Making Philanthropy Accountable

Are foundations living up to what should be their obligations to society?

The Foundation Center in New York City recently reported that grant funding for community improvement and development fell in 2000 for the second year in a row. Only 3.9 percent of overall grant dollars went to the kinds of organizations and functions that include settlement houses, community development corporations, and other community-based activities. Support for civil rights and social action also showed a decrease, down to 1.3 percent of total grant dollars.

Those figures are actually only estimates. They aren’t based on the performance of the 60,000 foundations handing out money today, but on only some 1,016 of the largest. That means the data is skewed to represent the funding behavior of foundations like Ford and Rockefeller and Surdna and MacArthur that have long traditions of supporting community development, neighborhood-based organizations, and social action. What about the other 59,000 foundations? It is logical to assume that their interests in and concerns about antiracist, community-development-oriented, social-action groups also do not match their funding behavior.

Therein lies a challenge for the social justice subsector of nonprofits. When does the nonprofit sector begin to posit measures of performance and accountability for organized philanthropy? What is philanthropy doing to be responsive to the needs of the people and constituencies who are least well served in our economy—and unfortunately least well served by our government?

That is why the National Committee for Responsive Philanthropy (NCRP) was founded. A quarter-century ago, a body of nonprofit leaders operating under the name of the “Donee Group” issued a report saying that philanthropy had an obligation to think about and address the critical social and public issues of our society. A quarter-century later, nonprofits now call themselves grant recipients instead of donees. But the message is still the same.

Philanthropy’s Contribution to Society?

In order to ask whether foundations are living up to what should be their obligations to society, two new ways of thinking are required. First, nonprofits—and government too—have a role in examining and critiquing what philanthropy is contributing to society. The discussion about what foundations do or don’t do shouldn’t be limited to foundations talking among themselves. Nonprofits are the delivery system for foundations. They need us. Just as we listen to them, they should listen to us.

The other new approach requires the willingness, as the founder of NCRP, Pablo Eisenberg, puts it, “to overcome the mystique of philanthropy, the sense that somehow as nonprofits we are beggars at the philanthropic table, content to try to gauge what foundations and donors are interested in, and happy with whatever goodies fall off the philanthropic table into our laps—or our budgets.” Eisenberg says that nonprofits should be candid, forthright, courageous, and risk taking in their dealings with foundations.

For NCRP, that means being willing to challenge how foundations behave and what they fund or miss funding. It also means taking on foundations as a public-policy issue. Too often we forget that foundations exist not simply as Victorian exercises in voluntary kindness, but as tax-exempt institutions where private individuals, foundation trustees, and foundation staff get to administer resources for the public good without much public oversight, criticism, or due process.

Issues in Philanthropy

What then, are the issues in philanthropy that merit attention?

First, as the data cited earlier indicates, there is a relatively puny proportion of foundation dollars going to social change. According to the National Network of Grantmakers, 2.4 percent of grant dollars go to social change. A major researcher on philanthropy says that around 1 percent goes to social movements.

Despite some courageous funders, for the most part foundation grant making is characterized, according to Gara LaMarche of the Open Society Institute, by timidity about staking out bold positions and allocating major funding on behalf of advocacy for social change. That isn’t the case for conservative foundations, which are quite aggressive in their funding of organizations and ideas.

The second issue is foundation spending, or payout. Despite double-digit growth in foundation endowments over the past decade or more, mandated spending is set at a minimum level of 5 percent of net foundation assets. Note that foundation spending is not equivalent to grants. For many foundations, the payout rate is below 5 percent; in some shocking cases, even below 4 percent. Too many foundations have taken the statutory floor on spending and turned it into a ceiling.

Nonprofits should be candid, forthright, courageous, and risk taking in their dealings with foundations

It isn’t only persons on the left who are thinking about the foundation payout rate. Harvard professor Michael Porter has been one of the leaders questioning the spending behavior of foundations. He points to three factors that justify an increase in foundation spending: the enormous growth of tax-exempt assets due to a stock market that saw the Dow Jones Industrial Average jump from 2,200 points in 1990 to mid-10,000 in 2001; an infusion of new charitable giving; and the creation of new foundations.

Even former President Bill Clinton had the same idea. At the first ever—maybe the last ever—White House Conference on Philanthropy in October 1999, the President cited the growth of the stock market and challenged everyone in the audience to consider raising their philanthropic giving by 1 percent. He was probably thinking of the individual rich donors in his audience and not worrying about the foundation payout rate. But his message made some foundation personnel in the room squirm anyhow.

Despite double-digit growth in foundation endowments over the past decade or more, mandated spending is set at a minimum of 5 percent of net foundation assets.

Porter even suggests that the tax-exempt growth of foundation endowments means that it costs the Federal government $1.48 in taxes foregone for every dollar of philanthropy actually spent on nonprofits. Porter’s argument and his numbers or the estimates of others, including Barnard College economist Perry Mehrling, who says that an 8 percent payout rate could work, can be debated. But there is clearly something here indicating that the payout rate merits some review. In this nation, where the richest 1 percent of us owns 42 percent of the wealth, up from 19 percent in 1970, the role of foundations as owners of some of that wealth is worth examining.

The third issue is operating support. In the nonprofit community-development sector, for example, many great community development corporations and other community-based organizations with excellent programs of neighborhood services and low-income housing struggle to pay core operating costs. Foundation spending for core operating support is less than 14 percent of all grant dollars, compared to over 18 percent not so many years ago. When a foundation executive extolled the virtues of foundations to then First Lady Hillary Clinton, she responded—off script—by bemoaning the project-funding preoccupations of foundations to the detriment of nonprofits raising money for their core costs. We hope she will remember this issue in the Senate.

Who gets most of the foundation operating support? For most of the small, neighborhood-based or constituency-led community organizations, making the case for operating support is a difficult undertaking. It is doubtful that it is as easy to raise as the Hewlett Foundation’s $400 million infusion into the endowment of Stanford University. In all likelihood, the bulk of operating support goes from foundations to organizations whose structure and finances they feel comfortable with—like universities—as opposed to grassroots advocacy organizations.

In New York City and around the nation, there are a number of foundations that have taken on the operating support issue in the community-development sector, including a multifunder collaboration, the Neighborhood 2000 Fund, devoted to increasing operating support for nonprofit community developers. The Ford Foundation must be credited with spawning multifoundation operating support collaborations for community developers around the nation. But the overall foundation commitment to operating support for grassroots groups, advocacy groups, and social-change organizations is still paltry compared to the need.

A fourth point for a philanthropic agenda for nonprofits is to ask where the money goes. Why the lower percentage to community development, civil rights, or social action? Why the decline in overall giving in the category of grant making called “public and society benefit”? Why the absolute decline—not simply a percentage decline—in grant making for organizations addressing African-American issues and causes, and the overall decline in total dollars addressing minority issues? How much goes to advocacy? How much to community organizing? How much to women and girls? How much is devoted to gay, lesbian, bisexual, and transgendered populations and issues? How much to groups that are constituency controlled?

Even the minimal available statistics are sometimes appalling. Foundation support for civil rights and social action has fallen to 1.3 percent of foundation grant dollars as of 1999. Support for community development is at 3.9 percent of total grant dollars, down from 4.3 percent in 1995. Grant making for racial or ethnic minorities is 7.9 percent of all grant dollars, down from 9.9 percent in 1998, down from 8.3 percent in 1995. Grants designated for African Americans/blacks decreased—not simply in percentage terms—from 3.8 percent in 1998 to 1.9 percent in 1999 of all grant dollars, but even in absolute numbers, from $367 million in 1998 to $222 million in 1999. Grant making for gays or lesbians (presumably including bisexual and transgendered populations) is a steady 0.1 percent of grant dollars. And again, all of these percentages are probably overestimates, based on a survey of the largest 1,016 foundations, including those that are likely to be more progressive than the other 59,000 in the sector.

A fifth area for action is to move philanthropy into public policy. For all the talk about philanthropy and charity in this country, despite charitable giving topping $200 billion, in reality we aren’t that generous a society. And it’s not simply a matter of judging the congressional lemmings who voted for the George Bush Administration's tax cut, which will likely be used in the future to cut back federal discretionary spending.

Why the absolute decline—not simply a percentage decline—in grant making for organizations addressing African-American causes, and the overall decline in total dollars address ing minority issues?

After the Capitol Hill battle in 2000 over the estate tax, the nation saw one clear indicator of the charitable miserliness of the population. Eighty percent of the individuals who die with estates large enough to qualify for the estate tax, which means less than the top 2 percent of estates, leave exactly zero to charity. If you look at the giving of Americans, the least wealthy are the most generous. Of families with positive net worths, the lowest quintile, or fifth, in this nation gives 13 percent of its wealth annually to charity. The remaining four-fifths of the U.S. gives less than 1 percent. The top fifth gives less than one-half of 1 percent of its wealth to charity. The most charitable persons happen to be the ones who attend the programs and receive the services of low-income and neighborhood-based service providers, which are starving for decent program and operating support.

Unfortunately, social-change philanthropy is not likely to be helped by policy recommendations of the Bush Administration and its congressional allies. Although the proposed elimination of the estate tax was repealed, it won't go into affect until ten years from now and, due to a quirk in the legislation, last for only one year. Then, they will try again. This threatens some significant percentage of the more than $16 billion given annually in charitable bequests, not to mention that it is simply a horrible tax break that benefits only the superwealthy.

President Bush has called on states to offer tax credits, not tax deductions, for charitable giving to nonprofits providing services to address poverty. These credits would be paid for with unspent Temporary Assistance for Needy Families or welfare funds, and even other federal block grants have been recently mentioned as additional candidates for compensating state treasuries. This is a component of the President’s faith-based initiative. In fact, the initiative calls for an egregious expansion of charitable choice, opening up $250 billion in federal dollars to be administered by pervasively religious organizations. The President’s 2002 budget proposals called for the creation of a compassion capital fund, slated to grow to $700 million in a few years, to be housed in the Department of Health and Human Services (HHS). To finance the fund, the President and his conservative foundation allies plan to lean on foundations at a new White House “summit” on philanthropy to put up the financing for the fund and other faith-based initiatives that cannot be capitalized by federal dollars.

Although the President was blocked by Senator John McCain on this issue, he and Vice President Cheney called for paycheck protection as an element of campaign finance reform, which could affect charitable giving in the workplace, restricting the use by nonprofits that participate in public-policy advocacy. With Elaine Chao as Secretary of Labor, it is hard to imagine that we have heard the last of paycheck protection or that the Bush Administration will not promote the same among states.

There is, of course, nothing in the President’s agenda that refers to corporate philanththropy, particularly with regard to getting corporations to fully disclose their philanthropic activity. There are many corporate grant makers, but increasingly, corporate philanthropy is shifting from their foundations to the marketing departments. Corporate philanthropy geared toward serving a corporate bottom line—rather than corporate good citizenship—is increasing. As a result, $50 billion in corporate philanthropy goes to sponsorships, tours, and cause-related marketing. Six billion dollars alone goes to sponsorship of sports.

It may be that the elements missing from the President’s agenda on charity and philanthropy are just as important as the items on the docket. For organizations from communities of color, there is plenty more on the horizon of charity and philanthropy that warrants activism and engagement.

Promoting Social Change

How can grassroots groups promote social change in and through philanthropy? Social justice nonprofits can begin by asking their congressional delegations where they stand on the pack of bills that have been introduced by both Democrats and Republicans on charity and philanthropy. Ask them how community-based organizations, civil rights groups, and disadvantaged populations will fare under such legislative initiatives. Lobby them to take a position—or act as a bloc—on these issues.

Social-justice nonprofits can organize themselves to look at where the philanthropic dollars flow in their communities. To which causes? Which neighborhoods? For what purposes? Consider whether philanthropy should be delivering for the neighborhoods, the poor, or the working people of their cities and states.

Philanthropy has to move into the forefront of social-justice organizing issues if there is a fundamental belief in a redistribution of wealth in the U.S. But consider this: Charitable giving represents 2 percent of the Gross Domestic Product, while private and public foundations control endowments topping $450 billion. These resources should be mobilized for the populations that are not served by the New Economy and to help redress the inequities of racial and ethnic discrimination in our society.