February 07, 2008

New Study Sheds Light on Foundations' Charitable Expenses

Nearly one-quarter of the nation’s 10,000 largest private, community, and corporate foundations did not report any administrative expenses as part of their annual minimum-payout requirement, a new study has found.

The report was issued today by the Urban Institute, the Foundation Center, and GuideStar. The study pinpointed only those administrative expenses directly related to charitable and program activities, which count toward the federal government’s 5-percent minimum-payout requirement for private foundations. The study did not take into account, for instance, expenses related to investment activities.

Not surprisingly, foundations with higher assets tend to pay out more in administrative costs than their smaller peers, as they usually hire more staff members, carry out more-complicated activities, and pay their CEO’s more. But the authors add the caveat that the largest foundations “also enjoy some economies of scale, so they can achieve lower cost ratios for certain activities.”

The three-year study found that only 2,938 — or 29 percent — of foundations employed any staff members. Cumulatively, the 10,000 grant makers included in the study accounted for 78 percent of all foundation giving and for 77 percent of foundation assets in 2001, the study’s “baseline” year.

Says Elizabeth Boris, the study’s coauthor and director of the Urban Institute’s Center on Nonprofits and Philanthropy: “It was surprising to a lot of folks, the extent to which there are large foundations that are being run by volunteers or that are absorbing the costs themselves.”

Other key findings of the report include:

Of the 10,000 foundations, only 2,571 compensated non-staff board members, and those grant makers tended to be private foundations with paid employees. Corporate and community foundations rarely compensated their board members. When it came to analyzing the expenses of individual foundations, the authors found their practices to be “clear and consistent over time,” with little fluctuation in how the foundations allocated charitable administrative expenses over the three-year period. However, to some degree, economic dips and stock-market volatility influenced foundation assets and giving levels, with a subsequent bearing on the percentage of administrative expenses claimed as part of the annual 5-percent payout rate. The report also found private foundations to be particularly affected by changes in economic trends, as their payout rate is based on their net assets.

Researchers culled relevant data from the foundations’ IRS Forms 990 and 990-PF from 2001 through 2003, the most-recent years for which data were available when the study began. But the analysis also factored in other information that might affect administrative expenses, such as whether a foundation made program-related investments or engaged in international grant making.

In general, say the report’s authors, the nation’s largest foundations are a remarkably diverse bunch, and that “even among foundations of the same type, differences in assets, giving levels, work styles, geographic reach, and program type vary dramatically and produce very different expense and compensation patterns.”

The report also flags the need for improvements to the IRS Form 990, the public document filed by community foundations, and IRS Form 990-PF, the document filed by private and corporate foundations, particularly with regard to salaries and compensation.

“Folks who just go to the 990-PF and try to pull out compensation information are often flummoxed,” says Ms. Boris. “We really spent a lot of time differentiating staff people from those in a governance function, and that’s one of the changes that needs to be made in the 990-PF.” She says that the report provides “benchmarking tables” that foundation executives and boards can use to gauge how their compensation stacks up against peers.

Ms. Boris adds that the current IRS forms have a “catch-all” category that doesn’t allow for proper reporting of the types of expenses many foundations incur.

“We needed to find what kind of things are being put into that category so that we can say, Hey, IRS, we really need to break out expenses into some categories that make sense — like communications, technology, and evaluation — and that show the degree to which the 990’s really don’t get at the current expenditures that foundations have.”

The research was made possible through large grants from the Charles Stewart Mott Foundation and the Ford Foundation, with additional money from the California Healthcare Foundation, the W.K. Kellogg Foundation, and the Rockefeller Foundation.

The report — “What Drives Foundation Expenses and Compensation? Results of a Three-Year Study” — is available free for download at the Web sites of the Foundation Center, the Urban Institute, and GuideStar.