01 May 2017

Little evidence that foundation abuse is “common”

by Sean Parnell, Vice President of Public Policy, The Philanthropy Roundtable

Little evidence that foundation abuse is “common”

The Boston Globe published a blog post yesterday titled “It’s a tax rip-off” that describes the salaries paid by the James. G. Martin Memorial Trust to three daughters of the founder (who is still living, according to the article) and quotes several individuals suggesting the salaries are inappropriate:

Since at least 1998, the daughters of its donor, Gerard “Jerry” M. Martin, 82, a former nursing home executive, have been listed as foundation employees working about 40 hours a week. In return, the women — Marianne Burke of Wellesley, Marilyn Parker of Jamaica Plain, and Michelle Pesaresi Martin of Newton — are each paid up to $115,000 annually.

They receive that six-figure compensation, and are described as working full time, despite the foundation making donations to only about a dozen organizations annually, on average, and in one year as few as five.

In some years, the daughters have been paid more than was donated. In 2013, for instance, they collectively made $347,000 in salary and benefits, while the foundation gave $230,000 to seven organizations. Over the past 18 years, the foundation has donated $6 million and paid the daughters more than $5.3 million.

What’s more, the donations usually go to the same dozen or so organizations, with the largest often given to the family’s alma maters, such as Newton Country Day School of the Sacred Heart and Boston College.

There isn’t enough evidence to make any firm conclusions and it’s possible there are key pieces of missing information that could explain this, of course, but at a minimum this doesn’t quite look right – foundations are permitted to pay staff and directors (as they should be), but there are prohibitions on paying unreasonable amounts, and the basic information presented in the article suggests this foundation may have violated these prohibitions.

It’s always unfortunate to read of possible misbehavior in the philanthropic sector, just as it’s disappointing to read stories of public school staff embezzling public funds or corruption in unions and corporations. It’s almost as unfortunate to read unsubstantiated and dubious allegations that such misconduct is widespread and “common” in the philanthropic sector. From the article:

The Martin Memorial Trust’s practices are widespread in the foundation world, said Bruce R. Hopkins, a Kansas City lawyer and author of “Private Foundations: Tax Law and Compliance.”

“This kind of thing is relatively common, unfortunately, where children or friends or even the founders themselves are employees, and they’re paid a fairly high salary for doing jobs that really don’t require that much effort or time.”

“When you aggregate all these instances,” he added, “it could be a big revenue loss for the states and federal government, and a big abuse that people are taking a charitable deduction for these donations.”

This appears to be an unfounded and, in my estimation, irresponsible accusation. I have no doubt there are instances of foundations funneling money inappropriately to the children of founders, or otherwise engaging in inappropriate behavior along these lines. But “widespread” and “relatively common”? That seems unlikely.

But if it is pervasive, as Hopkins suggests (and Pablo Eisenberg at Georgetown University’s Center for Public & Nonprofit Leadership echoes similar thoughts, blaming the IRS for lax enforcement), this should be relatively easy to demonstrate. All foundations are required to submit a 990PF return with the IRS, and are required to list all compensation paid to directors as well as the five highest-paid employees and independent contractors who receive more than $50,000. These forms are publicly available, and there are programs capable of reading and sorting the data included on the returns.

So perhaps the critics who suggest foundations are routinely used to funnel tax-free funds (for the donor) to family and friends ought to conduct some simple research and analysis on this publicly available information. There’s a relatively small defined population (roughly 85,000 private foundations in the U.S.), and a few simple queries such as excluding foundations that don’t pay their directors and then narrowing it down further by comparing director and staff compensation to total grants ought to produce a pool of foundations that bear a little scrutiny. If the practices are indeed widespread then this might produce a list of thousands of foundations that can be made available to enterprising reporters, philanthropy critics, or state attorneys general. If, on the other hand, it’s a fairly small list – dozens or scores, perhaps – then hopefully it will put an end to the claim that such practices are “widespread” and “relatively common.”