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Foundation support for nonprofit organizations

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Foundation support for nonprofit organizations is under constant scrutiny by such funder/foundation watchdog organizations as Media Transparency and The Center for Consumer Freedom. Independent Sector, the trade association of the nonprofit sector, was founded in 1980. It has a budget of $5 million and 800 members. [1]

According to a June 8, 2003, Opinion piece published in The New York Times, "The Life and Death of Foundations", nonprofit organizations dependent upon foundations for their continued existence may reap a "bonanza" courtesy of the U.S. Congress:

"A bill pending in the House of Representatives would force the nation's foundations to pay out more money in grants every year, providing a bonanza for nonprofit organizations that depend on foundation support. Advocates of the change say they want foundations to make a greater contribution to national needs at a time when the economy is sputtering, wealthy individuals are reducing their charitable contributions and government resources are stretched. But some leading foundations are terrified that the seemingly innocuous bill would virtually ensure their demise by forcing them to spend down their endowments faster than they can make money through investments. The foundations may well be crying wolf, but Congress needs to explore the consequences carefully before making a potentially momentous change.
"The bill in question would change the rules governing how much money foundations must distribute each year to retain their exemption from most taxes. Under current law, foundations must spend at least 5 percent of their assets every year, but that sum can include administrative expenses such as salaries, travel and rent. The new bill would require that the whole 5 percent be paid out to charity, forcing foundations to use additional capital to pay their administrative expenses. By one count, the average foundation would have to spend another 0.4 percent of its assets unless it cut its operating expenses.
"Some foundation executives hint darkly that right-wing ideologues are trying to destroy foundations that support social, environmental and international causes they dislike. But the bill is strongly supported by many charities and by liberal advocacy groups that believe foundations hoard their money and contribute too little toward social and economic change. The National Committee for Responsive Philanthropy, for example, calculates that the proposed new law could generate more than $4 billion in additional grants each year without endangering the foundations' long-term survival.
"The push to change the payout law is driven in part by evidence that a few foundations spent lavishly on high salaries and luxurious quarters. But the Internal Revenue Service, which monitors the reasonableness of administrative costs, could presumably police any clear abuses if given sufficient funds. Some of the nation's most respected foundations have high administrative costs because they manage some programs themselves, provide extensive support to community groups that lack skilled management, or send people abroad to monitor projects in foreign countries.
"The critical issue is whether a 5 percent payout rate would deplete foundation assets over time. Dueling studies have come up with conflicting results. Critics have raised an important issue -- whether foundations are more intent on preserving their wealth than in supporting charity. But the proposal has had no hearings in the House and is not included in a Senate-passed bill to encourage charitable giving. It seems foolish to push for potentially far-reaching changes so cavalierly."

An issue which the NYT article perhaps overlooks is that the change in the law would allow some foundations, such as those who clearly underwrite the activities of front groups, to exceed current funding limits and provide more financial support with less accountability. The issue would be less how much money is "lavished" on foundation expenses and more focused on how much more money is legally channeled to special interest organizations and quasi-governmental think tanks.

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