Private foundations in trouble: tax laws, inflation eat up funds

The geese want to lay fewer golden eggs. Private foundations -- a primary source of money for many symphonies, museums , and charities -- are urging Congress to relax laws regulating how much cash they must pay out every year. Otherwise, they say, a combination of inflation and clumsy government policy will make them an endangered species.

"Do you believe foundations should have the same ability to do things 20 or 30 years from now?" asks Bill White, president of the Mott Foundation. "That's what it comes down to."

At issue is tax law that now requires foundations to annually bestow grants equal to either their net investment income -- such as stock dividends and bond returns -- or 5 percent of their net worth, whichever is larger. The law was meant to prod a few geese that were not dispensing their share of wealth.

"The idea was not to demolish foundations but to get those that were stalled, just paying salaries, up and going," says a foundation official.

Foundations are lobbying for Congress to remove the "investment income" part of the requirement. Bills to that effect have been introduced in both chambers.

In 1969, when the original law was passed, few congressmen foresaw years of double- digit inflation. Since then, the wage-price spiral has pushed up interest rates and dividend yields, increasing the nominal income foundations get from their investment portfolios.

Most foundations must therefore give away all their income, every year. But that means there's nothing left over to plow back into the portfolio, whose value is eroded by inflation.

Consider the case of the fictional Largess Foundation, whose million dollar portfolio is 60 percent bonds and 40 percent stocks. If inflation continues at 10 percent a year, and Largess distributes all its income, that millioin dollar fund will be worth only $329,151, in real terms, by the year 2010.

So foundations struggle to pay for evermore-expensive concerts, exhibits, and educational programs, while their financial base shrinks.

"The basic objective of this payout rule -- to insure that every foundaton makes a substantial current distribution to charity -- is sound. On the other hand, under current economic conditions, the requirement that foundations distribute their entire current income is nothing less than a delayed death sentence for foundations," said Russell Mawby, president of the Kellogg Foundation, before a recent congressional hearing.

Not all foundations are supposed to last forever. Some are set up to give away their capital and then quietly fade away.

But, chased by inflation and the payout rule, many foundations have fluttered their wings and keeled over from exhaustion. A 12- state survey taken by the Foundation Center found that 100 foundations were dissolved in 1968.In 1971 it was about 750.

The pay out rule may also cause foundations to skew their investments toward riskier ventures -- such as high technology stocks -- which offer less in the way of immediate income, but hold out promise of a large capital return in the future.

"We feel we may make investment decisions we would not otherwise have made," says Bill White of the Mott Foundation.

By simply requiring that golden eggs be worth 5 percent of net assets, foundation officials say, the government could go a long way toward alleviating the problem.

The historical real return from a balanced portfolio, similar to that favored by foundations, is around 4.5 percent, according to a study by Dartmouth College Prof. J. Peter Williamson. So a 5 percent payout would allow most foundations to maintain their donations and keep their lump of capital essentially intact.

Some, however, say foundations are guilty of partly contributing to their own demise. Six of the 10 largest foundations sunk more than half their money in one company, according to a survey taken by the Twentieth Century Fund.

A study by the National Committee for Responsive Philanthropy (NCRP) says "many foundations remain aloof and isolated from the public."

The study said 30 percent of the country's largest foundations refused to give out information on their grants and operations. Thirteen had unlisted telephone numbers.

"Unless foundation accountability to the public is substantially improved, no changes should be made in current laws regulating foundation payout requirements ," NCRP director Robert Bothwell recently told a congressional committee.

Two bills to loosen the payout requirement have been introduced in Congress. The House legislation, cosponsored by 22 of the 35 Ways and Means Committee members, has yet to be considered. A similar Senate bill has stalled, after a tie vote in the Finance Committee.

The Reagan administration favors the principle of easing the payout for foundations. "But they've said 'not now' [in reference to the pending bills]," says a source familiar with the legislation.