Do or Die for Nonprofits

In a time of great economic peril for the communities they serve, nonprofit grass-roots organizations need to push the federal government to raise foundations' payout requirements.

The recession and forthcoming depression will prompt all but a few foundations to make severe cuts in their grantmaking at a time when they should be providing more money to safeguard the nonprofit safety net.

With the exception of several community foundations and a few large private foundations — Kellogg, James Irvine, and MacArthur, for example — many foundations, large and small, are already announcing not only sizeable reductions in payout but also their termination of longer-term grants.

The outlook for local, small, and grass-roots advocacy organizations is particularly dire. The wealth gap between large and small nonprofits is huge, paralleling the mounting inequality of wealth and income between the rich and the poor. It will only grow larger in the coming years.

The decline in their asset base is the reason that foundations are giving for cutting back. Although they are required by federal law to distribute annually 5 percent of their net assets, they have come to view this requirement as a ceiling, not a floor. They have accepted without much thought the Council on Foundations’ 11th Commandment, “Thou shalt not increase the payout rate whatever the circumstances.” Since the payout requirement can include all staff and other administrative costs, the effective payout rate in grants at large foundations often amounts to only 4-4.5 percent.

Most foundations give little thought to providing counter-cyclical funds in hard economic times or to contributing their fair share to any economic recovery. Rather, their boards focus on investment policies and the preservation of their asset base. Many institutions are also wedded to the notion of perpetuity, because some of their donors expressed a desire for their funds to be held indefinitely. The foundation idea of perpetuity seems to encompass an ever-growing asset base, rather than the continuity of the foundation over time even with lower assets. Yet perpetuity is irrelevant to the performance of foundations and is too often used as an excuse not to give more money.

Increasing the required payout to 6 percent in grants would not undermine foundations’ perpetuity. What it would do is add almost $7 billion to the coffers of nonprofits at a time of great need. Even if a handful of foundations were eventually to go out of business as a result — a result that is hard to imagine — it would be in the national interest, a development that would trump what is an unreasonable principle.

The 5-percent payout rate is outmoded. It is an affront to American taxpayers who have provided foundations and their donors with extraordinarily generous tax benefits but have not received equivalent benefits. It is time for foundations to distribute a more reasonable amount to their nonprofit grantees.

The advent of a new, more progressive administration signals the probable availability of more federal money targeted to social services, community development, and housing and health programs benefiting poor and working-class people. Much of this program money will be channeled to nonprofits that have the capacity to operate programs effectively. Many nonprofits do not currently have sufficient capacity to take advantage of this new money for a variety of reasons: declining budgets, reduced general operating support, and staff shortages. This is a time when foundations need to strengthen the capacity of nonprofits to take advantage of these new funds, not reduce their budgets even more.

As Rick Cohen has pointed out, banks have been the major contributors to economic and community development programs, including housing. The collapse and decline of many banks will severely reduce their financial support for housing and community development corporations. In recent years, private foundations also have cut back on their sponsorship of affordable-housing programs, partly because of the high cost of housing production projects. One wonders how much more bang for the buck these foundations might have received had they focused their efforts more on supporting housing advocacy efforts rather than direct housing production by community development corporations (CDCs), which can rarely go to scale. Encouraging CDCs and nonprofit housing developers to manage, rather than produce, the development of affordable housing could turn out to be a much more productive investment.

Community development and housing groups will have to steel themselves for the financial hard times to come, at least in the next couple of years. Placing more of their resources into advocacy efforts might prove more effective and less costly.

To date, the Obama transition teams seem to be the repositories of old Clintonians, who in their former days at bat did not exactly shine in their support of grass-roots activities, public housing, affordable low-income housing, intelligent urban policies, and poor women and children on welfare. The teams are composed almost entirely of think-tank staff, policy wonks, lawyers, and academics. Grass-roots organizations, representatives from national and local constituency groups, community organizers, and advocacy and watchdog organizations are nowhere to be seen.

Nonprofits should push hard to gain better representation in the transition and appointment processes.

The chances that foundations will be willing to increase, rather than decrease, their grants to the nonprofit community remain slim unless nonprofits themselves are prepared to fight publicly for a bigger share of foundation assets. If past is prologue, the future appears gloomy.

Nonprofits and their leadership have been overcome by what may be called “the mystique of philanthropy,” a view that accepts a beggar’s mentality and the notion of powerlessness in the face of philanthropic financial power. They have been terrified by the possibility that any advocacy on their part will elicit foundations’ retribution. What they have failed to recognize is their potential political power and the force of their numbers.

There is no reason why nonprofits could not mobilize broad support among themselves, policymakers, and members of Congress to pass legislation to increase the foundation payout rate. It would be both in their interest and that of the taxpayers. If they exhibit the courage and will to demand an increase and organize to bring it about, they will succeed. If not, nonprofits will have to share the blame for having failed to provide the necessary resources they need in a time of trouble.

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