Grantmakers should support a House bill to increase the amount of grant dollars paid out by foundations.
H.R. 7, the House version of the Senate's CARE Act, includes a provision to prevent foundations from counting operating expenses as part of their payout rate.
Federal law requires that foundations pay out 5 percent annually, but all of this money does not flow directly to communities because the law allows foundations to include administrative and operating expenses, including trustee fees, travel, rent and staff salaries.
The grant dollars that actually get to nonprofits are therefore substantially smaller than they could be.
The Internal Revenue Service estimates that if the proposal had applied to foundations in 2001, as much as $1.2 billion more could have gone to charitable causes.
And though the bill may increase foundation expenses, the National Committee for Responsive Philanthropy estimates that excluding operating and administrative costs from the payout rate, and maintaining all other expenditures at current levels – including grantmaking – would increase annual foundation spending by a mere four-tenths of 1 percent.
From 1999 to 2001, the National Network of Grantmakers actively called for a voluntary increase in the payout rate, and commissioned a report that argued foundations could spend at least 6 percent in payout without hurting their endowments.
While many foundations are paying out over 5 percent, and many of us are continuing to maintain grantmaking levels despite the downturn in the economy, this has not been the case across the foundation community.
We cannot even begin to estimate the impact of decreased grantmaking on nonprofit organizations.
Opponents of increases in payout have consistently argued that foundations need to minimize spending to save for a rainy day. And it certainly is raining now.
The overall public response from the foundation community to this bill has been alarmist and exaggerated.
Taking out operating and administrative expenses will not "force foundations to choose between efficient and effective grantmaking," as the Council on Foundations insists in its recent flurry of emails opposing the bill.
The bill challenges foundations to maximize their efficiency while delivering more needed grant dollars to communities already in need.
In light of recent scandals involving, among other things, outrageous compensation for the president of the Irvine Foundation, the House is weighing in on this issue.
The Senate and House will have to agree on the language of the final bill in the next few weeks, so there is a great urgency to speak up on this issue as progressive funders who believe that more money should go to non-profit organizations especially in these difficult economic times.
The heart of philanthropy is the benefit received by society through the distribution of resources. While prudent investment is important and relevant to effective grantmaking, the purpose of philanthropy is not the preservation of assets and warehousing of wealth.
As funders, we need to focus attention on people, communities and the need for change. Foundations must make payout decisions based on their philanthropic vision rather than the investment goals of their financial advisors.
As a result of this bill, the money available to nonprofits could increase dramatically. Grantmakers should encourage Congress to vote to take administrative expenses out of the payout calculation so more money can go into communities in need.
Diane V. Feeney, Philanthropy Journal