U.S. foundation giving keeps surging, and changing

The Foundation Center, the best source of information on charitable foundations, has released its latest trend data. While the fact that foundation grantmaking continues to boom is hardly a surprise given various newspaper headlines the last few years, there are some changes underway which development directors and executive directors would be wise to think about.

The Center's data comes from the largest 1,100 foundations, representing about half of all foundation grant dollars awarded. Total grant dollars from those institutions are rising now at close to twice the rate of inflation: up about 6% in 2005 after a rise of 8% for 2004. (And the center predicts an even greater increase for 2006 thanks to various high-profile foundation gifts starting to turn into new grant dollars).

Those increases are in dollars awarded, though -- the total number of individual grants issued rose only half as much. So the average size of individual foundation grants is rising. At the top end, a record 308 individual grants were at least $5 million each in 2005.

The common accusation that foundations have limited attention spans is supported in some ways by this data. For example the largest grantmaking increases by subject area in 2005 were environmental and animal-related causes, two categories which had declined the previous three years.

Unrestricted grants rose by only 1% for 2005, meaning they declined as a fraction of all grant dollars. So that's one recurring gripe which is not yet being persuasive for many folks on the foundation side of the discussion (I'm one example of that, actually).

A constitutional right to federal grants?

Public-health and human-services groups have celebrated two federal court rulings overturning a string that Congress placed onto federal grants for overseas work to combat HIV/AIDS, and a broad coalition is now working to defeat the Bush Administration's appeal. On the specific issue at hand I'm totally with them, but at another level this makes me uneasy.

A US law enacted in 2003 requires nongovernmental organizations to pledge their opposition to prostitution as a condition of receiving funds for international anti-AIDS work. The issue is that non-profits doing such work feel they must work with sex workers and that in order to gain trust they have to refrain from trying to talk folks out of being prostitutes. That's a policy-tactics choice which I'm fine with but a lot of folks in the U.S. Congress aren't, hence the idea of requiring signing that pledge in order to get federal funding.

The pledge, it's worth noting, does not stop anyone from working with prostitutes nor require anyone to specifically try to stop them from plying that trade, and United Nations-affiliated programs were specifically exempted from it. You can read it for yourself here in one of the court decisions, see page 12. Actually the feds' interpretation of the pledge, according the court ruling, has been more that it would prevent a group from advocating the legalization of prostitution.

Regardless, the plaintiffs successfully turned this into a free-speech issue; the government's counterargument is that it's just a contract issue (there's no constitutional right to a grant and anyone not wanting to sign the pledge can just decline to accept one on those terms). It turns out that the Supreme Court has previously concluded that when the federal government is the funder, speech-inhibiting grant requirements have a big enough impact that they can constitute an unreasonable infringement of the First Amendment right to free speech. (See the page of that court document numbered 56.) As one of the federal judges put it, “The Supreme Court has repeatedly found that speech, or an agreement not to speak, cannot be compelled or coerced as a condition of participation in a government program.”

That was news to me but as stated it sounds like the government can't require somebody to sign a loyalty oath as a condition of receiving an entitlement, like a Social Security check. An interpretation that it means the government can't place conditions on a discretionary optional grant...is it just me or does that slope sound rather slippery? Can't we imagine scenarios where such a right to federal grant money could lead to funding going to groups carrying out far-less-positive agendas? Is that really what the Supreme Court meant?

And do we really want corporations (albeit in this case not-for-profit ones) to be able to assert inalienable rights just like an individual person? I thought Teddy Roosevelt settled that point a while back in the negative and I've always been glad he did. I dunno, could be I'm just exposing my ignorance of constitutional law and theory, but...really not sure the forest isn't being lost for the sake of a tree here.

A thoughtful response from Gates

Thanks to reader Greg for a tip that the Gates Foundation has replaced the online announcement that replies to the L.A. Times articles. The new essay, still signed by Chief Operating Officer Cheryl Scott, is quite different from the one that was online for only half a day last week though it does still make the good point that Gates has been completely transparent about its investing.

The new essay makes a point of stating that "Bill and Melinda oversee the investment of the foundation's endowment", so it does look like they were annoyed that the previous posting and Scott's newspaper interview made it sound otherwise. It says that they give "guidance" to professional investment managers, which every non-profit watchdog would agree is the appropriate approach for a foundation board.

Perhaps the most-important substantive message of the new essay is that the Gates Foundation is not in the camp that says a foundation should seek only to maximize returns with its endowment. Rather, their reason for mostly declining to rank companies on moral grounds is the real-life complexity and contradictions inherent in that concept. "There are dozens of factors that could be considered...Many of the companies mentioned in the Los Angeles Times articles do a lot of work that some people like, as well as work some people do not like. Some activities might even be viewed positively by some people and negatively by others." They also note that some of the issues which the newspaper brought up as reasons not to invest in a company, such as lending laws or environmental regulation, are outside the foundation's charitable mission.

On the shareholder activism question they basically vote for reserving proxy voting for issues directly related to a company's carrying out its core mission, i.e. good management of the company itself. And they do note the one specific subject on which Bill and Melinda have thus far decided that the issues are clear-cut enough to decide not to invest at all: tobacco.

I don't personally agree with all of the above decisions but also don't find any of them to be out of the bounds of what reasonable people of good will might conclude. It does sound like the newspaper articles have provoked renewed focus on the subject over there, and that the Gates folks understand that its unique status in philanthropy inherently places some special obligations on them.

Gates Fnd: she maybe shouldn't have said that out loud

It may be that Gates Foundation COO Cheryl Scott is in hot water today, and the reason can be read between the lines of today's news coverage.

The L.A. Times today has a followup article which is obviously based on that press release that appeared and then disappeared from the foundation website yesterday. The newspaper is spinning that announcement as being about the foundation newly reconsidering its investment practices in reaction to their articles. I didn't get that from what they had posted, particularly, but since I still can't find a copy I'm not sure. They secondhand-quote Scott saying that such internal discussion was already underway long before the recent articles, which is completely plausible to anyone working in major foundations because it's not at all a new subject in that world.

Nobody at Gates is talking to the L.A. Times but Scott on Tuesday did talk to their hometown paper, the Seattle Times. To them she said on the record that the foundation's current method of investing its assets is "not 100 percent effective," and she did apparently say to that paper that the foundation will now newly review its investment practices. She had also in that press release written that the foundation would "formalize the process by which Bill and Melinda Gates analyze and review these issues."

That last part may be what ticked off one or more people named Gates. In effect Scott told the world that Bill and Melinda, personally, have not been paying much attention to or thought about the issue of where the foundation invests its huge endowment. Whether that is or isn't a fair characterization I dunno, but I can hazard a guess as to how well it was received by a guy who quit college at age 20 and built from scratch a huge global business and fortune.

Moore learned something, and Gates is being silly

I sat down this evening to write some complimentary things about the Bill & Melinda Gates Foundation based on an "announcement" from the Chief Operating Officer that was posted on their website a few hours ago. Cheryl Scott made, I thought, some good counterpoints to the nasty L.A. Times articles as well as pointing out how notably transparent the foundation is with both its grantmaking and its investing, which is true and they deserve credit for. Broadly Scott pointed out that choosing pure investments is a lot harder in practice than it seems to people who've never tried to do it, which I have no doubt is true, but I won't try to re-create her words. That doesn't make the issue of investing being aligned with mission go away, nor did Scott suggest that it does.

But now that reply has vanished from their website, gone without a trace. I can't find any cached copies of it online either, wish I'd thought to save it -- if anyone sees a copy, a pointer would be welcome here. This was, earlier today, the URL.

I suppose some public relations expert convinced somebody atop that food chain that any public response to the slanted newspaper articles simply dignifies the latter, or maybe somebody whose last name starts with a G didn't like what Scott said? If so then I think they're wrong but it's their party and they can cry if they want to. Seems a shame though, why not be the adults in contrast to the L.A. Times' adolescent cheap shots?

Regardless of that, I spent some time on their website and confirmed that they are more overtly transparent than almost any other foundation around. They not only have their entire list of grants on the web (which a fair number of foundations are now doing including the one I work for) with annual summary statistics, plus all the basic financials (ditto), they also put their full detailed tax return with all schedules up there -- meaning the complete list of their endowment investments. Which in their case is literally thousands of pages (big PDF files) and not a quick or easy read, but the point is, it's there in full. That's a standard of transparency everyone in this sector should aspire to.

Down the West Coast a ways, fellow dot-com billionaire Gordon Moore has by his own admission had some humbling experiences with his big new foundation. Like Warren Buffett and many others he has learned firsthand that doing philanthropy well is not nearly as easy as successful businessfolk often assume, and he says he's found religion with regard to transparency. Benefit Magazine's writeup is fairly long but worth the read.

The case against more gen-ops grants

NOTE: my first attempt at describing the CEP report was more truthy than accurate (see reader comments), and is now revised and hopefully better.

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There are a couple of "inside baseball" type subjects which keep coming up anyplace non-profit and foundation staffs gather, regardless of what the specific conference/workshop/briefing/luncheon is actually about. One of them is evaluation (of non-profits, of projects, etc.); the other is that foundations should make more general-operating grants rather than project grants. Say the words "program grant" at any such gathering and you'll quickly be surrounded by knowing sighs and frowning head-shakes.

However the Center for Effective Philanthropy recently assembled a bunch of data suggesting that grantees are not nearly so worked up about that issue as are the foundation staffs who fret about it at conferences. The CEP also reports that a lot of foundation CEOs think that more general-operating grants would be better, although they mostly actually issue restricted grants: funding which can be used only a specific project or program.

As the CEP reports, the top reason that foundation boards prefer restricted grants is one that I find perfectly respectable: to be able to track specific outcomes of grant investments. (Foundations no less than operating non-profits are tying themselves into knots these days trying to figure out how to track and document the results of their work and not simply the amount of work they perform.) And while the CEP notes the obvious fact that grantees prefer to get unrestricted grants and hate the paperwork related to restricted grants, their main point is that non-profit directors are actually far more concerned about the length and amount of a grant than about its strings.

My own beef with this whole debate is that the relevant context is often overlooked. Foundation grants altogether are no more than one-sixth of all philanthropy in the U.S. (according to Giving USA); it would take a dozen new Gates Foundations to change that ratio significantly. The vast majority of philanthropic support for non-profits (mostly from individuals) is unrestricted. So is the large fraction of non-profit revenues (anywhere from a quarter to two-thirds depending on specific sector) that comes from earned income. Hence no more than one-tenth of non-profit revenues is actually arriving with specific strings attached. That hardly seems like a crushing burden of red tape for the hardworking executive director; and wishing that the foundations' reasons for those strings weren't necessary doesn't render them invalid.

On a side note, the CEP report includes a sidebar quoting Elizabeth Keating on the "overhead game", whose interesting proposals on that subject were described previously here.

Overhead: let's make it plain

One of the interesting sessions at the recent Grantmakers in the Arts conference, of direct relevance to folks working in all non-profits, was led by Elizabeth Keating of the Kennedy School at Harvard. She argues persuasively that the ways funders and grantees interact regarding overhead expenses is irrational for all concerned, and that more transparency would enable mutual improvement.

[All which follows is my version of Keating's ideas, any transmission errors are mine.]

If you're a program manager or artistic director who's ever had to debate with your own finance staffer about which grant can pay for which costs, she means you. Or perhaps, as in my case, you've been that grants administrator! For several years at a large complex organization in the 90s I was that spreadsheet geek trying to rationalize a dozen grants with differing rules and reporting requirements, and I'm sure our hard-working program staff didn't enjoy the process any more than I did. (If Laurel, Dave, Steve, Michael or Diane read this they will right now be either laughing or wincing.) Of course now I'm on the funder side of the conversation, to which role I bring direct knowledge of how the bodies get buried so to speak...

Which is not to say that I think the process was entirely time wasted -- actually it forced us as a staff team to deal with important decisions including programmatic choices. But it sure was awkward and messy and arbitrary, and some of the incentives were perverse: the honest answer to a funder's question "What are the overhead costs?" would be "It depends, what are your overhead rules?" Yecch. Many perfectly well-intentioned staff teams have had that experience, and many funders have felt misled.

That last is actually what Keating means by her slightly-unfortunate presentation title "Is There Enough Overhead in This Grant?" She's not particularly arguing that funders should be magically made to only issue unrestricted grants. (Which is good cause they ain't about to, and there are good reasons why not.) Rather she argues that the core of the problem is that there is no consistent definition of "overhead" in detail or even in principle, and that the two parties in the funder-fundee relationship aren't honest enough with each other about the subject.

Keating proposes that non-profits adopt the sort of transparency that is standard for corporations about their finances, and she's working on some promising tools (software, and report formats) for that. She proposes mandatory non-profit openness on this subject once they get big enough to accept project grants: "Once a non-profit has to figure out an overhead allocation for any one grant, they must make that data public as part of financial reporting or annual audits." In return, foundations would agree (locally or nationally) to standard definitions of what is overhead and how much of it is reasonable. We could as a sector have sensible conversation about how much is or is not too much, and have no more jerry-rigged 90-page spreadsheets which arbitrarily assign the copier lease to this grant and the office assistant's salary to that one. Works for me, and the sooner the better.