Imagine yourself a trustee of a charitable foundation. It is your job to collaborate with 11 other trustees to decide how to distribute charitable funds to organizations that have requested your support. In a typical year you would have $1 million to distribute but the requests this year amount to $2.5 million. All the organizations have proven themselves to be effective in contributing to the social and financial well being of some of the poorest citizens. Your job is to choose how to distribute those dollars.
Your decisions will be informed by written analysis provided by competent program officers who have conducted all the “due diligence” on the organizations making sure the administration is solid, that the board is contributing to the operational expenses and that the financials are in order.
The meeting begins and you are informed that due to the economic collapse, the money you have to give out is reduced from $1 million this quarter, to a mere $350,000. You know that some of these organizations and the great programs they deliver will receive much less funding from you than in prior years. Other organizations will not likely survive because your past grants gave a credibility to them that enabled them to leverage funds from other foundations and some governments.
Included on the list are: The Second Harvest Food Bank (read their intro page)
Also, there are several requests to support alternatives to failing public schools like those described in my favorite HBO series The Wire.
Given the crisis in education in public schools and knowing that each year thousands of young people are lost, do you consider the request from schools like those of the Cristo-Rey network that are transforming the lives of children and families in inner city neighborhoods. These schools like other faith-based receive no State support and will not survive without private individuals and foundation support. The total requested from four of these schools is $125,000.
In the Health and Social Services areas, there is a request from Providence House that provides a shelter for homeless women and their infants. They need a new roof on the building which costs $150,000.
Then there is the Youth Arts Program for schools. Without the support of the foundation they will have to cut their artist in residency programs in schools. Children in seven targeted public schools will NOT get any exposure to art curriculum unless they get at least $50,000.
There is the Free Clinic, serving the needs of the ever-expanding number of medically uninsured and underinsured. They have asked for $50,000 to assist with a pharmacy respository that will provide desparately needed medicines to those in need, especially the alarming number of uninsured patients with clinical mental illness.
Their counterpart, the Federally Funded Community Health Center lost out on a $700,000 federal grant they hoped to secure and must now ask for $250,000 to help them get through a cash flow challenge.
There are many other worthy organizations on the list.
So, how do you make your decisions?
Direct all money to the Second Harvest Food Bank that will provide another six months of food to hungry families? What about that great faith-based schools which over the past ten years accepted children from failing public schools and in one year provides remediation that gets them to grade-level reading and math. Ninety-eight percent of their children go to college whereas their friends who remain in the public schools drop out or fail to graduate and never get to college.
Do you direct all money to the free clincs to help the unisured. What happens next year when they ask again but at increased levels?
Trustees at the foundation I work with will be faced with very similar situations when we meet. This will not be the first time difficult decisions are to be made, but the current economic climate has made it even more difficult.
Family foundations function under a set of rules established by the Federal government and the Internal Revenue Service. The States Attorney General has the duty to make sure the charitable institutions are registered and that they are complying with the federal regulations. The State Attorney General has the power to revoke the charitable status of an organization. If you are interested in the federal rules and regulations on foundations and nonprofits Marion Freemont-Smith’s book, Governing Nonprofit Organizations: Federal and State Law and Regulation,is by far the most comprehensive.
Briefly, the government allows families of wealth to establish foundations as charitable entities . Instead of going to the government as taxes, this money is invested in with managers and typically include a mixed portfolio that inclues equities (stocks) and fixed income (bonds). Whereas taxes would collect the dollars and direct them to general funds for immediate needs, foundation dollars are invested with the hope that they would earn between 10 and 17% interest on the principal. Rather than congressional representatives appropriating laws that will spend tax dollars, family foundations are overseen by citizens who serve as stewards of these funds. They are charged with allocating those funds, just as congressional representatives approve laws that allocate funds for many projects, including bridges to nowhere 🙂
The IRS is very specific about how these foundation funds must be directed. For the most part only agencies that IRS determines to be charitable entieis are eligible recipients of foundation dollars. There are exceptions for individuals but in all cases, the funds must be used for charitable purposed or to benefit the community at large.
As stewards the trustees must abide by the government rule that requires of minimum of 5% of the interest earnings on the endowment must be “paid-out” for the benefit of the community. So, a family foundation with $100 million dollars must pay out an minimum of $5 million year on a rolling average of three years. Ninety-nine and 44/100% of family foundations I know take their job VERY seriously. Distributing $5 million responsibly to worthy institutions is a complicated endeavor. Doing it well requires time, research analysis. There are a few stories of foolish and/or ignorant foundation trustees that misappropriated funds for their own enrichment. The press loved those stories which resulted in an expensive and public witch hunt against foundations and people of wealth headed by a federal bureaucrat named Dean Zerby serving as Sancho Panza to the quixotic and self-aggrandizing Sen. Chuck Grassley. Fortunately most legislators have realized the value philanthropy plays in this country and the punitive legislative responses by Sen. Grassley have subsided for the moment.
One useful way to understand how philanthropic decisions can be made by trustees of family foundations or by individuals for that matter is the Philanthropy Toolbox which I believe was developed out the Center on Philanthropy at University of Indiana. The toolbox is really a spectrum of philanthropy that categorizes types of philanthropic giving. I used the following slide show to demonstrate the types of giving.
The categories serve as headers and we “plot” all grant requests under each of the categories to get a sense of where the family is directing its giving. This exercise allows the trustees to see where they have concentrated their giving over periods of time. Of the organizations I described above, think of where you would place them among the categories within the toolbox. The try to determine which request and category on the spectrum would give one organization priority over another. Now you have entered the world of a family foundation trustee.
All the requests that come to the trustees for consideration are organizations that are doing great work and having positive impact on the lives of people they serve. Decisions as to where to allocate funds and why can be personal and vary from one individual to another. What makes foundations exciting places to work is that each person shares his or or reason for making the decisions they do. the others listen to their points . Some agree and some don’t. Debate is likely to ensue. At the end of the meetings decisions are arrived not by secret ballot but by consensus. On other occasions, I have described board meetings to be similar to deliberations by congressional delegations either federal or state. Trustees are usually people of varying backgrounds and even level of wealth. They range on the political spectrum and have deeply held passions. Representatives from one generation often have points of view and interests that differ from their parents; so in many ways their portraits reflect the diversity of opinion, character and even race that one sees among citizens serving in elected office. The image of foundation trustees as a homogeneous club of bow-ties and boiled wool is simply not true. It is a miniature version of any civic organization gathered to enhance the common good.
The economic crisis is placing pressure on State, Federal and local governments budgets that have not been seen since the early 20th Century. Scarce resources may place pressure on family foundations in the cross-hairs of government and question whether they and their endowments should continue to exist. This is a challenging question that was discussed recently at a conference at the National Center for Family Philanthropy. One of the sessions addressed the role of family philanthropy in a democratic society. It is worth listening to the panel moderated by my colleague Lance Lindblom, Director of the Nathan Cummings Foundation.
If you were to be part of the decisionmaking on the board, you would be reminded that the Federal government requires a minimum payout of 5%. You and board could make a decision to pay well beyond the 5% minimum to meet the needs of the community in times of economic distress. Of course one would need to balance generosity with prudence. Anyone who creates a foundation must be an optimist by nature. Doing so assumes that a carefully managed endowment will grow and will remain as an asset to draw upon to help those in need and, at times, support innovative and creative programs that challenge the status quo. The two brothers Eric and Evan Nord who established the Nord Family Foundation were men of profound optimism and faith in the community. They were known to say on many occasions, when the times are difficult the foundation has a responsibility to make sure it does not cut back on grantmaking, but be extra careful about directing funds that will have the greatest impact on the community. Most importantly, the funding should challenge the larger community to give what they can – personal giving – that will help their neighbors. With that in mind, I anticipate some of our grantmaking in the future will be challenge grants that will require others to give of themselves in either money or time.
Your decision to choose one group over the other is neither right nor wrong. Just the fact you bothered to read this far into the blog reflects your own interest in philanthropy and giving. Your thoughts of giving to benefit the lives of others honors not only those you consider, but yourself. I leave you with a quote by Thomas Jefferson