Private Foundations Falling Out of Favor With the Rich

One of the major sources of money for the private sector initiatives that President Reagan favors as an alternative to government spending is beginning to dry up, new research shows.

Private grant-making foundations--those monetary monuments endowed by Rockefeller, Carnegie, Mellon and other accumulators of great wealth--have fallen out of favor with the rich as philanthropic vehicles.

“There has been a significant decrease in the creation of foundations with assets of $1 million or more or those awarding grants totaling at least $10,000 annually,” since 1969, according to Theresa J. Odendahl, a Yale University researcher. Odendahl is the project manager on a $300,000 study of the births and deaths of foundations in America due to be published next year.

If present trends continue there will be far fewer new foundations, and very few new large ones, created in the future, according to Yale’s Program on Nonprofit Organizations and the Council on Foundations, which are jointly sponsoring the study.

Fewer foundations would mean less money to finance long-term studies into the root causes of social problems, to encourage social movements and to fund medical and other research, experts studying the issue say.

Foundation grants for research into problems and development of solutions is analogous to what “the business world would call ‘venture capital’--the seed money which allows an idea to be tested,” Robert H. Hull, executive director of the Southeastern Council of Foundations wrote in a booklet titled “Why Establish a Private Foundation?”

James Joseph, president of the Council on Foundations, observed that “there has been a significant decline in the birth of new foundations since the 1950s and it should be a cause of major concern in our society.”

The council’s 1,000 members have about 85% of the $58.7 billion in assets held by America’s 23,770 private foundations.

Americans created 10,077 private grant-making foundations in the 1960s, a Government Accounting Office study shows.

Then Congress passed the 1969 Tax Reform Act, which significantly scaled back the tax advantages of creating a private foundation. As a result, in the 1970s only 4,146 private foundations were created.

The Tax Reform Act’s passage came after evidence of extensive abuses involving the creation of foundations as tax dodges. Congress acted to stop such practices as rich friends taking tax deductions for donations to private foundations, which then awarded scholarships to each other’s children.

One effect of the 1969 reforms was to make it more advantageous for the rich to give to institutions known as “public charities,” which depend on a wide variety of sources for their money and are not under the control of one individual or family, as most private foundations are.

‘Ultimate Family Dynasty’

Public charities include most private universities, voluntary health organizations such as the American Heart Assn. and United Way. Large gifts to such public charities often can be structured to realize greater tax deductions than gifts to private foundations.

“Once a family becomes established they think about philanthropy and creating a foundation,” Odendahl said. “That’s really the ultimate family dynasty--creating a foundation.”

Odendahl said interviews that she and Elizabeth Boris, research director at the Council on Foundations, have conducted with 120 rich Americans reveal a contradiction between the motives they attribute to themselves in making charitable gifts and the motives they attribute to others.

“Every one of them talks about others creating foundations for immortality, but they say they would not do that for themselves,” Odendahl said. “They say their own motivation is that they don’t want the government to get their money and that they are doing it for a specific cause they believe in--but the overwhelming issue is not wanting the government to get their money.”

Boris said many of the wealthy people and their tax advisers she interviewed said that tax advantages influenced their decisions about which type of charitable institutions to support with gifts.

Only the super rich, Boris said, feel they can make charitable gifts without giving serious thought to the differences in tax advantages offered by various types of charitable institutions.

Odendahl said that generally “creating a private foundation is now the last thing most tax and estate lawyers advise their clients to do.”

Another reason that fewer foundations are being created may be changing perceptions of wealth. Odendahl said her interviews suggest that because of inflation “a lot of people with considerable assets don’t feel they are wealthy.”

Craig Smith, a leading writer on philanthropy, said that while current data “look like a negative trend for philanthropy,” the long-term outlook is for “the growth of community foundations and the emergence of mega-philanthropies (with multibillion dollar endowments) and that will mean philanthropy will be flourishing” in coming years, especially in Southern California and other Sun Belt economic centers.

“In a decade or two there will be mega-philanthropies that will eclipse the Ford Foundation,” which has $3.5 billion in assets, said Smith, who is writing a book on foundation trends.

“A whole generation of new wealth is sitting on real estate fortunes that were accumulated in the ‘70s and these fortunes will be transformed into mega-philanthropies that, while there may not be hundreds of them, will make a significant impact because they will be quite large,” Smith said.

Jill Shellow, author of “The Grant Seekers Guide,” a recently published book that critically examines foundation giving practices, believes the study findings demonstrate that in philanthropy “the major problem is the disappearance of large foundations, those with $100 million or more in assets.

“The trend is to much smaller foundations and as a result the size of their grants is much smaller. For society’s long-term problems, though, finding solutions lies with the opportunities for experimentation,” Shellow said.

Large-Scale Experimentation

She said that large-scale experimentation requires funding on a scale that can only come from government or large foundations.

The emergence of large private foundations followed the amassing of great fortunes as America shifted from an agrarian society to an industrial economy in the second half of the 19th Century.

By giving vast sums to private foundations that they controlled, wealthy individuals such as John D. Rockefeller muted criticism of their business practices.

Establishment of large private foundations made possible a basic shift in the nature of public benefit activities in American society in this century, according to Professor Barry Karl of the University of Chicago.

In the 19th Century acts of charity focused on alleviating individual poverty and suffering, Karl said. But the emergence of private foundations provided a concentration of wealth that could finance systematic studies by researchers in the newly emerging social sciences. These studies focused on the root causes of social and other ills and provided data necessary to formulate policies and reforms, Karl said.

Many major social changes in 20th-Century America--including the civil rights movement and registering minorities to vote, reforms that reduced police violence and the growth of municipal libraries--were nurtured by grants from large private foundations.

Government spending at all levels is far more pervasive than that of foundations, but through targeting grants and creative use of money, foundations often provide competition to government, developing policies and ideas that government later adopts, the Council on Foundation’s Joseph said.

A relatively shrunken philanthropic sector could make government’s role in shaping research and developing ideas more pervasive, experts in the field say, stifling diversity and innovation.

Large foundations “have the resources and the time, they can undertake a five-year program if that’s what the situation calls for,” said Waldemar Nielsen, author of “The Big Foundations,” a 1969 book that lead to major reforms at several large foundations.

Nielsen said that large foundations possess a “unique ability to assemble competence and address issues of public importance of the complexity that other monitoring and idea-generating elements in society can’t.”

Only 79 foundations have assets of more than $100 million today, according to the Foundation Center in Manhattan.

Inflation has ravaged the endowments of old-line foundations.

Of the 64 largest foundations in 1960, only 17 invested their assets well enough to keep pace with or exceed the increase in the consumer price index before the inflationary cycle ebbed in 1982. Of the other 47 foundations, 33 grew but at less than the rate of inflation, nine fell below their value in 1960 and the remaining five went out of business.