stimulate charitable giving through adjustments to the federal tax code.

A key part of their bill would bar foundations from counting operating expenses like rent and salaries when they calculate how much money they must distribute each year to charities. Federal law requires foundations to spend 5 percent of their assets annually, and the proposal by Mr. Blunt and Mr. Ford would have the effect of forcing many foundations to distribute more of their assets for charitable programs each year.

Mr. Blunt, the House majority whip, said he was motivated by a desire to compel foundations to give more of their endowment assets to charity and to "build another wall against excess administrative expenses." Mr. Blunt mentioned no specifics, but in recent months some foundations have drawn criticism for paying excessive salaries -- in one case more than $700,000 -- to their executives and spending lavishly on offices and perks while distributing a small fraction of investment gains to charitable programs.

Many parts of Mr. Blunt's and Mr. Ford's bill, called the Charitable Giving Act -- HR 7 -- are similar to the Senate's Charity Aid, Recovery, and Empowerment (Care) Act of 2003, which was passed in April. For example, the Charitable Giving Act proposes to:

• Allow people who do not itemize on their income-tax returns -- estimated to be about 70 percent of taxpayers -- to write off some of their charitable cash gifts. Individuals would have to donate more than $250 in a year to qualify for a deduction, and their deduction would be limited to a maximum of $250 for individuals or $500 for couples. The same provision is in the Senate version.

• Permit people 70 1/2 or older to withdraw money from their individual retirement accounts and donate it directly to charity without being subject to federal income tax. Those individuals also could withdraw money from their IRAs and make donations through planned gifts, such as charitable remainder trusts, without paying income tax on the gifts. The Senate version sets the age threshold for IRA donations through planned gifts at 59 1/2.

• Reduce to 1 percent the excise tax that foundations must pay on their net investment income. No such provision is in the Senate version.

It is Mr. Blunt's and Mr. Ford's effort to increase the amount foundations spend on charitable programs that is drawing some of the greatest attention.

Charity officials who rely heavily on foundation grants hailed the proposal as long overdue. "Foundations should be putting more money into groups and hanging on to less," said Rebecca Abizaid, development director at the Washington office of WildAid. The San Francisco wildlife-conservation group received 80 percent of the $3-million it raised last year from grant makers.

Rick Cohen, president of the National Committee for Responsive Philanthropy, said a forthcoming study by his advocacy organization found that if foundations were required to give away a full 5 percent of assets annually in the form of grants, the 100 largest foundations would distribute nearly $900-million more each year to charities. "Given the economy and the needs of nonprofit groups right now, which in some ways have never been greater because of government cutbacks, foundation grants mean a great deal," said Mr. Cohen, a frequent critic of the mainstream foundation world.

Grant Makers Are Concerned

But foundation officials expressed concern over Mr. Blunt's and Mr. Ford's proposal. Some said that if Congress wants to root out foundation abuses, it should provide more money to the Internal Revenue Service to help it monitor tax-exempt organizations more effectively than it does now.

Douglas W. Nelson, president of the Annie E. Casey Foundation, in Baltimore, said that if the legislation passes, "Congress will be hitting a million unintended targets -- going after activities that actually help grant makers do better work."

Susan Berresford, president of the Ford Foundation, in New York, echoed Mr. Nelson's point. "It seems contradictory to me that, at a time when lawmakers want foundations to be operated with greater accountability, they would remove operating expenses from payout," she said. "Now's the time that foundations really need to be encouraged to pay for auditing fees, evaluations of grantees, and careful monitoring of their investment assets -- all of which are now considered operating expenses."

Dorothy S. Ridings, president of the Council on Foundations, said that grant makers have told her that they would stop producing annual reports, discontinue public-education programs, and quit providing management training to small grantees.

"There are examples of bad dealings in the foundation field," she said. "I don't think anyone who knows this field would deny that. But there are other ways to root out those problem foundations."