By Melanie Lundquist, Philanthropist & Civic Activist, and Patrick Sinclair, Communications Director, Partnership for Los Angeles Schools
We Americans share many blessings, among them a penchant for helping those in need, so much so that our nation's private foundations now command more than a half a trillion dollars in assets, or more than the GDP of Hong Kong, Singapore and Vietnam combined.
Given this vast wealth, one might think that in a time with more people on food stamps than ever before, our non-profit, tax exempt foundations would leap to the fore, providing relief and comfort to the millions of unemployed, hungry and downtrodden Americans still suffering the consequences of our continuing economic downturn. Think again.
While some brave foundations have increased their giving in the last two years, the vast majority still strive to limit their annual giving to no more than a nickel on every dollar they have. Three decades ago, Congress passed legislation forcing foundations to pay out at least 5% of their assets every year, a measure that was meant to set a minimum.
Instead, most foundations decided to make the 5% payout rule the maximum they give annually, arguing preservation of assets allows them to grow their portfolios and have more money to donate in the future. Really? In a time of historic, urgent and rapidly escalating economic problems, we're worried about future portfolio performance and social ills that may crop up in 10, 20 or 30 years? Really?
Billions of dollars are taken out of U.S. Treasury coffers today, not decades from now, so that foundations can contribute to our collective well-being. It's high time the foundation community open its eyes and stop worrying about 20-year portfolio performance and start worrying about what this country is going to look like in 20 years if we don't fix the overwhelming social and economic problems facing the nation today.
Some have argued we need to force foundations to increase their giving by raising the 5% payout rule, or changing it so that salaries and other overhead costs can't be counted toward the 5% payout as is the case today. I support such moves, but am acutely and sadly aware of the firestorm of protest the powerful foundation lobby throws up any time changes to the 5% minimum payout have been mentioned. The last time changes to this rule were considered in 2003 the foundation lobby protested so loudly, the measure never made its way out of the House.
At the time, foundations promised financial ruin should the proposal to raise the effective payout rate from 5% to 5.4%, with the head of the $11 billion Ford Foundation saying that any increase in the payout rate would lead to the dissolution of the Foundation. This, despite a report from the French American Charitable Trust and others showing how various foundations had given more than the required 5% and either maintained or even increased their assets.
So what's the real problem here? Why do foundations cling to their cash despite overwhelming need and obligation to act? Clearly, the only answer is self-interest.
Like any human organization, the priority for too many foundations has become self-preservation and perpetuation. It happens with government agencies and corporations, it happens with PTAs and unions. It is simply an undeniable facet of the human condition: the survival instinct.
That doesn't mean we can't rise above our basic instincts; we've done it throughout human history, and it's during those times that civilizations have grown and prospered the most, and our greatest societies have evolved. Now is the time to do so once more.
If that means raising the 5% minimum payout for foundations, then we need to do it. If that means changing the excise taxes currently levied on foundation income, then we need to do it. Whatever it takes to move foundations just a little from their basic need to survive and toward sacrificing some of who they are -- we need to do it.
It means the president and Congressional leaders need to re-examine the laws governing foundations and re-evaluate their proper role. It means finding equitable ways to encourage, and if necessary, require foundations to give more of their resources back to the larger community from which they took them in the first place. It means listening to the concerns of the foundation lobby and trying to address those concerns, but making sure these very same foundations understand their tax-exempt status obligates them to better help people in crises now, not in some distant, undefined future.
As Martin Luther King, Jr. said in his 1963 book, Strength to Love, "Philanthropy is commendable, but it must not cause the philanthropist to overlook the circumstances of economic injustice which make philanthropy necessary." That quote is as true today as when first written. American philanthropy must use some of its enormous wealth to better respond to the economic injustices we face today, and to do so with force and resources well beyond the 5% payout rate. The stakes have simply become too high.