NCRP: Closing the Loophole on Foundation Overhead Costs Will Give Nonprofits New Grant Resources

9/3/2003

From: Jeff Krehely of the National Committee for Responsive Philanthropy, 202-387-9177; e-mail: jeff@ncrp.org web: http://www.ncrp.org

WASHINGTON, Sept. 3 -- The National Committee for Responsive Philanthropy (NCRP) issued the third in its recent series of reports on foundation "payout" rates and the legislation in front of the House Ways and Means Committee which would increase foundation grantmaking by excluding private foundations' administrative and operating expenses from the required minimum 5 percent charitable spending requirements. NCRP Executive Director Rick Cohen called on nonprofits and foundations alike to speak out in favor of the bill, saying "This legislation has the potential to increase foundation grantmaking to the nation's finally strapped nonprofit organizations by billions of dollars, plus it will enhance foundation accountability and simplify foundation compliance with federal requirements." As a nonprofit watchdog group working to improve philanthropic effectiveness with an eye toward social justice, NCRP congratulated the bipartisan sponsors of Section 105 of the Charitable Giving Act for recognizing the importance of foundation grantmaking to the vitality and productivity of the nation's nonprofit delivery system.

"Our report makes it clear once again that foundations have nothing to fear from excluding their administrative and operating expenses from their federally mandated charitable payout," NCRP Executive Director Cohen said. "Even including the past few years of turbulence in the stock markets, private foundations have earned on average a return on their investments in a mix of equities and bonds that would allow for a payout in grants that is greater than 5 percent of their endowments. Furthermore, many foundations receive even additional income on top of investment returns in the form of additional contributions from donors and income from rental fees and real estate."

NCRP's new report, Closing the Loophole: Removing Foundation Overhead Costs from Payout, reviews the most recent research to conclude that foundations could and should pay out at least 5 percent of their endowments annually in grants.

"Foundation grantmaking is crucial to the support of public policy advocacy, social change, and nonprofit organizing groups," Cohen said, "and there could hardly be a time more than now where the advocacy voices of nonprofits are needed to call for social change and social justice in our society."

Among the major findings in Closing the Loophole:

-- Foundation overhead expenses are likely to be as much as $3.2 billion in 2003, which would translate into 26,000 average-sized grants to nonprofits if those funds were granted out to nonprofits under Section 105 of H.R.7.

-- Many foundations have turned the 5 percent payout "floor" into a "ceiling", which when including administrative and operating costs, frequently amounts to considerably less than 5 percent in grants.

-- Returns on investments, even with the past couple of years of turbulent stock markets, are still sufficient to keep foundation endowments growing, even ahead of inflation, even if they increased their payout from 5 percent to 5.4 percent or more. An investment portfolio that was 70 percent equities and 30 percent bonds would have earned an inflation-adjusted return of nearly 8 percent from January 1980 through December 2002. NCRP's earlier reports demonstrate that many private foundations receive new infusions of money beyond portfolio investment returns, including new contributions from donors and income from real estate holdings, further undergirding their ability to meet or exceed a payout rate of 5 percent in grants.

-- Although foundation grants represent less than 10 percent of nonprofit revenues, they are key sources of support for nonprofit organizing, public policy advocacy, and social justice groups.

-- A significant amount of foundations' administrative expenses go toward payments for foundations board members. Recent analysis shows that a sample of 238 foundations paid their trustees in 1998 an unfathomable $45 million in compensation simply for their board service, all of which could be counted by foundations as charitable expenditures to meet their payout requirements.

The Charitable Giving Act of 2003 (H.R.7) is a bipartisan bill, introduced in May by Congressman Roy Blunt (R-Mo.) and Congressman Harold Ford (D-Tenn.) to promote increased charitable giving and increased philanthropic or foundation grantmaking. Section 105 of the bill, titled "Reform of Certain Excise Taxes Related to Private Foundations", reduces and simplifies the excise tax private foundations pay on investment income. It also effectively creates an all-grant 5 percent payout rate by excluding foundations from counting their administrative and operating costs toward this mandated spending requirement. It does not forbid them from spending money on overhead, but simply from counting their overhead as the legal and financial equivalent of a grant.

"Despite heavy and expensive lobbying from some foundations and their national trade association, we have been gratified to see newspapers and journals across the political spectrum around the nation endorsing Section 105 as a reasonable and appropriate change to get foundations to put more money into the hands of the nonprofit sector," NCRP Executive Director Cohen noted. Section 105 has been editorially endorsed by USA Today, the San Jose Mercury News, the St. Petersburg Times, the Memphis Commercial Appeal, the Milwaukee Journal Sentinel, the Wall Street Journal, Forbes magazine, and the Springfield News-Leader, among others.

H.R.7 is scheduled for mark-up by the House Ways and Means Committee on Friday, September 5, 2003, and the Committee has scheduled a press conference on the topic for 11:00 a.m. on Thursday, September 4, 2003.

NCRP's Cohen added, "Now is the time to get foundations to put more money into the frontline nonprofits that are addressing the critical issues of our neighborhoods, our communities, our urban and rural areas. One hugely important and easy way to do that is to require that private foundations transform their required foundation 'payouts' into just about an all-grants formula."

The study -- Closing the Loophole: Removing Foundation Overhead Costs from Payout -- was released today and can be requested directly from NCRP by contacting Jeff Krehely, NCRP's Director of Research, by e-mail at jeff@ncrp.org or Rick Cohen, NCRP's Executive Director, at rick@ncrp.org, or by phone at (202) 387-9177. NCRP's two earlier reports -- A Billion Here, a Billion There: The Empirical Data Add Up and Helping Charities, Sustaining Foundations -- on foundation payout are available on its website, http://www.ncrp.org.

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.