Opinion
December 11, 2014

Courageous Nonprofit Leadership Groups Are Greatly Needed

The nonprofit world is peppered with trade associations, advocacy groups, and watchdogs that are supposed to provide the money and political support that organizations need, as well as the accountability and effective oversight the public expects.

Yet very few of these institutions provide much service to nonprofits or the public.

Without doubt, the foremost need for nonprofits is money.

Small and midsize groups are under an especially big strain as demand rises, and the years of a bad economy continue to cause aftershocks in both government and individual giving.

As the government has shrunk its role, the public expects more of nonprofits, but such groups can’t shoulder that burden unless they have more dollars at their disposal.

If organizations like Independent Sector, the National Council of Nonprofits, and BoardSource really wanted to do something meaningful for charities, they would find big sources of new money — and one smart way would be to push Congress to increase the annual distribution requirements for foundations.

Most grant makers don’t give more than the 5 percent of assets that is the legal minimum. Today, about $55-billion flows to nonprofits each year from foundations. An increase in the minimum payout to 6 percent — along with the requirement that no foundation overhead or administrative costs could be counted in that sum, as current law allows — could easily add more than $7-billion, or perhaps $10-billion, to the sum nonprofit receive each year.

Grant makers hate the idea of increasing the payout. They say that 5 percent is the traditional formula that can maintain the perpetuity of their organizations, but many researchers believe that a 7 percent or 8 percent payout would still allow foundations to live forever.

Moreover, who says perpetuity should be a key factor in determining how much donors and their foundations distribute each year, given the huge tax benefits they receive? Taxpayers have as much of a right as foundations themselves to determine the payout rate, but that is not an argument any nonprofit coalition ever makes. Nor have they pressured the Obama administration to take action on this issue.

This has been a longstanding problem. Nearly a dozen years ago, several key members of the House of Representatives proposed raising the payout rate by only 0.4 percent, but foundations and nonprofits were defiant in their opposition, spending more than $500,000 to hire lobbyists to fight the measure.

The National Committee for Responsive Philanthropy was the only major group of all the watchdogs and trade associations that supported this legislation, yet today it has, curiously, backed off fighting for a payout increase.

Individual nonprofits lack the courage to push for an increase in the payout rate because they are deathly afraid of challenging or upsetting foundations, even though it would be in their own interest to do so.

That’s why we need coalitions of nonprofits — along with the federal government — to work together to push the idea. And we need Congress to just act. It should understand why nonprofits need more money and change the outmoded payout standard.

Other approaches would also channel more foundation money to nonprofits.

Professor Ray Madoff of Boston College has suggested in an op-ed in The New York Times that another way to get more money to charities would be for Congress to reduce the excise tax foundations pay if they increase their payouts voluntarily above the 5-percent sum.

A more modest idea is also available: How about banning most of the trustee fees that foundations give each year to their wealthy board members? There is no justifiable reason for this giveaway, which probably amounts to $400 million to $500 million a year. Not one trade association or watchdog is touching this issue, though.

A growing source of untapped money, almost as big as some major foundations, is now available in the form of donor-advised funds. They have no payout requirement at all. So in addition to changing foundation rules, Congress should look at imposing distribution rules on advised funds or requiring them to spend all their money within seven to 10 years, as Ms. Madoff suggests.

It’s not that nonprofits are unwilling to lobby. They have just misdirected their energy, putting it all into fighting a measure to prevent passage of any legislation that would reduce the charitable deduction to 28 percent. That idea, scholars at Indiana University’s Center on Philanthropy estimate, could result in charities losing as little as $1-billion of the $335-billion donated every year, while other scholars say the figure could be $5-billion or more.

Another vital role for organizations that represent nonprofits is to ensure that charities are accountable. Yet nonprofits have been entangled in many financial scandals, including self-dealing by top employees and board members. Many nonprofits are opaque about how they spend their money and are run by irresponsible boards and incompetent managers. Media scrutiny of such problems is eroding public confidence in nonprofits, raising additional obstacles to fundraising.

This lack of public accountability has been reinforced by an inadequate system of oversight and enforcement. Regulations are either being ignored or unenforced. In many areas — such as compensation, executive perks, and political activity — new, tougher regulations are required. State charity regulators have neither the resources nor the will to oversee their nonprofits, a task made more difficult by the fact that all but seven Attorneys General are elected, thus bringing politics into the oversight equation.

The Internal Revenue Service, the federal regulator, has never had the money or staff needed to police nonprofits. Fewer than 500 staff members have the responsibility and the impossible task of overseeing the country’s more than 1.3 million charities. Congress, for some inexplicable reason, has refused to give the agency sufficient resources to do its job. And it has kept a tight leash on regulators, making it hard for them to take tough stands.

One might have thought that major nonprofits would try to push for better oversight to help good charities maintain their integrity and improve their image.

On the contrary, nonprofits have fought tooth and nail to avoid new, tough regulations and better enforcement. They claim that it’s best for nonprofits to monitor themselves, despite any evidence that self-regulation has ever worked. They refuse to petition Congress to install a more effective system of public accountability. And they are willing to risk the integrity and reputation of nonprofits by doing nothing.

And except for the National Committee for Responsive Philanthropy, large nonprofits have shown little concern for the undemocratic composition of foundation boards of directors. Philanthropic boards are composed almost entirely of very wealthy members, making foundations one of America’s most elite institutions and skewing the priorities of these organizations toward establishment charities rather than the overwhelming majority of nonprofits that serve average citizens.

The issue has become more prominent with the emergence of huge foundations like the one created by Bill and Melinda Gates. As more and more foundations run by a few family members gain control, they pose dangers to our democracy as a handful of wealthy people determine national priorities and public policies, thereby diminishing the role of nonprofits and other civic institutions.

To date, few nonprofits and their advocacy organizations have viewed this development as a threat to nonprofits and society. No discussion and debate is taking place. Once again, nonprofit coalitions are failing in their responsibility to protect the charitable world.

A related concern is how little access nonprofits have to big foundations or wealthy donors.

More than 60 percent of foundations no longer accept unsolicited proposals, according to the Foundation Center. Only large nonprofit institutions or those with personal contacts at foundations have the opportunity to apply for grants; smaller, more grassroots and nonestablishment groups are being left out. A few elite foundations are thus increasingly controlling the way the nonprofit world operates. Where are the voices of opposition? Who is challenging this takeover of our democracy?

Money, easy access to resources, public accountability, democratic governance, and fair and enforceable regulations are essential to protecting nonprofit integrity and respect. Yet that’s not what nonprofits seem to care about.

Why have nonprofit leaders tolerated such a situation for so long? Why do they continue to pour hundreds of millions of dollars into organizations and leaders that are not doing their job?

We don’t need Independent Sector or other similar groups to cater to the lowest common denominator. We do need organizations that are willing to speak up for the nonprofits interests and to challenge inappropriate actions of foundations, big donors, and nonprofits. We do need institutions that will help maintain standards and sound practices. And we require organizations that are willing to demand and produce adequate resources for nonprofits to do their essential work serving society.

It’s time for nonprofits to set higher expectations from their leadership groups. More nonprofit executives need the vision to push for change. And grant makers and nonprofits should stop wasting money and refuse to pay dues and other fees to incompetent or unproductive leadership organizations.

Making nonprofit leadership groups more responsible isn’t the answer to all the problems facing the charitable world, but if they were more aggressive and courageous, they could catalyze the kind of change nonprofits and the public need.

Pablo Eisenberg, a regular Chronicle contributor, is a senior fellow at the Center for Public and Nonprofit Leadership at the Georgetown Public Policy Institute. His email address is pseisenberg@verizon.net.