The Economic Value of Foundations and How to Approach the Question

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Anna Omelchenko /

Editor’s Note: Are foundations addressing critical societal needs effectively – are they truly (or could they conciveably be) “society’s passing gear”? Last week Rick Cohen addressed the question at a panel hosted by the Urban Institute and The Philanthropic Collaborative.



Thank you for inviting me to be on this panel—and to participate in the entire program. I should reveal, to no one’s surprise, that I generally fulfill the role of iconoclast and apostate. As sympathetic as I am to the notion of generating data to explain the roles of grantmaking foundations and public charities to our nation’s policy-makers, I do harbor strong concerns that arguing the economic benefits of foundations and nonprofits isn’t all that compelling. The 501(c) sector has many more points of importance than its economic multipliers, which, pound for pound, don’t necessarily stack up well against the private sector in terms of jobs and salaries. Moreover, questions about the value of nonprofits are often not about how many jobs they generate, but how much value they deliver—in quantitative and qualitative terms—to people in need.

That being said, we see a number of attitudes or questions among lawmakers at all levels, Congress included, that make issues such as tax reform and the sequester such difficult lobbying challenges for nonprofits. 

The first is embedded in the description of this program, which goes back and forth between arguing the value of foundation grantmaking and the value of the nonprofit sector overall. If the issue is explaining and justifying the value of foundations, we have to acknowledge that foundations are a very special kind of nonprofit. The value, so to speak, of the nonprofit sector cannot be over-attributed to the grantmaking of foundations. According to the latest Giving USA, foundation grantmaking in 2012 reached $45.74 billion out of a total $316.23 billion in total charitable giving. That’s only 15 percent attributable to foundations. Compare that to public charity revenues of over $1.5 trillion or so. Foundations have a limited claim on the accomplishments and value of the nonprofit sector.

There is a second challenge for foundations: They present an image of size and wealth and assets. Public policy decision-makers often overestimate the size of the philanthropic sector and the magnitude of its potential grantmaking—that is, the idea that foundations have a lot of assets to provide that can supplement or fill the increasing gaps in government funding. At all levels of government, regardless of the facts, decision-makers think that foundations can be tapped to do more. In fact, government programs, like the Social Innovation Fund at the federal level along with the efforts of various state governments, write in increasing amounts of foundation funding to make government initiatives work. So the argument that exists in some policy-making circles, sotto voce, is not how much are foundations doing for the nation and for society, but how much more they ought to be doing that they aren’t. Now, many of us think that foundations could be doing more…spending more…paying out more, but increasing foundation payout a percent or two doesn’t answer state or federal budget shortfalls.

Part of the problem in the foundation argument is that the foundations that lawmakers interact with most—and perhaps the nonprofits lawmakers interact with, as well—are among the larger and wealthier ones. But most of the nonprofits that really face challenges in this environment are small, as is the nonprofit sector overall. Over 85 percent of nonprofits filing 990s or 990Ns that reported information on revenues reported revenues of less than $1 million. The small nonprofits that populate the congressional districts of our federal legislators don’t necessarily see themselves as benefitting much from many foundations—in fact, many feel distant and alienated from foundation grantmakers. If foundations are going to make their case with members of Congress, they have to make a case about supporting those small nonprofits that constitute the bulk of the sector and the bulk of the community-based nonprofits that are the mainstays of community revitalization and community-problem solving in their home communities.

In all candor, however—and friends who work the Hill lobbying on these issues tend to confirm my observation—I haven’t seen or heard much criticism of foundations from members of Congress, or anyone else in legislative capacities, in recent years. There may be continuing questions in Congress about supporting organizations that often have the surname of “foundation,” but not much that I’ve sensed about concern from Congress regarding foundations as a specific class of organizations. At most, one can look to the questions that members of the House Ways and Means Committee asked foundation sector witnesses in one hearing earlier this year, but the questions were about who benefits from charitable giving overall, not just foundations, and whether charitable distributions might be better targeted to specific public purposes and constituencies. The most effective answer during the hearing was delivered by a foundation spokesperson from a community foundation leader, rather than a big institutional foundation. The explanation was not about the economic impact of philanthropy, but the community foundation’s assistance to low-income families in Reading, Pennsylvania. However, the actions of a community foundation in the poorest city in the nation aren’t necessarily transferable to the actions of other foundations elsewhere, particularly family and institutional foundations.

The question that was posed by members of the committee, especially Charlie Rangel and Xavier Becerra, did not concern the economic multiplier effects of foundations in terms of jobs and gross domestic product, but whether foundation resources—and charitable giving altogether—were addressing critical societal needs, especially at a time when government was cutting back on social safety net funding. Despite the actions of the community foundation in Reading, that city, like many other cities, is still declining and losing vital social safety net resources. Whether and how foundations are responding to places like Reading, Pennsylvania, and Flint, Michigan, and Gadsden, Alabama, and other poverty-ridden communities is a huge challenge for our society and, in the context of this program, for foundations, that some in Congress do not think that the bulk of foundation grantmaking reaches people in need.

It doesn’t help when foundations show a lack of racial or ethnic diversity that doesn’t quite track that of the changing demographic composition of the American population—or even Congress. Nineteen percent of the members of the House of Representatives are persons of color, compared to 8.4 percent of the CEOs of the 801 foundations that shared that information as responses to a survey administered by the Council on Foundations. The composition of foundation boards of directors is more homogeneously white than the composition of Fortune 100 and Fortune 500 corporate boards.

In the wake of the bankruptcy filing of Detroit, as the federal government appears uncertain or worse about its ability to respond to the city’s fiscal death spiral, the challenge to foundations is not their share of the nation’s GDP or their grantmaking ROI, but what they can deliver to communities to help reverse a decades-long decline. Probably the most significant steps in Detroit have been taken through the efforts of foundations like the Kresge Foundation, which is designing and capitalizing a plan for Detroit’s future that lays out a coherent path that the city and government agencies might follow, and the Skillman Foundation, which is working on the remaking of Detroit’s public education system. It doesn’t boil down to an economist’s conception of ROI, but risk-taking initiatives along the lines of Kresge’s or Skillman’s might be the most valuable thing that Detroit foundations can do to help that troubled city. Similarly, in the wake of the killing of Trayvon Martin and the acquittal of George Zimmerman, the activities of those foundations that are taking aim at issues of racial disparities—big foundations, such as Kellogg and Ford, and small foundations, such as Akonadi and Hazen—might be as valuable as anything foundations might do. These activities might not show short-term economic impacts, but are vital for long-term social progress in our society.

In fact, that’s the role that makes foundations invaluable: their role as risk capital, with their ability to experiment and take chances without being overly concerned with economic metrics. The ability of foundations to take chances on things that government can’t do and that charitable giving generally doesn’t do is a selling point with legislators. You don’t always need to boil foundation grantmaking—or nonprofit program activity, for that matter—down to a bunch of quantitative metrics. Sometimes, when you do, you fall into a trap where what you’re measuring shapes and determines what you actually do. The likelihood that foundations and nonprofits caught up in too much emphasis on metrics might shy away from thorny problems that don’t lend themselves to easy quantification and measurable causality is a serious concern in the nonprofit sector.

Nonetheless, if I were to point to broader concerns that legislators have about nonprofits, I’d note the unfortunately significant pushback against charities at many levels of government. You can see this in the efforts of cities, particularly in the Northeast and Midwest, to design schemes to exact property taxes from tax-exempt property owners under the guise of payments in lieu of taxes and user fees. You can see this as many small- and medium-sized cities are cutting back on or eliminating grants from municipal general funds to local human service nonprofits and increasingly trying to find ways of reducing Community Development Block Grant distributions to nonprofits. Those local political dynamics are not unknown to state and congressional legislators; I would describe the situation as one starving sector looking for resources from another.

During the charitable deduction campaign, members of Congress have heard conflicting messages from charities that produce little but confusion. As many people remember, nonprofit leadership organizations coalesced around the message of protecting the charitable deduction and avoiding discussion of the potential need for tax increases or generating increased governmental expenditures. My interviews with nonprofits indicated that a segment of nonprofits defended their advocacy of the charitable deduction by contrasting it with governmental expenditures, telling members in no uncertain terms that a charitable dollar was more efficient and effective than a government dollar as the result of government regulations and bureaucracy. In line with recent writings I have seen from James Piereson and Howard Husock, there’s a perspective that nonprofits that eschew government funding are in some ways more deserving beneficiaries of tax-deductible charitable donations. Rather than coalescing around sector-wide issues, nonprofits are seen as pitting themselves against each other on the resource that pays for one-third of nonprofit revenues—governmental grants and contracts, along with fees for goods and services from government.

Another dimension of concern, or perhaps confusion, is the explosion of political organizations—the 501(c)(4) social welfare organizations—that look like well-heeled, well-capitalized nonprofits. There is a huge amount of money flowing through political entities that the press and frequently members of Congress simply refer to as “nonprofits.” When the public sees press reports about these “nonprofit” organizations, it’s almost unavoidable that people will conflate and confuse these 501(c)(4)s with public charity 501(c)(3)s. Although they have been dubbed “social welfare organizations,” the past couple of years of new and big 501(c)(4)s deliver precious little social welfare.

Finally, there is a problem for nonprofits among legislators that is partially being abetted by foundations themselves. In state legislatures and at the national level, there is increasing question as to the charitable distinctiveness of 501(c)(3) nonprofits. As states pass legislation authorizing L3Cs (low-profit limited liability corporations) and B corporations, the sentiment has arisen that a charitably minded for-profit can do good that is comparable to the public benefit delivered by nonprofits. Because, at this point, these so-called hybrid entities haven’t sought much from the tax code other than easy access to foundation Program Related Investments, they are increasingly seen as less resource-demanding variations on the charitable theme. Many of their adherents describe these “social enterprises” as something akin to better-functioning nonprofits that don’t need to seek charitable contributions and tax exemptions. The nonprofit sector—and the foundation sector that is committed to nonprofits—has to be strong in explaining why the status of 501(c)(3) public charity is distinctive and important and not simply a function that can be carried out by for-profit entities, regardless of their motives.

It is important to note that the public statements of some foundation leaders, who say that they want philanthropy to be “sector agnostic,”—that is, open to supporting for-profits as well as nonprofits if they fulfill the foundation sector’s mission—are quite unhelpful. But it also puts the lie to the thinking that foundations can simply buy into the activities and accomplishments of the 501(c)(3) sector to demonstrate their economic value if foundations are open to treating nonprofits as just another supplicant, differing only by federal tax status.

Overall, I haven’t seen much indication that foundations per se have been subjected to the kind of congressional scrutiny that has been aimed at nonprofits. In the broad scheme of things, $45 billion in foundation grantmaking accounts for a small part of overall charitable distributions and a much smaller part of the revenues of public charities. What I hear Congress demanding of nonprofits is that they help people in need, that they deliver on their promises to their constituencies, and that they maximize their problem-solving abilities working with the communities and constituencies they serve. That should go double for foundations.

If I were concerned about the specific delivery of benefits of foundations, I would concern myself with showing how they help communities tackle their most difficult problems, how they deliver resources to take risks that can’t easily be addressed with governmental dollars, and how they deliver to nonprofits the wherewithal, including general operating support, to build and sustain nonprofit capacity. In the end, the value of foundations isn’t theirs, but the value carried out on the ground by their nonprofit delivery systems. 

  • Steven E. Mayer, Effective Communities Project

    Economic value of foundations? I agree with the approach you’re taking, Rick, that Congress is asking the wrong question, and that there are more compelling points of importance than foundations’ economic multipliers. Otherwise, a good answer to their question would be to present the combined value of private sector assets held by foundations. Imagine all that being dumped on the market at once! We’d have some answers right quick about the value of foundations – to the private sector at least.

    What if one asked what’s the economic value of Congress. They would be quick to point out, as did you, that one can’t measure the value of anything just through its monetary ledger. And as you point out, their real concern is in how much value foundations deliver. This is a worthy quest for discovery (for all sectors), as long as they mean something different than just the increased wealth of all they touch.

    A good goal for foundations would be to diminish the gap between the assets they each control, and the value they each deliver in all the ways at their disposal.