A recent New York Times op-ed by David Callahan offers a long list of inaccuracies and dangerous ideas regarding the regulatory oversight of charities. Callahan is the founder and editor of the Inside Philanthropy digital media site. His piece was ostensibly written in response to recent charges brought by federal and state authorities against four cancer charities, and also to ongoing reports about fundraising and record-keeping at the Clinton Foundation. In reality, however, the latest nonprofit scandal is simply an opportunity to rehash proposed “reforms” that jeopardize both the independence of private institutions of civil society and the private giving that supports those vibrant and diverse entities.
Callahan argues that the laws governing charities are flawed and that those responsible for monitoring the sector are not doing their jobs very well. “Philanthropy…,” he writes, “is a world with too much secrecy and too little oversight.” While acknowledging Alexis de Tocqueville’s recognition that an independent civil society is a hallmark of American democracy, he ignores Tocqueville’s warnings about the dangers of an overreaching government. Instead, Callahan labels the private donations of generous Americans (totaling over $358 billion in 2014) as “public money,” refers to tax exemption and the charitable deduction as “subsidies,” and proposes restrictive laws and a greatly expanded role for government – all of which threaten the right of Americans to choose how and where to spend their charitable assets
Every sector will always have its share of bad actors. Nor is any sector immune from sloppy record-keeping, as the Clinton Foundation is painfully learning. But to suggest that the nonprofit sector is “like the Wild West” is silly. Ask any charity or foundation executive about federal and state regulation and you will get a litany of rules and protocols that must be observed, recorded, and reported. The Internal Revenue Service and state charity officials demand both accountability and transparency when it comes to matters like compensation, fundraising, grantmaking, restructuring, and a host of other nonprofit management concerns. Their work is complemented by codes of conduct and examples of best practices offered by national organizations like the Association of Fundraising Professionals, the Council on Foundations, and the National Council of Nonprofits. State and regional associations of funders and nonprofits also provide helpful guidance. No one I know thinks our model resembles the OK Corral.
Callahan also mischaracterizes the tax exemption and charitable deduction as “subsidies,” and he is wrong to say that philanthropic dollars are “public money.” Tax exemption protects the independence of private institutions of civil society from government interference. The charitable deduction recognizes that donations given away for charitable purposes provide no tangible return benefit to the donor, and should therefore be excluded from the donor’s income. The charitable deduction is unique among all other deductions in this regard, and its presence in the tax code is an accurate reflection of the voluntary donations of personal time, individual talent, and private treasure which have supported what Tocqueville called the “intellectual and moral associations of America” since the nation’s earliest years.
In The Philanthropy Roundtable’s publication, How Public is Private Philanthropy, legal experts Evelyn Brody and John Tyler demonstrate that “foundations and other charities are not inherently public bodies and their assets are not ‘public money.’” These organizations are obligated to provide public benefit and pursue charitable purposes as defined by the tax code and further interpreted by administrative and judicial rulings. They are also obligated to comply with the laws and regulations which guard against private inurement. But this arrangement, the authors conclude, “does not otherwise compromise or undermine the inherent private character of these organizations and their entitlement to autonomy and independence.”
Bad assumptions lead inevitably to bad ideas, and there is no shortage of those in Callahan’s piece. He first suggests “bringing more transparency to charitable donations.” In his view, donor disclosure should be mandatory for groups that work in the policy arena or are led by former public officials, though he appears comfortable allowing anonymous gifts to hospitals and arts organizations. But there are many hospitals and arts organizations that have policy interests, and the category of “former public officials” is both vague and broad. We can safely assume his concern in the latter case is the Clinton Foundation, but would he also impose donor disclosure on Purdue University, now led by former Indiana Governor Mitch Daniels? What about a small-town community center whose director happens to be a former county legislator? Where would Callahan draw the line?
Readers who see anonymous giving as a virtuous act might well wonder when it became a vice. Many faiths praise the quiet giver who seeks no recognition – although it is also true that public gifts may encourage generosity in others. Individual donors choose anonymity for many reasons – humility among them – but Callahan’s recommendation would affect far more than donor choice.
Maintaining the privacy of donors to public charities guarantees that our most controversial civil society institutions – precisely those who are working “to sway public policy” – can exist in safe space where donors are free from harassment and threats. The Supreme Court’s 1958 ruling in NAACP v. Alabama affirmed that the Fourteenth Amendment protected the NAACP’s right to keep its membership list confidential. Revealing that information, the majority wrote, “is likely to affect adversely the ability of [the NAACP] and its members to pursue their collective effort to foster beliefs which they admittedly have the right to advocate, in that it may induce members to withdraw from the Association and dissuade others from joining it because of fear of exposure of their beliefs shown through their associations and of the consequences of this exposure.” As Callahan himself notes, “Tocqueville was right when he said that a vibrant civil society is a unique strength of American society.” Donor privacy is essential to insure that vibrancy.
His second complaint is that too much giving is defined as charity, and that some “independent” measure of public benefit should be used to narrow that meaning. It’s certainly true that in everyday language, “charity” brings to mind traditional almsgiving, soup kitchens, and Tiny Tim Cratchit. But in the language of our tax code, and the varied facets of American civil society, “charity” is much more.
The IRS website provides a much expanded definition: “The exempt purposes set forth in section 501 (c) (3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”
In fact, the broad discretion of choice provided by the tax code reflects the variety of charitable choices Americans have historically made – choices which include our diverse religious, educational, medical, environmental, civic, and cultural institutions. So when Callahan advocates for a more hierarchical treatment of nonprofits, providing differing levels of tax exemption and deductibility depending on an organization’s perceived value, he is actually calling for a shrinking of civil society. Exactly who, you might well ask, will be making those judgments and how will the “public” in “public benefit” be defined? If government chooses the winners and losers, how can we insure a place for causes deemed politically or socially unpopular? Americans should make their own charitable decisions.
The author’s next criticism is that there is not enough charity. He recommends that the mandatory payout rate for private foundations be increased from 5 to 10 percent, complains that donor-advised funds have no payout requirements, and wonders about the social value of “husbanding” endowments. Nowhere does he mention that donor-advised funds had an average aggregate payout rate of 21.5 percent in 2013, according to the National Philanthropic Trust. Nor does he note that such funds are now the country’s fastest growing philanthropic vehicle because of the ease and convenience they provide to small and large donors alike.
A mandatory distribution (payout) rate (MDR) of 5 percent for private foundations has been part of the tax code since 1981. While critics like to assert that 5 percent has become the ceiling and not the floor, there is plenty of evidence to the contrary. A Foundation Source study of some 89,000 foundations with less than $50 million in assets reported that in 2014, “all foundation sizes in our report exceeded 5 percent MDR, with the mid- and largest-size foundations distributing 7.2 percent of their assets, and foundations with less than $1M distributing nearly twice that percentage (13.2 percent).” Payout rates do drop with foundation size, but even among the largest foundations, payouts typically exceed the minimum requirement. Looking at large endowed independent foundations in the period 2007-2009, the Foundation Center reported that 46 percent of the sample distributed between five and six percent, with nearly 20 percent spending 10 percent or more on charitable distributions.
But actual payout data is only part of the story. A 2013 study by Cambridge Associates makes it quite clear that a mandatory 10 percent payout rate would be a “spend-out” sentence in disguise. The Philanthropy Roundtable recommends that donors give while living and that they strongly consider limited lives for their foundations, especially to safeguard their charitable intent and to maximize their short-term impact on their communities or in specific focus areas. An increasing number of foundation donors and boards are now choosing to “sunset” their philanthropies.
There are, however, also many instances where long-lasting foundations strengthen civil society. Callahan himself seems particularly concerned about the tough issues of poverty and economic mobility – issues which will not be successfully addressed with quick fixes. Foundations based in rural areas may well question whether the “trillions of dollars in new funds…set to flow into philanthropy in coming decades” will ever arrive in the small communities they serve. Many family foundations are intentionally preparing the next generation to address as-yet-unknown challenges. To recommend a one-size-fits-all spend-out plan for all foundations dismisses the benefits of endowed philanthropy and ignores both the right and the obligation of those who serve as stewards of those funds to examine their missions and make the most thoughtful and appropriate decisions about present versus future value.
Callahan’s fourth suggestion is that there should be “a better accounting of whether philanthropic dollars are effectively spent.” The implication is that such assessments are not being done, but that is certainly not the case. As with payout, assessments of performance do not lend themselves to one-size-fits-all solutions, and in any given year foundations experience a broad spectrum of great successes, acceptable outcomes, and disappointing failures. Is it likely that “the threat of regulation clearly in the background” will stimulate a higher quality of grantmaking? Will it encourage foundations to fund risky pilot programs, take chances on unknown individuals, or tackle seemingly intractable problems? Hardly. What it is far more likely to produce is a lot of risk-averse, more-of-the-same grants to well-established organizations.
The current role of federal and state charity oversight officials is to insure compliance with federal and state regulations. That alone is a big job, and one that demands ideological neutrality and professionalism. Adding to that responsibility the assessment of the performance and effectiveness of charities and foundations will guarantee that subjectivity comes into play as regulators now scrutinize organizations’ missions, program and staffing decisions, evaluation methodologies , policy initiatives – one wonders how broad and deep such “accounting” might go. We’ve heard this idea before, notably in 2007 from Steven Miller, then director of the IRS exempt organizations and government entities division and acting IRS commissioner from the fall of 2012 until his resignation in May 2013. It has never been a good idea. Do we want a citizen-driven civil society – which is admittedly messy – or one which must constantly be approved by the overseers?
Finally, in conjunction with his recommendation that government oversight of charities be expanded in significant and dangerous ways, Callahan calls for “a new federal bureau to police this sector.” Again, this is not a new idea – it was proposed in a Congressional Research Service report in 2009. The Philanthropy Roundtable’s President, Adam Meyerson, noted in 2013 that “with some notable exceptions, [the Internal Revenue Service] has been guided by a culture of professionalism, philosophical impartiality, and respect for privacy in its administration of tax laws for exempt organizations. “ A seemingly independent regulatory agency, he added, “would be more likely to be subject to political pressure and manipulation from interest groups within the nonprofit sector itself…” We depend on those who regulate the institutions of civil society to apply the laws in ways that promote citizen engagement and free discussion with minimal intrusion because anything more would always be fraught with politicization and favoritism.
We have seen over-reaction to charity scandals before, and we should note the irony of the loudest voices emerging when bad actors are publicly exposed – at those times when it is most apparent that existing rules and regulators and the oversight of the press appear to be working. Charity critics are certainly welcome to suggest ways to improve enforcement or to propose new rules to address innovations like online fundraising. But any treatise on charity regulation which begins with talk of “subsidies” and “public money” is bound to go awry, and David Callahan’s op-ed is no exception.