House Committee Weakens Foundation Spending Reform Measure in Charitable Giving Act (Sec. 105 of H.R. 7)

9/9/2003

From: Sloan C. Wiesen of the National Committee for Responsive Philanthropy, 202-387-9177, ext. 17; e-mail: sloan@ncrp.org; web: http://www.ncrp.org

WASHINGTON, Sept. 9 -- In approving the Charitable Giving Act of 2003 (H.R. 7) this afternoon, the House Ways and Means Committee dropped the original version of a foundation spending reform measure (Sec. 105) that could have produced up to $3.2 billion annually in new grants for charities while simultaneously encouraging foundation efficiency by simply excluding foundations' overhead costs from what they count as charitable spending. Instead, the committee adopted a complicated substitute version of the measure, advanced by the foundation industry trade association, that opens more loopholes than it closes and may actually reduce the amount of foundation grant dollars that go to charity, according to the National Committee for Responsive Philanthropy (NCRP), a philanthropic watchdog organization that researched and supports the unadulterated original version of Sec. 105.

"While the original version of Sec. 105 would have pumped more grant money into charities and simplified grantmaking procedures for foundations, the complicated substitute would do the exact opposite," said NCRP Executive Director Rick Cohen. "Unfortunately the new version of Sec. 105 is likely to open more loopholes for abuse than it closes; tempt foundations to disguise even more of their overhead as if it were charitable spending; and encourage foundations to spend more money on categorizing their expenses and less on charitable grants. The upshot will be less foundation accountability and less grant money for charity instead of more. What a bad idea."

Under current law, private foundations are required to spend a minimum of 5 percent of their assets each year for charitable purposes -- and they can, and often do, include many of their own administrative overhead expenses in that 5 percent. The original Sec. 105 of H.R.7, sponsored by Reps. Roy Blunt, R-Mo., and Harold Ford Jr., D-Tenn., would have excluded foundations' administrative costs -- such as executive salaries, fees paid to trustees and board members, travel, office construction and rental costs -- from their required annual charitable spending known as "qualifying distributions" or "payout." While freeing billions of dollars for charitable grants, the original version would have only modestly increased foundation expenses by an annual average of no more than 0.4 percent of assets.

Unlike its predecessor, the altered version of Sec. 105 creates a laundry list of certain administrative expenses that foundations can count toward their minimum charitable spending requirement of 5 percent of their assets, and certain expenses that cannot count as charitable spending. The revised version therefore tempts foundations to define even more of their administrative expenses under the heading of charitable spending, while the IRS division that is supposed to keep tabs on charitable activities will continue to have few resources for enforcement.

If the altered version of Sec. 105 is enacted, it would not be the first time Congress has tried to force foundations to make intricate distinctions between "good" and "bad" administrative expenses. In the 1980s, Congress imposed a similar requirement. The Treasury Department studied the impact of that attempt, and found that it was so problematic as to be "complex and burdensome to private foundations" and that the requirement was "not an effective method of discouraging foundations from incurring excessive amounts of these administrative expenses." The requirement was eventually repealed. In 2001, the bipartisan Joint Committee on Taxation also confirmed that simplifying -- rather than complicating -- provisions in the tax code, such as reducing and consolidating the foundation excise tax, would encourage effective philanthropy.

"It is ironic that lobbyists for the foundation industry trade association have criticized the original version of the proposed Sec. 105 as being overly complicated when in fact the original proposal was far clearer and simpler than what emerged today from the House Ways and Means Committee," observed Cohen. "By simply excluding administrative costs from foundations' charitable spending, the original version of the proposal was a modest and reasonable reform to help charities and foundations alike by focusing foundation spending on charitable grants and by improving efficiency. Simplification is often good policy making, but the proposed change we see in the new version of Sec. 105 is complicated, convoluted and counterproductive -- a recipe for bad policy making."

Both the original and the revised versions of Sec. 105 in the Charitable Giving Act would also 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.

"Because of its complexity, the revised 'compromise' Sec. 105 provision on foundation spending requirements will actually require more IRS oversight, if the documented experience of foundations in the 1980s is any guide; but the new H.R. 7 fails to rededicate the foundation excise tax payments to the purposes they should address -- IRS oversight and enforcement of standards of accountability and probity by private foundations," noted Cohen. "If the tainted substitute version of Sec. 105 is enacted into law and does not live up to its billing, the foundation lobbyists who touted it as an acceptable compromise should not be surprised when policy makers and the public revisit the issue of foundation spending habits. Foundations are meant to be focusing their spending on their charitable missions -- not on themselves. Now that this issue of foundation spending practices has drawn new attention, NCRP is hopeful that more meaningful reforms may be adopted in the future."

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.