03/01/2012 01:31 pm ET Updated May 01, 2012

Government Bailout 101: Foundations Aren't the Answer

Pennsylvania Governor Tom Corbett recently unveiled his proposed budget for Pennsylvania. Like other governors around the nation, he developed a budget based on lower-than-hoped-for revenues, putting pressure on state social-service programs and education budgets. The Center for Budget and Policy Priorities estimates that at least 29 states will enter their next fiscal year with budget deficits, forcing legislators to make tough choices about cutting services or increasing taxes in an economy that still looks shaky.

In a seemingly unrelated event, the nation learned last month that the foundation established by the late Pittsburgh industrialist, William Dietrich, will pay out only about 3 percent of its value each year to charity. That news is sure to set off another round of debate about whether, given the current economic pressures, America's foundations should increase their grant-making budgets.

Most of America's foundations were created to last forever. While there are notable exceptions (the Bill and Melinda Gates Foundation, for instance), the concept established by their founders was one of perpetuity, where only the earnings from the gifts that created them would be spent. Federal law requires most foundations to spend five percent of their value each year (Mr. Dietrich seems to have found a narrow exception). Generally, foundations are expected to earn about nine percent on their portfolios, which would allow the portfolios to grow slightly each year to account for inflation.

Therefore, whenever governmental budgets are tight, some policy makers look at foundations and see a solution to their problems. It's simple political rhetoric to point at foundations and say, "If they just spend more, our problem will be solved." We hear that idea a lot in the foundation world, but it rests on two faulty assumptions.

The first assumption is that the problems created by declining government resources can be solved by tapping our nation's philanthropic investment accounts. By one estimate of federal spending, our government goes through about $6.9 million a minute. If you decided to spend down all of the assets of the Bill and Melinda Gates Foundation (by far the largest foundation in the United States), it would fund the federal government for about 80 hours. At the local level, our county government spends the annual grant-making budget of Berks County Community Foundation in less than two days, to provide human services to about 400,000 people.

We can't shrink government and expect private philanthropic dollars to meaningfully fill those holes.

The second assumption is that spending down America's foundations today would solve longer term problems. Forcing foundations to spend more today is the policy equivalent of burning the furniture to heat the house. By spending down or reducing the future giving power of America's foundations, we add one more burden to the enormous debt we're bestowing on our children and grandchildren. Sacrificing their access to charitable funds that are flexible and encourage innovation because government cannot make hard choices today isn't fair. It would perpetuate a generational injustice that both fails to honor those who proceeded us (and wisely established these foundations) and burden the generations that follow us.

The nation -- Pennsylvania included -- is engaged in a robust debate about the role of government, how big it should be and what it should and should not do. It would be superficially satisfying, but ultimately fruitless, to imagine that we can avoid those choices by passing the bill to philanthropy.