NCRP Findings Show Reasonable Reform Measure Could Pump Billions Into Charities While Preserving Foundations

6/2/2003

From: Sloan C. Wiesen of the National Committee for Responsive Philanthropy (NCRP), 202-387-9177 or sloan@ncrp.org; http://www.ncrp.org

WASHINGTON, June 2 -- A new analysis released today by the National Committee for Responsive Philanthropy (NCRP) suggests that private foundations can afford to devote up to an additional $4.3 billion annually to nonprofits while sustaining themselves for the long term and enhancing their own efficiency. The findings lend support to a provision in a bipartisan charity aid bill in Congress, Sec. 105 of H.R. 7, that would help foundations focus their required charitable spending almost entirely on grants. The reform would end foundations' rampant practice of counting much of their own administrative costs toward their annual charitable spending obligations.

"This is a modest and reasonable reform that would help charities with desperately needed new grantmaking while simultaneously safeguarding foundation perpetuity," said NCRP Executive Director Rick Cohen. "Rather than stopping foundations from spending funds on administrative and operating costs, the proposed provision of the Charitable Giving Act simply guarantees that at least 5 percent of foundations' endowments will be devoted to strengthening the budgets of America's nonprofits on the front lines of social progress."

NCRP's new analysis, titled "Helping Charities, Sustaining Foundations: Reasonable Tax Reform Would Aid America's Charities, Preserve Foundation Perpetuity and Enhance Foundation Effectiveness and Efficiency," can be viewed online at http://www.ncrp.org/HelpingCharities.pdf.

Under current law, private foundations are required to donate only 5 percent of their assets each year to charitable purposes - and they can include many of their own administrative overhead expenses in that 5 percent. The proposed bipartisan reform (Sec. 105 of H.R. 7) under consideration in the U.S. House of Representatives, sponsored by Reps. Roy Blunt, R-Mo., and Harold Ford Jr., D-Tenn., would hold that level at 5 percent, but exclude foundations' administrative costs - such as executive salaries, fees paid to trustees and board members, office construction and rental costs - from their required annual charitable spending known as "qualifying distributions."

The proposed provision in the Charitable Giving Act would also simplify and reduce the private foundation excise tax from 2 percent to 1 percent - a tax break that the foundation sector has long sought. NCRP has long supported that change, but with the requirement that the public revenue generated by the private foundation excise tax be rededicated to improved IRS oversight and support of the foundation sector and the entire nonprofit sector.

Among NCRP's findings:

-- Foundations counted $2 billion of their administrative costs toward their 5 percent charitable spending requirement in 1999, according to IRS data NCRP uncovered. More recent data suggest that foundations may be counting up to $4.3 billion of their administrative and operating expenses toward their charitable spending requirement, according to 2001 data from the National Center for Charitable Statistics (NCCS) at the Urban Institute that NCRP included in its assessment.

-- NCRP also looked at the top 100 U.S. grantmaking foundations in the NCCS data, and found that in 2001 they counted $883 million of their own administrative expenses toward their annual 5 percent charitable spending requirement. The line items of most interest to NCRP in this instance - related to compensation, travel and rental expenses - were all largely counted as charitable spending. In particular, 89 percent of occupancy expenses, 68 percent of travel expenses and 63 percent of total compensation expenses were counted toward these 100 foundations' charitable spending.

-- In 2001, these top 100 foundations counted 62 percent of their own total operating and administrative expenses toward their annual charitable spending requirement. And looking at all foundations, IRS data for the same year indicate that foundations counted nearly half - 47 percent - of their total administrative costs as a part of their minimum charitable spending requirement. NCRP found it noteworthy that some foundations counted nearly all of their operating and administrative expenses toward their charitable spending requirement, while others counted hardly any of these expenditures as such. The inconsistency makes it harder to meaningfully compare charitable spending among foundations, creating an impediment to foundation accountability and transparency.

In addition to NCRP's findings, the analysis pointed to additional studies bolstering the case that private foundations can be doing significantly more to help struggling nonprofits while still preserving their own long-term sustainability. One such study was even sponsored by the Council on Foundations itself - the industry trade association that consistently lobbies against stepped-up foundation investment in nonprofits:

-- A 1999 study commissioned by the Council on Foundations and performed by DeMarche Associates, Inc. found that foundations could have paid out 6.5 percent annually and still would have grown their assets by 24 percent from 1950 to 1998.

-- A June 2001 study by Akash Deep and Peter Frumkin (both at Harvard University), studied a sample of 290 of the largest foundations, across 1972 through 1996. They found that, "As a group, the foundations in our sample have returned 7.62 percent annually on their assets, while paying out an average of 4.97 percent."

"NCRP's analysis concluded that Sec. 105's proposed reform would modify foundation expenses by only .4 percent, to 5.4 percent - well below the 6.5 percent level that the research sponsored by the foundation sector itself has found to be sustainable," the new NCRP paper notes. This assumes that foundations continue to spend for administrative and operating costs exactly as they did before, without counting such expenses toward their qualifying distributions.

"This modest change is sustainable for foundations," NCRP's Cohen noted. "It doesn't require them to reduce their administrative expenditures one iota, but it does get new money into nonprofits now, to address today's problems, when nonprofits face the triple whammy of charitable giving declines, federal and state public investment cutbacks, and increasing demands from constituents in the most difficult economy in two decades."

-- The analysis concludes: "The research suggests that the modest simplification of foundation expenditures proposed in Sec. 105 of H.R. 7 constitutes a balanced and reasonable tax reform that would help America's charities, offer foundations a tax break that they have long sought, safeguard foundation perpetuity and enhance foundations' long-term effectiveness and efficiency."

Founded in 1976, the National Committee for Responsive Philanthropy is dedicated to helping the philanthropic community advance the traditional values of social and economic justice for all Americans. Committed to helping funders more effectively serve the most disadvantaged Americans, NCRP is a national watchdog, research and advocacy organization that promotes public accountability and accessibility among foundations, corporate grantmakers, individual donors and workplace giving programs. For more information on NCRP or to join, please visit http://www.ncrp.org or call 202-387-9177.