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Populist wave of resentment not likely to be turned back by an abstruse discussion of the finer points of tax law.

If anyone doubted that, sooner or later, Congress would start eyeing foundation endowments as a source of emergency funding for nonprofit organizations hard-pressed by the pandemic, then he or she hasn’t been paying attention. That moment has arrived.

In a series of op-eds (see, e.g., here, here, and here) and interviews in the nonprofit sector’s leading publications, Scott Wallace, co-chair of the Wallace Global Fund, and Chuck Collins, director of the Charity Reform Initiative at the Institute for Policy Studies (IPS), have introduced the idea of an “Emergency Charity Stimulus,” to be included in the next relief bill to emerge from Congress. Other groups have joined the call, including Patriotic Millionaires and Voices for Progress.

In an IPS policy brief, Collins and Helen Flannery call for “enact[ing] a three-year emergency mandate requiring private foundations to double their annual required payout, from 5 percent to 10 percent.” Three items could not be counted as payout: donations to donor-advised funds (DAFs); investment in private corporations; and “anything more than a modest percentage of overhead expenses.” In addition, the 10%-payout requirement would be extended to DAFs, which don’t have a payout requirement now. 

These measures would, the authors maintain, “inject more than $200 billion into the economy, protect jobs in the nonprofit sector, and help fight the coronavirus disaster.”

Crafty

This is a carefully crafted proposal. It bills itself as an “emergency,” three-years-only measure. It thereby avoids the thickets of controversy surrounding perennially futile efforts to increase permanently the payout, to term-limit foundation lifespans, and to ban overhead costs as counting toward payout. The foundation sector’s lobbying arsenal is full of weapons addressing these proposals, which they characterize as existential threats to philanthropy itself. We’ll see what they have to say about a one-time-only emergency measure—that is, beyond making the valid point that emergency revenue measures are seldom confined to the emergency.

The proposal comes at a perfect time for its proponents. The initial two waves of reasonably generous, federally funded legislative relief have been passed, but the economic problems facing nonprofits are still urgent and severe. If the federal government is willing to dig so deeply into its own pockets, what could seem more reasonable than tapping into foundation endowments to shore up philanthropy’s own neighboring institutions?

Were foundations already dipping generously into their reserves voluntarily, legislation wouldn’t be necessary. And some philanthropies are indeed responding.  As Alex Daniels noted in The Chronicle of Philanthropy, the Wallace Global Fund itself is increasing its payout to 20%. Nine philanthropy-serving organizations recently called on the sector to increase grantmaking “even if it means liquidating endowment assets when their values have sunk.” And, of course, readers of The Giving Review know that we too have urged foundations to spend “considerably more” than the current five-percent minimum.

But Ryan Schlegel at the National Center for Responsive Philanthropy points out that, during the last recession, foundations’ “overall sector funding dipped as much as 10.5% at the height of the Great Recession. In fact, it wasn’t until 2013 that levels matched 2007 giving levels.” There is as yet little reason to be hopeful for increased voluntary spending this time around.

Indeed, there are substantial indications that the response might be worse, and that the general public is taking notice. We’ve witnessed activity that can only be described as Endowed Institutions Behaving Badly. Several universities with notoriously outsized endowments nonetheless initially sought to take advantage of public-relief funding, as did at least one think tank with a decent bank account. These efforts were only abandoned after an enormous public-relations backlash.

Not so clear

Although it’s clear to sector insiders that foundations are quite different from universities and research institutions, it’s not so clear to the general public. (Take my word for it, after decades of involvement with all these institutions and trying to explain “what I do in D.C.” to folks back home in upstate Michigan.) From the perspective of someone scraping the last dollars out of a vanishing savings account, all endowed institutions look pretty much the same—and look pretty well off. The fact that they are pleading all sorts of reasons for not drawing down their own comparatively plush “savings accounts,” but are instead filing for federal bailouts, is not sitting well.

It’s in this increasingly hostile atmosphere that establishment philanthropy’s lobbyists are going to have to contrive reasons for turning back an emergency levy on its endowments. Yes, as they will point out, it’s private money, and there’s an argument against federal interference with its disbursement. But as supporters of the emergency measure argue, it’s not in fact entirely private money.   

As Collins and Flannery note, “for the wealthiest donors, every dollar parked in their foundation or DAF reduces their tax obligations by as much as 74 cents, leaving people of more modest means to cover public programs.” This interpretation is, of course, open to dispute. But right now, the populist wave of resentment against Endowed Institutions Behaving Badly isn’t likely to be turned back by an abstruse discussion of the finer points of tax law. 

At any rate, as Dean Zerbe pointed out in his recent conversation with The Giving Review, we’ve already seen that anger erupt in last year’s private-realm-invading tax levy against university endowments. That was a measure so lacking in meaningful fiscal consequences that it can only be understood as an expression of public disgust with the endowed high-life. It should have sent a frisson of fear down the spine of every foundation and university lobbyist.

Cadres and conclusions

Although the Emergency Charity Stimulus proposal clearly originates on the political left, it will surely attract some support on the Hill from the populist right as well, as sources tell us. It wouldn’t be the first time. Almost two decades ago, the first sentence of the first op-ed I ever wrote for The Chronicle of Philanthropy went like this: “The debate in the House of Representatives over the Charitable Giving Act of 2003 offered a rare spectacle: conservative Republican legislators quoting with enthusiasm research prepared by the National Committee for Responsive Philanthropy, a left-leaning philanthropy watchdog group.” As historian Ben Soskis frequently points out, this sort of unorthodox coalition between populists from both the right and left is precisely what has fueled the most-significant philanthropic reforms in the past.

A populist conservative buy-in would be even more likely if the stimulus proposal sought to meet the challenge we posed in The Giving Review several weeks ago: “What would Dean Zerbe’s Grandma do?” Zerbe’s mythical Grandma—well-represented on the Hill—still clings to the naïve notion that charity should be about charity, rather than the elaborate schemes of thinly veiled political activism that philanthropy professionals prefer today. 

Were the stimulus measure to include statutory language (however open to interpretation) designed to meet the Grandma test, that would give it a boost among populist conservatives on the Hill. Right now, Collins and Flannery argue against such, in an unexpected paroxysm of privacy-consciousness. 

But they should try harder to ensure that the measure would, as they suggest, “stimulate over $200 billion over three years in additional giving to direct charities in the independent nonprofit sector,” at a time when “millions of Americans are still relying on the support of local nonprofits such as food banks and human services.” 

If the charity stimulus ends up assisting cadres of ideological activists rather than “direct charities” like “food banks and human services,” Zerbe’s Grandma is likely to conclude that this is yet another example of Endowed Institutions Behaving Badly.

We at The Giving Review continue to hope that foundations will rise to the occasion and voluntarily spend considerably more than the mandatory five-percent payout in the face of this emergency. But we would not be surprised if the proposal for a “charity stimulus” gathers support on the Hill from an unorthodox coalition spread across the political spectrum. 


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