On Sunday, May 31, The New York Times published a piece by Philanthropy Insider editor David Callahan titled "Who Will Watch the Charities?" in which he connected recent news media coverage of fraudulent cancer charities and the donor solicitations by The Clinton Foundation to the activities of private grantmaking foundations. The philanthropic sector has responded strongly to Callahan's piece by calling out the ways in which it disagrees.
Philanthropy New York wrote to the editors of the New York Times:
In his disingenuous opinion piece “Who Will Watch the Charities?” David Callahan asks an important question, but one that already has an answer. New York charities have an effective regulator: the New York State Attorney General and his Charities Bureau. The Nonprofit Revitalization Act, implemented last year, is an important indication that New York’s watchdog is indeed paying attention.
Callahan conflates very different kinds of organizations. He treats deceptive cancer charities and public foundations as if they are the same as endowed private foundations, and then takes a problem from one to create a solution for another. Charity scams in the nonprofit sector are abhorrent. They deserve serious attention. Instead, Callahan stiches together the latest scandalous headlines with lots of holes in his net, but wide enough to ensnare tons of philanthropic bycatch. Oversimplifying the sector and then creating “fixes” based on the bad behavior of a few is a great way to grab attention, but a poor way to actually increase transparency and accountability.
Characterizing the charitable sector as the “Wild West” is wholly inaccurate hyperbole, in a piece that is literally full of it. The sector benefits from thoughtful and strategic thinking – not cheap shots.
Ronna Brown, President
Michael Hamill Remaley, Senior Vice President, Public Policy & Communications
Philanthropy New York
The Forum of Regional Associations of Grantmakers wrote to the editors of the New York Times:
We applaud the state attorneys general and other regulators for cracking down on fraud by four charities highlighted in David Callahan’s May 30 Op-Ed (Who Will Watch the Charities?). The case he cites answers his own question and confirms the oversight process for the charitable sector is working.
Representing 5,500 organizations nationwide, our network of regional philanthropic associations works with state charity officials and nonprofit associations on effective governance, finance, administration and grantmaking for our member foundations and the thousands of nonprofits they support.
Our communities’ needs are great, and while fraud must be exposed and laws enforced, the charitable sector has a long history of effective partnerships with government. Callahan’s over-statement of the problem and confused recommendations are not helpful. Frankly, we believe government should do more to encourage charitable giving.
Americans have the freedom to support charities of their choice, without government determining which are more worthy. We must strengthen that tradition of U.S. philanthropy – not undermine it – to meet the challenges that limit opportunities for all to succeed.
David Biemesderfer, Chair, and Mary O'Neill, Interim Director
Forum of Regional Associations of Grantmakers
The Council on Foundations wrote:
David Callahan (“Who Will Watch the Charities?,” Sunday Review, May 31) cites recent charity fraud as justification for new regulations on philanthropy.
State and federal regulators already oversee the activities of philanthropic organizations. In this case, the Federal Trade Commission and numerous state attorneys general worked together to uncover and address the fraud. The system worked.
This effort should be applauded as an example of how to maintain the integrity of our charitable sector.
No industry will be able to eliminate all instances of bad behavior. But government oversight can be vigilant and punish fraudsters, as it did in this case.
Additionally, the jump to new regulation doesn’t have a landing. Government can’t credibly determine a national hierarchy without the politics of favoritism. Donors should be free to choose their charitable preferences. Some want to address veterans’ homelessness, while others prefer to support victims of domestic violence.
Mr. Callahan’s proposal to expand mandatory payout ignores the value of sustained long-term philanthropic investment in support of the public charities addressing the issues of today. We need short-term fixes, but we also need long-term strategies that develop over time. Only then will philanthropy be able to address the most persistent and vexing challenges of our time.
Vikki Sprull, Steve Taylor and Steven Woolf
Ms. Spruill is president and chief executive of the Council on Foundations. Mr. Taylor is senior vice president and senior counsel for public policy at United Way Worldwide. Mr. Woolf is senior tax counsel for the Jewish Federations of North America.
Only the Council on Foundations letter was chosen for publication by The New York Times editors.
If your organization responded to the "Who Will Watch the Charities?" piece and would like to share it with us, please email us.
The Connecticut Council for Philanthropy wrote to its members:
In Connecticut we have a very positive and productive relationship with our regulators to ensure that bad actors are weeded out and the charitable sector continues to grow, operate within the regulatory framework with integrity and continues to serve the people of Connecticut and beyond. The Connecticut Council for Philanthropy, our board and members, subscribe to the highest principles and best practices in alignment with our mission to promote and support effective philanthropy.
Below please find a link to our website and one of our core resources Guiding Principles and Effective Practices for Connecticut Grantmakers as well as others from the field that exist to maintain the integrity and accountability of the field. Thus far, along with our regulators, Philanthropy and our supporting organizations have done a good job of keeping us honest and strong in service to the common good with very few exceptions.
Last Sunday, David Callahan, founder and editor of Inside Philanthropy, submitted an op-ed to the New York Times, “Who Will Watch the Charities?”. I wanted to share some of my colleague’s responses to the op-ed as I feel they are consistent with my thinking. [PNY and Forum pieces followed.]
Maggie Gunther Osborn, President
Connecticut Council for Philanthropy
The Center for Effective Philanthropy's Phil Buchanan wrote on the CEP blog:
In a toughly-worded op-ed in Sunday’s New York Times headlined “Who Will Watch the Charities?”, Inside Philanthropy founder and editor David Callahan argues that philanthropy “is a world with too much secrecy and too little oversight” and that “perhaps no sector is less accountable to outsiders.”
Callahan’s op-ed confusingly conflates operating charities (most of which get by on small budgets) with large foundations and ultra-wealthy donors, and it’s not always clear which entities are the focus of his concern. But he seems especially worried about large foundations, and he points in particular to the Clinton Foundation as an example of the consequences of “lax oversight.”
(An aside: The Clinton Foundation, it seems to me, is actually a fairly unusual organization — in a whole host of ways — in the landscape of U.S. philanthropy. So I am not sure how much we should draw conclusions about the sector from its troubles, whatever they may be.)
While I applaud the call for more openness, it’s certainly not clear to me that other sectors — business or government — are exactly leading the way on the transparency and accountability fronts. Callahan calls the nonprofit sector “the Wild West,” but that feels like a more apt description of the finance industry pre-2009.
But, more importantly, most of Callahan’s proposed solutions are neither practical nor grounded in any sense of what’s transpired in the nonprofit sector in recent decades. Some would do more harm than good.
Callahan proposes four “reforms.” The first, to bring “more transparency to charitable donations,” is hard to argue with.
But it goes downhill from there.
He calls for: “varying levels of tax exemption, or none at all, depending on the actual public benefit provided by a nonprofit, measured independently”; an increase in mandated payout for “foundations and other philanthropic funds” to “say 10 percent”; and, finally, a “better accounting of whether philanthropic dollars are effectively spent” because “it’s problematic that there’s no way to assess the performance or impact of such a large, rich and influential part of American society.”
To ensure all this happens, Callahan argues, “It’s time to create a new federal bureau to police this sector.”
But do we really want to hand over judgments about the relative worthiness of charitable goals to a central government authority? Callahan does not seem to understand that the “independent measurement” of “public benefit” that he calls for as a way to assess how much tax exemption a contribution deserves is not as simple as it sounds. Is a charity or foundation working to ensure convenient access to safe abortions providing public benefit? What about one working to promote abstinence-only education or to encourage adoption instead of abortions?
Is a charity or foundation supporting school choice and the creation of charter schools providing public benefit? What about a charity or foundation opposing the creation of charter schools and encouraging a focus on strengthening traditional neighborhood public schools?
It depends, of course, on your point of view.
Look, I agree wholeheartedly with Callahan that assessment is crucial — I’ve spent 14 years working on this with my CEP colleagues. But assessment happens in the context of goals, and goals are shaped by values and judgments which, in a free and democratic society, will vary. As John Gardner noted, the nonprofit sector is one in which organizations are created “to honor the worthy and smite the rascals with everyone free to define worthiness and rascality.”
Callahan quotes Tocqueville, but seems not to grasp that the vibrant civil society that Tocqueville observed is grounded in a belief that citizens should be free to pursue their goals — their visions of what serves the public good — and not be forced to bow down to a central government’s conception of what that is. (For more on the importance of this kind of freedom, see, for example, the American Revolution.)
Also strangely missing from Callahan’s op-ed, which refers to a “backdrop of secrecy” in the sector, is any acknowledgment of the important changes over the past two decades. In fact, there is much, much more information readily available to donors and the public today than there was 20 years ago. From Guidestar to Charity Navigator to BBB Wise Giving Alliance to GiveWell to GreatNonprofits, and others, there are now numerous resources available to those seeking information about a nonprofit’s finances and its goals and strategies.
None are perfect, of course, but for Callahan not to even nod to these efforts seems flaky at best.
When it comes to assessment, there’s been a similar shift in the sector, which, again, Callahan ignores.
“Ideally, the philanthropic sector would take the lead in finding ways to assess itself,” writes Callahan, presumably referring to foundations.
But, in fact, this is happening. Foundations have spent considerable energy and resources on assessment in recent decades — and the trend has been toward greater effort and prioritization of assessment, as CEP’s research has documented.
CEP’s very existence is evidence of this: the fact that several hundred foundations have used our assessment tools (including nine of the largest 1o U.S. grantmaking foundations) or that nearly 50 foundations support our work — and our research focused on improving foundation practices — is telling. (Certainly the more than 300 leaders of large foundations who gathered at CEP’s conference two weeks ago to focus on assessing and improving performance seemed pretty sincere to me.)
The Evaluation Roundtable — a network of evaluators of staffed foundations — meets regularly to share assessment strategies and lesson learned.
Foundations such as Robert Wood Johnson Foundation, The Wallace Foundation, and others have for decades invested significantly in evaluation — including randomized control trials — and routinely made public the results of their evaluations, whether good or bad.
The Edna McConnell Clark Foundation has championed and executed an evidence-based approach to funding and attracted the support of numerous other foundations and donors — support to nonprofits delivering great results from Nurse Family Partnerships to Youth Villages and a host of others.
And, in an op-ed about transparency and accountability of foundations, you’d think Callahan would have mentioned that Foundation Center has been assertively promoting foundation transparency through its Glasspockets initiative. Or that a consortium of large foundations — including Hewlett and Ford — recently launched the Fund for Shared Insight to encourage foundations to be “more open about what we do, how we work, why we make the decisions we do and the lessons we have learned — both the good and the bad?” Or that the foundation-funded National Committee for Responsive Philanthropy (NCRP) launched last year an effort called Philamplify to provide very public feedback to foundations.
None of the many efforts to address the very issues he writes about are mentioned by Callahan! Even in the context of a tight word limit, it would have been possible to make clear the range of work underway.
What about the call for a higher payout? I’ll leave it to the foundations to explain why a mandated 10 percent payout would be challenging, especially for those that are seeking to honor their donors’ wishes to manage their foundations to exist in perpetuity. I’d be the first to agree that too many donors and foundations default to perpetuity without sufficient thought, but it hardly seems fair or appropriate to arbitrarily double the payout requirement on those institutions, which were created with the understanding that they’d be allowed to exist in perpetuity, by legislative fiat.
I am all for more debate about the roles and responsibilities of foundations and nonprofits. I am all for asking more of the tough questions. I am all for calls for more focus on assessment, openness, and transparency. And I think even wacky, misguided policy proposals can be healthy to stir things up.
But can we please have at least a little context, a little nuance, and just a little more grounding in the facts?
National Council of Nonprofits President Tim Delaney wrote on the organization's website:
Muddled Misunderstandings Lead to Misguided Reforms
Two sets of high-profile media stories involving extreme outliers – law enforcement taking action against individuals and sham groups that were masquerading as cancer “charities” to swindle $187 million from the public, and the one-of-a-kind Clinton Foundation founded by a former President and a current presidential candidate – have pundits wagging their fingers in scolding fashion at foundations and nonprofits. But muddled misunderstandings make for misguided reforms, as shown by David Callahan’s recent opinion piece.
That piece at various points uses the terms “nonprofits,” “charitable,” and “foundations” interchangeably, as if they mean the same thing. They don’t. The distinctions are important, because different laws and limitations apply. Such lack of accuracy about fundamental matters infects the entire piece. For instance, it calls for greater disclosure of who is making “charitable donations” to “groups that work to sway public policy.” If Callahan is concerned about the dark money being channeled through non-charitable nonprofits (such as 501(c)(4) social welfare organizations) to partisan political activities, many would agree. But he referenced “charitable donations,” which can be made only to 501(c)(3) charitable nonprofits that already are prohibited from engaging in partisan electioneering activities. So one can only conclude that he wants charitable nonprofits that engage in advocacy under the First Amendment to fill out even more paperwork for the government. He is certainly entitled to his opinion, but a unanimous U.S. Supreme Court ruled otherwise, in N. A. A. C. P. v. Alabama (1958) (a charitable nonprofit that was working to sway public policy in favor of civil rights did not have to disclose the names of its members, who contributed to it, to government officials in the South).
For those interested in fact-based solutions, here are four that would protect the public and legitimate charitable nonprofits from abusive behavior by nefarious individuals:
1. Congress should apply the funds collected through the Foundation Excise Tax to their intended purpose. In 1969 Congress established a special tax on private foundations for the express purpose of covering “the cost of a more extensive and vigorous enforcement of tax laws relating to exempt organizations.” Yet Congress has never applied those tax receipts to their intended purpose; instead, it has sent them to the general account. In recent years, Congress has compounded that diversion by repeatedly cutting the IRS’ budget, which is now below the level in 2009 with about 10,000 fewer employees. If the IRS doesn’t have the resources to do its job, then responsibility for future scandals belongs to Congress for refusing to apply excise tax revenues as intended: to protect nonprofits, foundations, and the public from swindlers.
2. Congress should stop the damage caused by the short-sighted rubber-stamping of all applications for charitable status. It’s important to recognize that Congress has so underfunded the IRS that the agency is no longer performing its most basic duties. Last year, in the face of significant budget cuts and close scrutiny of its growing backlog, the IRS ignored warnings from its own Advisory Committee on Taxation, the National Association of State Charity Officials, the National Council of Nonprofits, and others as it virtually eliminated its up-front screening of applications for charitable status. It did so by adopting both an expedited, rubber-stamp approval process on all applications for charitable status and a feeble application form (1023-EZ) for supposedly smaller groups. These steps effectively removed all safeguards needed to screen out bogus operators. The IRS has done “away with a review intended to counter fraud and prevent political and other noncharitable groups from misusing the tax code,” according to Time magazine. Now the IRS is handing out tax-exempt status like candy at Halloween. The situation is so bad that Nina Olsen, the National Taxpayer Advocate, observed that it is “making a mockery of the I.R.S.’s significant oversight function.”
3. Legislatures should provide state charity officials with the resources necessary to perform their oversight roles. Our Public Policy Agenda has long called for state legislatures to provide “adequate funding for quality education, transparent oversight, and fair enforcement activities of state regulators charged with promoting nonprofit compliance and protecting the public.” Why? To keep fraudsters out of the sector and protect not only the donating public, but also the hundreds of thousands of nonprofits and foundations making a difference in their communities from having their reputations sullied by bad actors.
4. Charitable nonprofits should continue training on accountability and transparency. Board and staff members of bona fide charitable nonprofit regularly look to “best practice” guidance, such as the Principles and Practices and Standards for Excellence® promoted by state associations of nonprofits, to ensure they are operating transparently and accountably. Such efforts at self-regulation are an important part of any regulatory regime. But that alone will not drive out con artists from a sector, industry, or profession. That‘s why Congress needs to give the IRS the resources to do its job, and state legislatures need to invest in education, oversight, and enforcement for the nonprofit community.
The problem is not with the hundreds of thousands of nonprofits and foundations that serve their communities ethically every day. Nor is it a lack of government regulations. Rather, the real problem rests with lawmakers who set up regulatory systems but then fail to adequately fund them.
Council of New Jersey Grantmakers President Nina Stack wrote on The Geraldine R. Dodge Foundation blog:
Hyperbole 101: Charitable Sector as Wild West
There was a piece in the New York Times two weeks ago that has caused quite a stir within the philanthropic sector. My colleagues within regional associations of grantmakers as well as other colleagues representing philanthropy and nonprofits around the country have been quite proactive in responding to what has generally been seen as a commentary that is at best ill-informed and at worst disingenuous.
Who Will Watch Charities? was written by the founder of a fairly new website/blog journal called Inside Philanthropy, David Callahan. In his piece, Mr. Callahan conflates different types of charities with private foundations and individual donors. He claims the charitable sector – the entire of the sector it seems — is like the Wild West, a term that brings to mind an image of rampant lawlessness. Certainly dramatic language… and one that serves no legitimate purpose in discussing the social sector and recommending improvements.
Since the piece came out there have been a number of varied and thoughtful responses that strike me as far better informed and definitely worth a read.
First and foremost is Phil Buchanan from the Center for Effective Philanthropy – A Misguided Call for Reform. Among the more disturbing recommendations made by Mr. Callahan is the suggestion that there is a hierarchy of “worthiness” (my phrase, not his) of causes that philanthropy supports and nonprofits work to address. This is the belief that some charities are more deserving than others. Callahan also suggests that the IRS or some other federal oversight agency should determine “public benefit.”
Buchanan rightly asks…do we really want to hand over judgment about relative worthiness to a central government authority? Is a charity or foundation working to ensure convenient access to safe abortions providing a public benefit? Is a charity or foundation working to ensure clean water providing a public benefit? Is a charity or foundation working to educate the public and stakeholders about policy issues impacting their state providing a public benefit? Eye of the beholder certainly comes to mind as well as a citizen individual’s perception of public good.
I’m also struck by the response from the National Council of Nonprofits by Tim Delaney. In Muddled Misunderstandings Lead to Misguided Reforms, Delaney provides four “fact-based solutions” to “protect the public and legitimate charitable nonprofits from abusive behavior by nefarious individuals.” Among these an issue that the CNJG Leadership and Policy Committee has long been concerned with – funds collected via the Foundation Excise Tax should be used for their intended purpose to strengthen the sector as opposed to being diverted into the general fund.
Finally, I invite you to read the many thoughtful and fully informed responses from regional foundations throughout the country – from Philanthropy New York to the Florida Philanthropy Network to the Connecticut Council for Philanthropy and Washington Regional Association of Grantmakers.
Perhaps all this debate further brings home what the philanthropic sector has known for some time: philanthropy must get better at telling its stories to the public and to stakeholders. Not only should these stories include the impact of grantmaking, but also that foundations provide a small percentage of all giving in the United States. Most giving is provided by individuals. AND both the nonprofit and philanthropic sectors must get better at helping the public and stakeholders understand the work of social sector and the nonprofit business model in general.
I end with the letter the Forum of Regional Associations of Grantmakers wrote in response to this article. The Council of New Jersey Grantmakers is one of 33 regional associations that is a member of the Forum. And I concur fully with this informed letter. [Forum letter to the NYTimes Editor followed.]
Washington Regional Association of Grantmakers President Tama Copeland wrote on the organization's site:
The importance of seeing the impact of philanthropy
On May 31, the New York Times published an op-ed entitled “Who Will Watch the Charities?” written by David Callahan, the founder and editor of a site called Inside Philanthropy. In it, he raises many concerns that seem to surface from time to time about the perceived lack of oversight and transparency of philanthropy, the ineffective use of funds, and what he refers to as the “charade that all philanthropy is somehow charitable.”
His comments have created a bit of an uproar in the philanthropic community. Some have noted his conflation of private foundations and public charities. Others have commented on his flippant likening of the charitable (or my preferred term, “social profit”) sector to the Wild West, suggesting an “anything goes” reality. That is not the case.
Contrary to what Mr. Callahan’s title suggests, there is a system of oversight in place that rests with the federal and state governments. What is missing is just plain sight – the actual act of seeing. Ironically, while the general public can see the results of philanthropic investments in their communities, they may not realize, for example, that private foundations are what enabled that new job training program to open or that senior housing center to be built. Local philanthropy is often invisible.
Private foundations are deeply engaged in philanthropy to effectively address entrenched social problems. (We highlighted this impact a few years ago in our report Beyond Dollars: Philanthopy and BIG Change in the Greater Washington Region, which we shared with our region’s Congressional delegation to make sure they were aware of the impact). Private foundations and their social profit partners are both meeting immediate needs in our communities, as well as working to create structural change so that everyone can thrive.
Painting the social profit sector with a broad brush, as Mr. Callahan does, is a disservice to the important work that both private foundations and their grantees are doing to make our country a better place for everyone. Can that work be improved? Of course. But maybe the real questions is “who will celebrate philanthropy?”
Philanthropy Roundtable Senior Vice President, Public Policy, Joanne Florino wrote on the Alliance for Charitable Reform website:
High Noon For Charity?
A recent New York Times op-ed by David Callahan offers a long list of inaccuracies and dangerous ideas regarding the regulatory oversight of charities. Callahan is the founder and editor of the Inside Philanthropy digital media site. His piece was ostensibly written in response to recent charges brought by federal and state authorities against four cancer charities, and also to ongoing reports about fundraising and record-keeping at the Clinton Foundation. In reality, however, the latest nonprofit scandal is simply an opportunity to rehash proposed “reforms” that jeopardize both the independence of private institutions of civil society and the private giving that supports those vibrant and diverse entities.
Callahan argues that the laws governing charities are flawed and that those responsible for monitoring the sector are not doing their jobs very well. “Philanthropy…,” he writes, “is a world with too much secrecy and too little oversight.” While acknowledging Alexis de Tocqueville’s recognition that an independent civil society is a hallmark of American democracy, he ignores Tocqueville’s warnings about the dangers of an overreaching government. Instead, Callahan labels the private donations of generous Americans (totaling over $358 billion in 2014) as “public money,” refers to tax exemption and the charitable deduction as “subsidies,” and proposes restrictive laws and a greatly expanded role for government – all of which threaten the right of Americans to choose how and where to spend their charitable assets
Every sector will always have its share of bad actors. Nor is any sector immune from sloppy record-keeping, as the Clinton Foundation is painfully learning. But to suggest that the nonprofit sector is “like the Wild West” is silly. Ask any charity or foundation executive about federal and state regulation and you will get a litany of rules and protocols that must be observed, recorded, and reported. The Internal Revenue Service and state charity officials demand both accountability and transparency when it comes to matters like compensation, fundraising, grantmaking, restructuring, and a host of other nonprofit management concerns. Their work is complemented by codes of conduct and examples of best practices offered by national organizations like the Association of Fundraising Professionals, the Council on Foundations, and the National Council of Nonprofits. State and regional associations of funders and nonprofits also provide helpful guidance. No one I know thinks our model resembles the OK Corral.
Callahan also mischaracterizes the tax exemption and charitable deduction as “subsidies,” and he is wrong to say that philanthropic dollars are “public money.” Tax exemption protects the independence of private institutions of civil society from government interference. The charitable deduction recognizes that donations given away for charitable purposes provide no tangible return benefit to the donor, and should therefore be excluded from the donor’s income. The charitable deduction is unique among all other deductions in this regard, and its presence in the tax code is an accurate reflection of the voluntary donations of personal time, individual talent, and private treasure which have supported what Tocqueville called the “intellectual and moral associations of America” since the nation’s earliest years.
In The Philanthropy Roundtable’s publication, How Public is Private Philanthropy, legal experts Evelyn Brody and John Tyler demonstrate that “foundations and other charities are not inherently public bodies and their assets are not ‘public money.’” These organizations are obligated to provide public benefit and pursue charitable purposes as defined by the tax code and further interpreted by administrative and judicial rulings. They are also obligated to comply with the laws and regulations which guard against private inurement. But this arrangement, the authors conclude, “does not otherwise compromise or undermine the inherent private character of these organizations and their entitlement to autonomy and independence.”
Bad assumptions lead inevitably to bad ideas, and there is no shortage of those in Callahan’s piece. He first suggests “bringing more transparency to charitable donations.” In his view, donor disclosure should be mandatory for groups that work in the policy arena or are led by former public officials, though he appears comfortable allowing anonymous gifts to hospitals and arts organizations. But there are many hospitals and arts organizations that have policy interests, and the category of “former public officials” is both vague and broad. We can safely assume his concern in the latter case is the Clinton Foundation, but would he also impose donor disclosure on Purdue University, now led by former Indiana Governor Mitch Daniels? What about a small-town community center whose director happens to be a former county legislator? Where would Callahan draw the line?
Readers who see anonymous giving as a virtuous act might well wonder when it became a vice. Many faiths praise the quiet giver who seeks no recognition – although it is also true that public gifts may encourage generosity in others. Individual donors choose anonymity for many reasons – humility among them – but Callahan’s recommendation would affect far more than donor choice.
Maintaining the privacy of donors to public charities guarantees that our most controversial civil society institutions – precisely those who are working “to sway public policy” – can exist in safe space where donors are free from harassment and threats. The Supreme Court’s 1958 ruling in NAACP v. Alabama affirmed that the Fourteenth Amendment protected the NAACP’s right to keep its membership list confidential. Revealing that information, the majority wrote, “is likely to affect adversely the ability of [the NAACP] and its members to pursue their collective effort to foster beliefs which they admittedly have the right to advocate, in that it may induce members to withdraw from the Association and dissuade others from joining it because of fear of exposure of their beliefs shown through their associations and of the consequences of this exposure.” As Callahan himself notes, “Tocqueville was right when he said that a vibrant civil society is a unique strength of American society.” Donor privacy is essential to insure that vibrancy.
His second complaint is that too much giving is defined as charity, and that some “independent” measure of public benefit should be used to narrow that meaning. It’s certainly true that in everyday language, “charity” brings to mind traditional almsgiving, soup kitchens, and Tiny Tim Cratchit. But in the language of our tax code, and the varied facets of American civil society, “charity” is much more.
The IRS website provides a much expanded definition: “The exempt purposes set forth in section 501 (c) (3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”
In fact, the broad discretion of choice provided by the tax code reflects the variety of charitable choices Americans have historically made – choices which include our diverse religious, educational, medical, environmental, civic, and cultural institutions. So when Callahan advocates for a more hierarchical treatment of nonprofits, providing differing levels of tax exemption and deductibility depending on an organization’s perceived value, he is actually calling for a shrinking of civil society. Exactly who, you might well ask, will be making those judgments and how will the “public” in “public benefit” be defined? If government chooses the winners and losers, how can we insure a place for causes deemed politically or socially unpopular? Americans should make their own charitable decisions.
The author’s next criticism is that there is not enough charity. He recommends that the mandatory payout rate for private foundations be increased from 5 to 10 percent, complains that donor-advised funds have no payout requirements, and wonders about the social value of “husbanding” endowments. Nowhere does he mention that donor-advised funds had an average aggregate payout rate of 21.5 percent in 2013, according to the National Philanthropic Trust. Nor does he note that such funds are now the country’s fastest growing philanthropic vehicle because of the ease and convenience they provide to small and large donors alike.
A mandatory distribution (payout) rate (MDR) of 5 percent for private foundations has been part of the tax code since 1981. While critics like to assert that 5 percent has become the ceiling and not the floor, there is plenty of evidence to the contrary. A Foundation Source study of some 89,000 foundations with less than $50 million in assets reported that in 2014, “all foundation sizes in our report exceeded 5 percent MDR, with the mid- and largest-size foundations distributing 7.2 percent of their assets, and foundations with less than $1M distributing nearly twice that percentage (13.2 percent).” Payout rates do drop with foundation size, but even among the largest foundations, payouts typically exceed the minimum requirement. Looking at large endowed independent foundations in the period 2007-2009, the Foundation Center reported that 46 percent of the sample distributed between five and six percent, with nearly 20 percent spending 10 percent or more on charitable distributions.
But actual payout data is only part of the story. A 2013 study by Cambridge Associates makes it quite clear that a mandatory 10 percent payout rate would be a “spend-out” sentence in disguise. The Philanthropy Roundtable recommends that donors give while living and that they strongly consider limited lives for their foundations, especially to safeguard their charitable intent and to maximize their short-term impact on their communities or in specific focus areas. An increasing number of foundation donors and boards are now choosing to “sunset” their philanthropies.
There are, however, also many instances where long-lasting foundations strengthen civil society. Callahan himself seems particularly concerned about the tough issues of poverty and economic mobility – issues which will not be successfully addressed with quick fixes. Foundations based in rural areas may well question whether the “trillions of dollars in new funds…set to flow into philanthropy in coming decades” will ever arrive in the small communities they serve. Many family foundations are intentionally preparing the next generation to address as-yet-unknown challenges. To recommend a one-size-fits-all spend-out plan for all foundations dismisses the benefits of endowed philanthropy and ignores both the right and the obligation of those who serve as stewards of those funds to examine their missions and make the most thoughtful and appropriate decisions about present versus future value.
Callahan’s fourth suggestion is that there should be “a better accounting of whether philanthropic dollars are effectively spent.” The implication is that such assessments are not being done, but that is certainly not the case. As with payout, assessments of performance do not lend themselves to one-size-fits-all solutions, and in any given year foundations experience a broad spectrum of great successes, acceptable outcomes, and disappointing failures. Is it likely that “the threat of regulation clearly in the background” will stimulate a higher quality of grantmaking? Will it encourage foundations to fund risky pilot programs, take chances on unknown individuals, or tackle seemingly intractable problems? Hardly. What it is far more likely to produce is a lot of risk-averse, more-of-the-same grants to well-established organizations.
The current role of federal and state charity oversight officials is to insure compliance with federal and state regulations. That alone is a big job, and one that demands ideological neutrality and professionalism. Adding to that responsibility the assessment of the performance and effectiveness of charities and foundations will guarantee that subjectivity comes into play as regulators now scrutinize organizations’ missions, program and staffing decisions, evaluation methodologies , policy initiatives – one wonders how broad and deep such “accounting” might go. We’ve heard this idea before, notably in 2007 from Steven Miller, then director of the IRS exempt organizations and government entities division and acting IRS commissioner from the fall of 2012 until his resignation in May 2013. It has never been a good idea. Do we want a citizen-driven civil society – which is admittedly messy – or one which must constantly be approved by the overseers?
Finally, in conjunction with his recommendation that government oversight of charities be expanded in significant and dangerous ways, Callahan calls for “a new federal bureau to police this sector.” Again, this is not a new idea – it was proposed in a Congressional Research Service report in 2009. The Philanthropy Roundtable’s President, Adam Meyerson, noted in 2013 that “with some notable exceptions, [the Internal Revenue Service] has been guided by a culture of professionalism, philosophical impartiality, and respect for privacy in its administration of tax laws for exempt organizations. “ A seemingly independent regulatory agency, he added, “would be more likely to be subject to political pressure and manipulation from interest groups within the nonprofit sector itself…” We depend on those who regulate the institutions of civil society to apply the laws in ways that promote citizen engagement and free discussion with minimal intrusion because anything more would always be fraught with politicization and favoritism.
We have seen over-reaction to charity scandals before, and we should note the irony of the loudest voices emerging when bad actors are publicly exposed – at those times when it is most apparent that existing rules and regulators and the oversight of the press appear to be working. Charity critics are certainly welcome to suggest ways to improve enforcement or to propose new rules to address innovations like online fundraising. But any treatise on charity regulation which begins with talk of “subsidies” and “public money” is bound to go awry, and David Callahan’s op-ed is no exception.