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Weighing the pros and cons of foundations in a democracy, Rob Reich cites their lack of transparency and public accountability, their support for the dead hand of donors, and their heavy tax expenditures. Nevertheless, he argues that they sustain pluralistic voices and perspectives, innovation and experimentation, and provide counterweights to both government and the commercial sector.
He does have his doubts, however. Reich, like other observers, raises serious questions about the performance of many institutions.
I share these reservations. While I believe foundations can be healthy for a democracy, I am concerned that without serious modifications they will harm our institutions and the public interest. These concerns revolve around issues of governance, the growth of mega-foundations, and past and current foundation priorities, issues to which Reich pays too little attention.
A recent Forbes article argued that foundations had not changed their priorities in the century since the Carnegie and Rockefeller foundations were started. They still give an overwhelming portion of grants to established institutions of higher education, health, and the arts and very little to the poorest in our society and to some of our most urgent public needs. Can these results be justified to taxpayers who provide a hefty tax subsidy to these institutions? Foundations receive more in tax breaks than they spend on grants, which neglect a large portion of our citizens and nonprofit groups.
The issue of priorities relates directly to governance. Foundation boards are composed almost entirely of wealthy people and elite professionals. Until they include members of the non-elite classes and truly represent the face of America, foundation priorities will continue to reflect the preferences of the wealthy few.
Procedural obstacles also bar a wider and more equitable distribution of foundation money. The current minimum payout rate of 5 percent of net assets—a minimum toward which staff and managements costs are counted—may comfort donors hell-bent on maintaining their assets in perpetuity, but it denies taxpayers the satisfaction of seeing tax subsidies better spent, and spent in greater quantities, on the public good.
While Reich worries about the thousands of small family foundations, in his view too small to be effective, the more concerning development in family foundations is the growth of the super large, mega-foundations. They will pose a real threat to our democracy.
Foundation payout rates should rise, and tax incentives be reduced.
If the pundits are right, we are about to experience an enormous transfer of wealth. Researchers at Boston College predict that rich individuals will transfer trillions, not billions, of dollars to foundations and charities over the next few decades. These will each be run by two or three people—the Gates board includes three members, Bill, Melinda and Warren Buffett. These foundations will each spend billions of dollars annually without any public discussion or political process.
So what can be done to ensure that foundations are more accountable, represent the American population, and distribute their money in a more equitable manner?
The first measure would be to limit the size of foundations to, let’s say, no more than $10-15 billion. Antitrust policies would be used to break up the larger ones like the Gates and Walton Foundations, as well as future behemoths. At family foundations over a certain size, at least two-thirds of board members should be non-family representatives of the public. All other family foundations should be required to have majority non-family boards. Foundations unwilling to meet these goals within ten years would be shuttered.
Next, the mandatory payout rates should rise to at least 8 percent of net assets, all in grants. New laws should demand a much wider distribution of money than currently prevails.
The tax incentive for establishing foundations should be reduced from a 40 percent deduction to a 25 percent tax deduction, thereby freeing up more federal money for needed social programs. Taxpayers would receive the benefits.
And tighter rules for public accountability should be instituted. All foundations should be required to submit a program and financial report at least every two years. Such reports would describe grant-making processes and decisions as well as foundation outreach to and interactions with the grantees.
Foundations have an enormous potential for strengthening our democracy along the lines Reich has suggested. But only if they change with the times, reform their governance practices, and alter their priorities to provide benefits to more people in an equitable manner.
In philanthropy, the trade-off between elitism and the public interest must be better balanced. To date, it has tilted toward the former.
The modern foundation is an institutional oddity in a democracy. A democratic society is committed to the equality of citizens, but foundations are the voice of plutocracy.
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