Time for Foundations to Dig Deeper

The looming recession represents a big challenge for nonprofits and foundations alike.

Nonprofits face rising demand for services from people hit hard by the economic downturn. They face higher costs of doing business. And they fear that individuals, corporations, and foundations may reduce or shift the focus of their giving.

Times also are tough for foundations, which have seen the value of their endowments shrink because of plunging capital markets.

These challenges represent an opportunity for nonprofits to focus on their mission, strengthen their operations, and fine-tune their message and their marketing, making sure they are telling the most compelling story they can about the impact they have and the need for givers to support them.

The economic crisis also should serve as a powerful jolt to foundations.

Using their clout, foundations in recent years have waged a fierce fight to limit to 5 percent of their assets the annual payout the law requires they make, a payout that includes not only grants but also overhead expenses.

And most foundations are reluctant to make grants to support nonprofit operations, preferring instead to fund programs or projects that often bear the funders’ names.

Foundations need to move beyond giving as usual.

They should give more and they should recognize that nonprofits need funding to build their operations so they can more effectively deliver services.

Foundations claim that increasing the required payout would drain their assets and force them to go out of business.

But the idea that foundations have a right to exist forever defies fairness and common sense.

While the law gives donors up-front tax breaks for creating foundations, it lets foundations hoard most of their assets.

In a typical year, the investment returns on a foundation’s endowment will cover the payout the law requires it to make, and in good years those returns will result in actual growth in the endowment.

So foundations, often controlled by donors and their families, simply accumulate wealth and power out of proportion to what the foundation actually gives back to the community.

In return for tax breaks the donors enjoy up front, and tax-exempt benefits foundations enjoy on an ongoing basis, taxpayers should receive equivalent value, and they should enjoy it sooner rather than later.

That means, simply, that foundations should pay more to address social needs, rather than investing tax-exempt funds to finance high-powered battles to fight moves in Congress to increase the required payout.

The economic crisis is hurting low-income and middle-income taxpayers, as well as the nonprofits that exist to address critical needs in our communities.

Instead of pitching fits about the plunge in value of the endowments they count on to perpetuate their power, foundations should be digging deeper and paying out more to begin to give back what they and their donors have received from taxpayers in the form of tax breaks and tax-exempt benefits.

Todd Cohen, a veteran news reporter and editor, is editor and publisher of Philanthropy Journal, an online newspaper published by the A.J. Fletcher Foundation in Raleigh, N.C. Cohen has taught nonprofit reporting and media relations at the University of North Carolina at Chapel Hill and at Duke University, and regularly speaks on the topics of nonprofit media relations and trends in the charitable world.

Read more stories by Todd Cohen.