Generous to a Fault

By Amy Domini and Thomas Van Dyck

After a 20-year economic boom during which the assets of American private foundations grew by more than 1,100 percent, a battle is roiling over the amount of money foundations should be paying out. The big winners or losers will be the taxpayers, who subsidize the formation and operation of these organizations.

Bill Gates may be one of the greatest philanthropists of our time, but remember that when he put $17 billion into the Gates Foundation last year, his gift was not entirely free. It cost taxpayers $3.4 billion in lost capital gains taxes, because foundations are virtually tax-exempt.

This tax subsidy is meant to encourage giving. But is it accomplishing that goal?

Under federal law, private philanthropists must spend a minimum of only 5 percent of their foundations' assets per year--a figure set in 1981 to help foundations rebuild their asset base after a decade of poor investment returns. This 5 percent includes not only grants, but also capital expenses (like new buildings) and administrative expenses (including often-handsome salaries and travel expenses for foundation officials), bringing the actual giving of many foundations to just 3 or 4 percent.

Over the last 20 years the Standard & Poor's 500 has returned 17.6 percent a year on investments--and returns are tax-free for philanthropies. Thus with assets of foundations now inflated to a total of more than $330 billion, the charities look more like investment banks than groups established to give away money.

The Robert Wood Johnson Foundation saw its asset base grow more than $1 billion, or 16 percent, in 1997 alone. The C.S. Mott Foundation's assets have grown 176 percent, from $838 million to $2.3 billion, in the past decade. The Ford Foundation has had portfolio growth of 15.3 percent over the past three years. Yet the Council on Foundations, the umbrella group that includes these three foundations and most of the wealthiest philanthropic organizations, wants to keep the rule allowing them to keep 95 percent of their money.

Another group, the National Network of Grantmakers, recently said the 5 percent rule on spending was too low and called on foundations to voluntarily pay out at least 6 percent of their assets in grants. But even that would fall short. A required payout rate of only 8 percent would release billions to nonprofit groups helping with education, early childhood development, job preparedness and other needs.

Many foundation leaders agree with us. At a recent meeting of the Environmental Grantmakers Association, Ted Turner said that his foundation would be giving away 10 percent, and he called on others to follow his lead. The Jessie Smith Noyes Foundation has paid out over 7.3 percent of net investment assets for the last three years. The Needmor Fund, a Colorado foundation that aids poor communities, has an annual payout rate of 11.1 percent.

In his recent budget proposal, President Clinton called for simplifying the tax rules for foundations--a long-needed change. But hand in hand with granting this benefit, Congress should increase foundations' payout requirement to at least 8 percent a year. It's time for private foundations to begin to give away an amount that reflects their share in the economic boom and provides the taxpayers with a fair return on their investment.

Amy Domini is the founder of Domini Social Investments. Thomas Van Dyck is the founder of As You Sow, an environmental foundation in San Francisco.

(c) 2000 published by The New York Times Co. Reprinted by permission.