As American foundations explore ways to respond to the coronavirus, one question haunts them: will they be willing to spend more than the legally required five percent of their corpus in the face of the emergency, even at a time when their investments are taking a substantial hit?
Many voices in the sector are urging them to take this step. The major philanthropy-serving organizations—including Independent Sector, the National Committee for Responsive Philanthropy, the Center for Effective Philanthropy, the Council on Foundations, and Grantmakers for Effective Organizations—issued an unusual joint call for foundations to consider significantly increasing their spending. Doing so is “more important right now than preserving endowment capital,” they noted.
“The strength of a funder’s grantees at the end of this crisis will be a much better measure of the significance of a foundation than the size of its endowment,” they continued.
The real challenge for the philanthropy-serving organizations, though, is this: are they willing to go beyond mere moral exhortation and petition Congress to mandate a higher minimum-payout requirement? If so, The Giving Review’s recent two-part conversation with Dean Zerbe suggests that there might indeed be a willing audience for such legislation on the Hill.
Skepticism, a repudiation, and a willingness
Zerbe made a name for himself in the nonprofit world as one of Iowa Sen. Charles Grassley’s chief tax counsels from 2001 through 2008, during which time the Senator chaired the Senate Finance Committee. Zerbe’s was a name to be respected by all—and feared by some.
For Zerbe shared the Senator’s ideological predisposition—which is, as he claims in the interview, a variety of “prairie populism.” That entails a skepticism of large, remote, unelected national institutions; a repudiation of their condescension toward the person in the street; and a willingness to measure their activities against the benefits they bestow upon everyday citizens, rather than upon their own administrative elites.
For the charitable sector, that meant putting philanthropies and nonprofits to what Zerbe describes as the “grandmother test.” “Can you explain [a charitable activity] to your grandmother and have her think, Yeah, that’s a charitable activity—where Grandma will say, sure, that makes sense, we’re helping these people. As opposed to, Wait, what are we doing, what’s going on here?”
For Zerbe (or least for Zerbe’s solidly Midwestern grandma), this means that charity should be about, well, charity—that is, the immediate and concrete response to pressing human need.
Yet for too many private foundations, Zerbe argues,
there seems more and more of a view toward, Well, we’re not going to buy the blankets for the Salvation Army, we’re not going to be the ones actually pulling the wagons in terms of helping the poor or what have you. What we’re going to do is instead make the trumpet calls to support advocacy and promotion of a government solution.
Put even more sharply, Zerbe points out that “you’ve got these wealthy folks with big tax breaks out there advocating for more government spending that’s going to be paid for by taxing the middle class and other folks.”
Zerbe is clearly troubled by the same “warehousing of money” in bloated endowments that the philanthropy-serving organizations have challenged. For him, donor-advised funds are a particularly striking example of wealth-hoarding. And it underlines the gap between “what the Hill understands about our charities versus what’s actually going on. Nothing is a better example than that.”
Asked to name the three top charities, Zerbe maintains, the typical Congressperson would say “Goodwill, United Way, and the Salvation Army.” But in fact, “it’s Schwab, Fidelity, and Vanguard that are up there”—all investment houses hosting substantial donor-advised funds. “You’d knock Members over with a feather when you tell them that those are among the biggest charitable recipients.”
Right now, though, Zerbe suggests that the “Hill’s a bit more alive” to the discrepancy between the street view of charity and what’s really going on. There’s “more of a cynicism about charities.” So the Hill is more willing to ask “what are we really doing to try getting more of that money into the hands of what I call working charities—charities that are actually helping folks.”
Zerbe suggests that a relatively little-noted piece of the tax-reform bill of 2017 is a clue to the Hill’s growing cynicism about charities. The 1.4% college-endowment tax was a “big wake-up call” for those who think massive university and philanthropic endowments aren’t drawing suspicious glances on the Hill. Though it promises to raise only limited revenue, the endowment tax’s larger significance is the signal it sends: “People are just furious at the colleges and universities across the board, from Harvard on down. How are they controlling costs? They going to put Mitch Daniels in charge everywhere?”
This is the moment, Zerbe argues, for front-line charities to exploit the dawning consciousness on the Hill about the less-than-charitable, wealth-hoarding activities of the charitable sector. Foundations “don’t seem to be all that troubled by essentially being an unelected elite with fingertips on massive amounts of money with no accountability.” Yet charitable leaders are unwilling to challenge this state of affairs. “Somehow, we embrace the big grip of the dead hand here. We’re going to let unaccountable folks have millions of dollars to grant out, with friends and neighbors as board members. That is troubling for a democracy.”
Zerbe simply does not understand why “the working charities themselves don’t band together and say, This is crazy, we need to have funds in our hands. We don’t need the lining of pockets of Fidelity money managers or folks at the fancy foundations. We need this money. We particularly need it now.” He notes that this is “tremendous opportunity for, oh, the Salvation Army, the United Way to get out there and say, Here are the reforms that we think should be coming out …. I think thoughtful private foundations can look at supporting some of that.”
Zerbe foresees support on both sides of the aisle for endowment reform, extending well beyond Sen. Grassley, who gives up his committee chair after this year. Although Congress isn’t likely to originate such legislation, it would be willing to look “for the charitable community writ large—basically, Goodwill, the United Way, the Salvation Army, people they think of as charity, and some of the major foundations—coming forward and saying, Here’s a proposal, a package of reforms that we think will matter.”
A well-prepared package of endowment reform, he notes, could then be hitched to one of the legislative “trains” that pass through Congress. Especially now, he notes, “we have huge trains moving every other day, it seems, in response to the pandemic.” A “unified package for charitable reforms—that encourages charitable giving and gets dollars into the hands of charities,” would be a “natural fit for the legislation Congress is considering. It is an opportunity that cannot be missed.” That is, as massive draws are being made on the public fisc to meet the crisis, it would hardly seem unreasonable to insist that private endowments be asked to sacrifice as well.
What are the chances that the philanthropy-supporting organizations, sector publications, foundations, and nonprofits imploring foundations to dip into endowment in this emergency will answer Zerbe’s call and support legislation mandating, say, a payout larger than five percent? If history is any guide, not great.
A panel discussion held by the Hudson Institute’s Bradley Center for Philanthropy and Civic Renewal in 2003 addressed an earlier, far more-modest reform proposal, namely, HR 7’s Section 105, which would have disallowed foundation administrative expenses from counting against the five-percent payout requirement. Rick Cohen of the National Committee for Responsive Philanthropy supported the increase, as he did a mandatory hike in the payout requirement.
But Dorothy Ridings of the Council on Foundations spoke against it on the panel. During the panel’s discussion period, two other major nonprofit groups—Independent Sector and the National Council of Nonprofit Associations—announced their opposition as well. This sort of reluctance to challenge the prerogatives of the big foundations is what invariably led Pablo Eisenberg to denounce nonprofit leadership organizations as “gutless wonders.”
But as Zerbe suggests, these are times calling for unprecedented financial commitments from government and philanthropy alike. Not only is the Hill very possibly in the mood to entertain a mandatory hike in foundation payout, but the defenders of the endowment status quo seem ill-prepared to defend themselves. Zerbe notes that the sector’s current leadership tends to be hopelessly tin-eared and inflexible when it comes to dealing with the Hill.
During the 2017 fight over increasing the standard charitable deduction, for instance, the nonprofit sector dug in around opposition to the hike, because it presumably would mean a decrease in charitable giving. “With my experience, I can tell you,” Zerbe argues, “if you want to make taxes simpler and provide a tax break for low-income people, one of the few tools you’ve got is to look at increasing the standard deduction.” But the sector “fought tooth and nail” in defense of its own institutional prerogative, against a tax break for low-income people—and “got run over.”
The sector’s tin ear is further illustrated today by Harvard University’s initial willingness to accept a federal bail-out of some $8.6 million in spite of its massive $40 billion endowment. This may make perfect sense when it’s reported, in all its technicalities and nuances, by The New York Times. “Although we entered this crisis in a position of relative financial strength,” the Times quoted university president Lawrence Bacow, “our resources are already stretched. If we are to preserve our core mission of teaching and scholarship, we face difficult, even painful, decisions in the days ahead.”
Zerbe’s mythical grandmother, whose children and grandchildren have lost their jobs at the local hairdresser and restaurant and are lining up for canned goods at the local food bank, may be hard-pressed to sympathize with Bacow’s “painful decisions.”
Harvard, along with several other immensely wealthy Ivy League schools, decided against accepting federal dollars after President Trump insisted on Twitter that “Harvard should give back the money now.” Ominously for the larger world of foundations and universities, he concluded the tweet with “Their whole ‘endowment’ system should be looked at!” If nothing else, this President knows how to tap into Grandma’s political sentiments.
As Zerbe notes and as the President will soon remind us, foundations never seem to find the right time to dip into endowments, which are invariably being preserved for a rainy day. “We’ve got these massive endowments. That’s the problem, right?” Zerbe continues.
There’s never the right time that they should be spending it. It’s always just, Well, we’re building it, and we have to build it because we just lost money. You see it now with the pandemic—it’s raining—and now the endowment funds aren’t used because they’ve lost value. It seems it’s never the right time to spend the endowment.
So will nonprofit and foundation leadership do more than issue moral exhortations for endowment reform during this time of unprecedented demands on nonprofits? Or will it, as it always has in the past, tread lightly around the prerogatives of the major philanthropies and shy away from any sort of reform initiative on the Hill?
That is the choice presented by Dean Zerbe, who is not only deeply knowledgeable about Congress’s view of charity, but may be looking to return to the Hill himself. As he notes, “I’ve worked with [Sen. Grassley] four times now. I’ve kind of gone back and forth and back and forth with him and who knows, maybe a fifth time. We’ll see.” That is a prospect likely to strike fear in the heart of big foundations. But it should spark joy in the hearts of Grandma’s working charities.