by Hodding Carter III, President and CEO of the John S. and James L. Knight Foundation
and INDEPENDENT SECTOR Board Member

Congress is considering a measure that would change the rules about the grantmaking of foundations. Section 105 of H.R. 7 would, if passed, exclude administrative expenses from counting toward the minimum payout required by private foundations. INDEPENDENT SECTOR has urged Congress to hold action on the foundation administrative expense provision pending further study, while passing the charitable giving tax incentives contained in the bill.

Hodding Carter III, president and CEO of the John S. and James L. Knight Foundation in Miami and an IS board member, wrote an op-ed piece published in the Miami Herald on July 11, 2003. In it, he articulates very clearly why this issue merits attention but is not ripe for legislation at this time. With Hodding's permission, we are pleased to share his article.

"Proposed Legislation Could Hurt Private Philanthropy"

Hard economic times can spawn proposals whose unintended consequences are potentially worse than the situation they seek to alleviate. So it is with a measure now pending in the U.S. House of Representatives.

With the best of apparent motives—to increase the flow of philanthropic dollars to those who need them most—the proposed legislation would require action whose long-term effects are, at best, simply unknown and which could be, at worst, disastrous for private philanthropy in America.

At first glance, what is proposed does not seem to warrant such concern. Section 105 of the House Charitable Giving Act bill, cosponsored by Reps. Roy Blunt, R-Mo., and Harold Ford Jr., D-Tenn., would increase the required annual payout rate of private foundations such as the one I serve. It would accomplish this by excluding administrative expenses—salaries, rent, supplies—from the 5 percent of endowment that such foundations are legally required to distribute each year.

Foundations in America gave away some $27 billion in 2002, according to Giving USA estimates; private foundations make up a portion of that. Increasing that flow, even by the relatively small increment envisioned in the House proposal, could obviously pay significant dividends. Not surprisingly, such an increase is bound to look attractive to those who have been battered by cuts in government funding and philanthropic giving during the market free-fall of the past three years.

But even organizations with a direct interest in the health of nonprofits such as INDEPENDENT SECTOR—a coalition of leading nonprofits, foundations and corporations—realize that the proposal's long-term consequences are too little understood to warrant hasty passage. INDEPENDENT SECTOR's board, of which I am a member, has urged Congress to pass the Senate version of the Charitable Giving Act, which does not include the hastily drawn House requirement, and then take the time to conduct a thorough analysis, complete with extensive hearings.

Let me be clear about the Knight Foundation's position. We already voluntarily meet the spending guidelines contained in the House version. Our grants on average come to 5 percent a year over and above our administrative expenses.

We further agree that foundations have an obligation to step up to the plate in bad times, which is why the Knight Foundation's board has voted to maintain the level of giving set during the boom years despite the 20 percent drop in our endowment's value over the past three years. That giving includes more than $46 million over the past five years benefiting Miami-Dade and Broward counties.

But this voluntary decision could not and would not be maintained indefinitely if the endowment continued to shrink. If you are losing money on your investments at the same time that you are required to increase the money you pay out, even as inflation continues, you soon find yourself out of money—as would any individual who spends more than he makes.

Most of the people who establish foundations do so in the expectation that they will be maintained indefinitely, providing philanthropic dollars to address our social problems today and those of our grandchildren's and great-grandchildren's generations. That is what the nation's tax laws have encouraged. That is what could be threatened by an arbitrary, mandatory increase in payout.

It is also worth noting that there are administrative expenses—such as my salary—that essentially service the foundation itself, and then there are administrative expenses that are of direct and primary benefit to grant recipients. As INDEPENDENT SECTOR points out, these include a wide range of services. For instance, Knight Foundation employs eight community liaisons, employees based in some of the towns and cities that are of particular interest to us. They work directly with nonprofits in fashioning and implementing grants. Their work is arguably of as much value to our partners as our grant dollars.

We are not certain that our analysis is absolutely on target. It could be that our deep fears about the House measure are overblown. There are dueling statistics being cited on all sides. But the fact is that no one really knows, most of all those who have put forward Section 105. Legislation in the dark is not a prescription for good laws.

Hodding Carter III is president and CEO of the John S. and James L. Knight Foundation.

© 2003 The Miami Herald and wire service sources. All Rights Reserved.