Fueled, in part, by demographics, the devolution of federal programs to the states and private sector, a prolonged bull market in stocks and other assets, and the persistence of longstanding social problems, the charitable sector in the United States has experienced unprecedented growth over the last thirty years. That growth has come at a cost, however, as state governments and legislators on Capitol Hill failed to adequately fund the oversight activities of the IRS and other entities charged with monitoring the sector. The predictable result has been a spate of media reports about alleged wrongdoing and self-dealing at foundations and nonprofits and a corresponding drop in the public's confidence in the sector.
To ensure that America's charities and foundations uphold the highest possible ethical standards and remain a vibrant and healthy part of American society, , with the encouragement of leaders of the Senate Finance Committee, convened a group of nonprofit leaders in 2004 to recommend actions designed to strengthen the governance, transparency, and accountability of charitable organizations. After eighteen months of listening and discussion, the issued its to Congress in June and, like almost everyone else in the sector, has been watching as congressional conferees negotiate over whether to include a package of charitable reforms and giving incentives in pending legislation.
Recently, Philanthropy News Digest spoke with Diana Aviv, president and CEO of Independent Sector, about the work of the panel, the current status of suggested charitable reforms, Warren Buffett's historic gift to the Bill and Melinda Gates Foundation, and the ability of the charitable sector to re-invent itself to meet the challenges of the twenty-first century.
Aviv joined IS in April 2003 after nine years at United Jewish Communities, where she worked closely with federations and national agencies concerned with the domestic health and welfare needs of vulnerable people. Prior to that, she was associate executive vice chair at the Jewish Council of Public Affairs, director of programs for the National Council of Jewish Women, and director of a comprehensive program to serve battered women and their families.
A noted expert on major issues affecting the nonprofit and philanthropic communities, Aviv is a frequent speaker on the accountability and transparency of nonprofit organizations, the financial state of the nonprofit sector, the role of civil society in democracy, and civic engagement. She has testified before Congress and has been quoted in numerous print, broadcast, and online media outlets, including The New York Times, the Washington Post, The Wall Street Journal, and National Public Radio.
Aviv is a past chair of the National Immigration Forum, an advisory board member of the Stanford Social Innovation Review and the Center for Effective Philanthropy, a member of the board of governors of the Partnership for Public Service, and a member of the board of directors of GuideStar. A native of South Africa, she graduated with a B.S.W. from the University of Witwatersrand in Johannesburg and received a Master of Social Work degree at Columbia University.
Philanthropy News Digest: The charitable sector has been hurt in recent years by stories in the press detailing instances of alleged fraud and self-dealing, excessive compensation of executives and trustees, and other abuses of the public trust. How would you characterize the health of the sector?
Diana Aviv: If an indication of health is how much money is available to the sector to do its work, I would say the sector is in relatively good shape. Look at giving for disaster relief. The most recent studies show giving for disaster relief up a significant amount — I think the overall figure was $7.37 billion in 2005. I also think the public views the sector's response to Hurricane Katrina in a favorable light; the public saw faith-based organizations and local charities responding immediately to the disaster, even as FEMA and state and local government stumbled in their response.
Another indication of the health of the sector is the growing number of nonprofit organizations in this country. Something on the order of 70,000 new nonprofit organizations are being formed every year, and the sector itself has more than doubled in size over the last twenty years.
On the other hand, it's also true, as you say, that there have been stories in the press over the last few years about alleged wrongdoing at nonprofits, examples of excessive compensation of executives and board members, self-dealing, and improper if not unethical fundraising practices. I think it's worth remembering, however, that to the extent those stories are true, the number of organizations involved comprises a very small percentage of the overall sector. Unfortunately, because those are the kinds of stories the press tends to focus on, the public might believe that wrongdoing in the sector is more pervasive than is actually the case. So, again, it depends on what your criteria are for assessing the health of the sector.
PND: Given the reluctance of government, especially at the federal level, to fund enforcement of existing regulations, isn't it a good thing the press has assumed a sort of watchdog role with respect to the sector?
[The media] can bring to light situations that need to be fixed and can help keep organizations vigilant in examining their own actions and policies....
DA: It's the media's responsibility to investigate and report. They can bring to light situations that need to be fixed and can help keep organizations vigilant in examining their own actions and policies. We often say that leaders and staff at nonprofit organizations should ask themselves, Am I comfortable with our activities and policies being reported by the local newspaper? If the answer is no, they need to think about whether they are comfortable with what they are doing. It would be great, as well, to hear more about the hundreds of thousands of nonprofits doing good work.
PND: In addition to your day job as president and CEO of , you've been executive director, for almost two years, of something called the . The panel recently submitted a final report to the that included a comprehensive series of giving incentives and reforms designed to strengthen the transparency, governance, and accountability of charitable organizations. For the moment, at any rate, that package seems to have stalled in Congress. Why did Congress decide to table the panel's recommendations?
DA: I'm not sure that's the case. If you look at any major initiative in Washington — and this is true for any field of endeavor — unless there's a crisis that galvanizes legislators into action, it typically takes years for Congress to agree on the specifics of legislation and to pass a bill. Look at how long it took for Congress to pass a major highway bill. Look at the pension bill currently under consideration; everybody said it was a must-pass, but it's in trouble. Even must-pass legislation takes longer to pass — sometimes much longer — than its supporters would like. The fact that Senator Grassley (R-IA), chairman of the Senate Finance Committee and the main leader of the reform effort, dropped some legislation into the hopper at the end of last year doesn't mean that that legislation will automatically be converted into a bill that can be signed by the president a few months down the road.
Secondly, it would not be accurate to say that everybody in Congress agrees with Senator Grassley that what the sector needs right now are reforms or changes to existing tax law to encourage more charitable giving. There are folks like Senator Santorum (R-PA) who have argued that the sector is doing fine as is and doesn't need more regulation or more tax incentives for giving. You have differences of opinion on that score. It's Senator Grassley's job to persuade his colleagues on the Senate Finance Committee of the value of the legislation and, just as importantly, to persuade Bill Thomas (R-CA), chairman of the , which has jurisdiction over tax-related issues in the House, to support the reforms and see that they are passed into law.
As you might imagine, that's no easy task 8111 especially when some groups believe their ox is about to be gored, which is the case whenever you are trying to close loopholes in the tax code or trying to increase penalties with respect to certain kinds of abuses of the code. Inevitably, somebody is going to be unhappy at the prospect of changes. Frequently their response will be to hire a lobbyist to persuade other lawmakers that the proposed changes are bad policy. Those lawmakers, in turn, may try to persuade Senator Grassley, for reasons unrelated to the specifics of the charity bill, to change or even eliminate something in the bill. It's a form of horse-trading, and it goes on all the time in Washington. Even when legislators are clearly for or against something, they'll weigh their vote on a bill against what else they might want or be able to get for their constituents. As a result, in the grand congressional scheme of things, legislation seldom moves forward quickly or easily unless there is a major crisis.
What I do know about Senator Grassley is that he is actively committed to this issue and these reforms....
What I do know about Senator Grassley, however, is that he is actively committed to this issue and these reforms. In fact, it is my understanding that recently he indicated that charitable sector reform is among his top three or four priorities. And don't forget, he is the chair of an extremely powerful committee. So I would say that it's too early to say what will happen with the legislation.
PND: Is it your sense that Senator Grassley believes charitable organizations routinely betray the public trust?
DA: I think Senator Grassley's perception of charitable organizations and the charitable sector have evolved over time. There was a point, a couple of years ago, when he described the sector as a "cesspool" — he actually used that word — and said that, in too many instances, it was a place where people viewed their tax exemption as an opportunity to pay for their country clubs and European vacations, rather than as an incentive to do the good work the sector was created to do. More recently, however, both Senator Grassley and Senator Baucus (D-MT), the ranking minority member on the Senate Finance Committee, have been very careful in their statements to differentiate between the vast majority of charitable organizations doing good work and the unscrupulous individuals who have exploited loopholes in the tax code for their own purposes and financial benefit.
PND: At a time when public-sector institutions increasingly seem unresponsive and ineffective, do you personally believe that more government regulation of the sector is the answer to its problems, perceived or otherwise?
DA: If you look at the recommendations made by the Panel on the Nonprofit Sector, you'll see that we said there were three was sets of actions that needed to be taken, and that all three needed to happen simultaneously. That is, if you pursued one set of actions in isolation — say, the recommendations designed for charitable organizations to improve their own governance — you would partially solve the problem, but you wouldn't really solve the whole problem. Another set of recommendations has to do with looking at existing regulations and making them work better — for example, providing more funding to the IRS for oversight, electronic filing of tax returns, and so on. And the third set of recommendations has to do with beefing up government's oversight role of the sector. I would suggest to you that if someone deliberately uses a charitable organization or engages in fraudulent practice to enrich him- or herself, only a government oversight body can stop that, because those kinds of individuals don't join organizations like Independent Sector, they don't join associations of grantmakers or nonprofit organizations, and they're not subject to group pressure because they are not there to serve the public in the first place. So we need to make sure that government is seen as the primary enforcer of existing regulations and has the authority and wherewithal to do its job effectively.
PND: And yet some critics of the panel have suggested that its recommendations put too much emphasis on self-regulation as the solution to the sector's problems. Is that a valid criticism?
Self-regulation is important, but it must be coupled with legislative changes and effective oversight....
DA: The recommendations of the panel's are focused on three different areas of action: actions to be taken by charitable organizations, by the IRS, and by Congress. Over 80 percent of the recommendations focused on specific changes for Congress and the IRS to make to existing laws and regulations to prevent unscrupulous individuals from taking advantage of tax loopholes. Self-regulation is very important, but it must be coupled with legislative changes and effective oversight.
PND: To a large degree, effective self-regulation hinges on questions of organizational and financial capacity. Did the panel consider those kinds of issues in making its recommendations?
DA: We were so concerned about that issue that we actually created a working group whose sole charge was to focus on the special considerations of small nonprofit organizations. When I appeared before Congress twice to testify on these issues, I told members of the committee that it was vitally important they take into account questions of capacity, especially as it relates to smaller organizations. We know that 73 percent of the organizations in the sector have budgets of less than $500,000; we know that a large percentage of foundations — I believe the figure is 83 percent — have no paid staff at all. That's also true for about 40 percent of public charities. Congress needs to take all that into consideration as it thinks about how to regulate the sector.
Let me give you an example of how we made adjustments for small organizations. With respect to audit committees, we recommended that smaller organizations be allowed to choose whether they have a separate audit committee, rather than be required to have one. We also suggested that only organizations with annual revenues of more than $1 million be required to audit their books, and that organizations with revenues between $250,000 and $1 million should only be required to have their financial statements reviewed by an independent public accountant. That particular recommendation was based on what we heard from people in listening sessions we conducted around the country; in all of those sessions, an overwhelming majority of people welcomed the idea of having an independent accountant review their financial statements.
PND: Will that group continue its work even though the panel has submitted a final report to Congress?
DA: Yes. The panel submitted two reports to Congress: the final report last June and the supplemental report in March. The former included nine areas of recommendations, and within those nine there were a whole bunch of sub-recommendations. We also noted in the supplemental report that there were two areas where we hadn't finished our work. One is self-regulation, and the other concerns forms 990 and 990-PF — the tax forms that public charities and private foundations are required to file with the IRS. We believe those forms could be made much clearer and more consistent, in terms of the information they seek to obtain. The focus of the self-regulation advisory committee, which has thirty-three members and has met three times, is on additional actions the sector might consider adopting to improves its own standards and practices.
PND: As the CEO of an organization whose membership comprises both large private foundations and small grassroots nonprofits, you're more familiar than most with the unequal power dynamic that exists between funders and their grantees. From your perspective, has that dynamic become more lopsided over the last twenty years?
If you want to talk about the power dynamic between foundations and nonprofits, you really have to talk about the power dynamic between foundations and their grantees....
DA: Before I answer that question, let me share a fact with you. Of the combined revenues of the 1.4 million charitable organizations on file with the IRS, only about 3 percent come from foundations and corporate giving programs — a very small percentage. So, if you want to talk about the power dynamic between foundations and nonprofits, you really have to talk about the power dynamic between foundations and their grantees. The and the and and and hundreds of other major national nonprofit organizations get little or no money from the foundation world, and organizations like those, in many instances, are much larger than the majority of private foundations.
The second myth about foundations worth noting is that the vast majority of them — about 83 percent, according to the — have no paid staff. In these instances, a wealthy individual has decided he wants to give some or all of his money to a charitable cause or causes and has created a foundation as a vehicle to do that. These small foundations bear no resemblance to the .
PND: Which, with almost $30 billion in assets, is the largest foundation in the world. Recently, Warren Buffet stunned the philanthropic community and much of the rest of the world by announcing that he planned to give the bulk of his fortune — something on the order of $31 billion — to the Gates Foundation. The gift, which is structured in such a way that the foundation will receive annual payments of approximately $1.5 billion as long as either Bill or Melinda are alive, will effectively double the amount of the Gates Foundation's annual grantmaking. Do you expect Mr. Buffett's announcement to lead to similarly structured gifts down the road? And are you concerned about the concentration of so much wealth in a single institution?
DA: While it is the largest philanthropic gift in history, it's worth noting that, according to the , foundations gave away $33.6 billion in 2005, and that the combined assets of foundations were roughly $510.5 billion in 2004. So Mr. Buffett's gift would add another $2 billion a year to what foundations give.
That said, it is still a huge amount of money to be going to one organization, and some people will express concern whenever so much money is concentrated in the hands of so few. Only time will tell if the money is used effectively, but Bill and Melinda Gates have assembled a magnificent staff, and it should not be assumed that larger organizations cannot be as accountable or transparent as smaller organizations. Don't forget it was smaller charities that were involved in the , which demonstrates that the size of a nonprofit organization has little or no correlation with its accountability.
You know, I think Mr. Buffett's gift sends a lot of messages. It sends a message to wealthy people that it is good to give back to society. It also shows that a large donation does not have to be about name recognition. Warren Buffett could have created his own foundation, but instead he decided to give the money to people he trusts and a foundation he believes in. And, maybe most importantly, his gift may inspire and create new philanthropists, especially among the ranks of wealthy business leaders.
PND: Buffett's gift was nothing if not creative. In their new book, Creative Philanthropy, Helmut Anheier and Diana Leet suggest that the foundation field is suffering from a sort of low-key malaise related to what they describe as "a lack of awareness of the possible." Have foundations lost their nerve?
Nobody says you have to be a genius or even be generous to establish a foundation....
DA: Good question. All it takes to establish a foundation is a lawyer and a certain amount of money. Nobody says you have to be a genius or even be generous to establish a foundation. The question really is, are all wealthy people brilliant and creative, and I would say to you the answer is no. That said, it's also true that large foundations that can afford to hire staff are in a position to hire some of the best minds in the business. So, if you're asking whether very large staffed foundations have lost their nerve and some of their creativity, I would say that the answer really depends on whom you're talking about. When I think about what the Gates Foundation has done over its short lifespan to organize a vaccine distribution system for the developing world before the vaccines have even been created, I will tell you that that's creative philanthropy in action.
Another foundation that comes to mind in this context is the , which has been making large investments in a limited number of organizations working in the youth development field. One of those is an organization called , which works to improve the quality of life for children and families in Harlem. McConnell Clark gave HCZ a grant of $250,000 in 1999 and followed that up with a grant of $1 million a few years later to help HCZ develop and implement a business plan and scalable management structures. That, in turn, has enabled HCZ to do some extraordinary work and to leverage McConnell Clark's initial investment many times over.
On the other hand, it's no secret that there are foundations out there that don't do a lot of due diligence and are not particularly effective. On that score, one of the interesting new tools on the market for foundations was created by an organization called the , which has designed an instrument for foundations that informs them in some detail about grantee perceptions of various aspects of their operation. What I'm saying is that when you look at the field as a whole, you see a mixed picture: There are some great things happening, some okay things happening, and some things that should be fixed.
PND: In their new book, the futurists Alvin and Heidi Toffler suggest that most of the philanthropic organizational structures with which we're familiar — private foundations, community foundations, the United Way, et cetera — are products of a 19th-century form of wealth creation that is rapidly giving away to new, knowledge-based forms of wealth creation. In the new world the Tofflers describe, only institutions that are capable of reinventing themselves rapidly and repeatedly are likely to survive. Do you agree?
DA: Well, I think the Tofflers have the right idea, though I'm not sure current reality comports with their predictions. The fact of the matter is that there are some organizations and businesses in our society that have survived the period of disruptive change we are living though only because someone bailed them out. Take the savings and loan industry, or the airline industry. These are not profitable industries in any recognizable definition of that word, and yet the government bailed them out because those kinds of industries and institutions need to exist in order for society to function smoothly.
I would suggest to you that the same is true of the charitable sector. In most cases, people give their time or money to a nonprofit organization because they believe passionately in the mission of the organization, not on the basis of a rigorous assessment of that organization's effectiveness. Which is not to suggest that organizations in the sector are incapable of making serious changes and re-inventing themselves. Two that come to mind are the United Way of America, which, under the leadership of Brian Gallagher, has done a terrific job of looking at different ways of relating to its local chapters; and the other is the , which has completely re-invented itself from an organization that was created to serve people suffering from polio into an organization that works to prevent premature baby births. Then you have an organization like the , which has been taking a close look at its practices to make sure they are relevant and align with current best practices and heightened scrutiny of the sector. The is an organization that needs — and is trying — to make those kinds of changes.
PND: Are you optimistic about the prospects of the charitable sector emerging from this period of heightened scrutiny and disruptive change strengthened and with its values intact?
This is the first time in over thirty years that there has been a major examination of the rules governing the sector....
DA: Absolutely. This is the first time in over thirty years that there has been a major examination of the rules governing the sector. The charitable sector has grown tremendously during that period and the tax laws have not kept up. The IRS's audit rate has been falling for some time and today less than one percent of nonprofit organizations are audited.
But while only a small number of organizations operate illegally or unethically, that is still not acceptable, particularly since we depend on the public's trust to do our work. New legislation needs to be passed, the IRS and state oversight bodies must be able to effectively monitor and enforce existing tax laws and regulations, and many charitable organizations may require help with governance and good practice.
We've already seen through the work of the Panel on the Nonprofit Sector that staff at nonprofit organizations are taking a look at their own practices and policies and thinking about what they can do better and what needs to be changed. And for me, that's a clear indication that the charitable sector will emerge from this period with its values, its capacity, and its reputation not only intact but strengthened.
PND: Well, thank you, Diana, for speaking with us today.
DA: Thank you.
Mitch Nauffts, PND's editorial director, spoke with Diana Aviv in June. For more information on the Newsmakers series, contact Mitch at [email protected].