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Who Will Watch the Charities?

by David Callahan

Last week federal authorities disclosed that four cancer charities had bilked tens of millions of dollars from donors. Questions continue to surface about the lack of transparency at the Clinton Foundation. Philanthropy, we’re learning, is a world with too much secrecy and too little oversight. Despite its increasing role in American society, from education to the arts to the media, perhaps no sector is less accountable to outsiders.

The charitable sector is a bit like the Wild West – by design. Foundations have long been granted expansive freedom, on the view that the diversity of America’s civil society is one of the country’s signature strengths, as Alexis de Tocqueville famously said, and that government shouldn’t mess with this magic. Both political parties have been content to impose a minimum of rules on philanthropy.

For example, foundations don’t have to prove that they’re making good use of billions of dollars of tax-subsidized funds, and nonprofits don’t have to identify their donors, as we’ve learned from the Clinton Foundation saga. The law even permits donors to get an immediate tax break for charitable gifts that may sit in investment accounts for decades, never helping anyone. And in many states, the rules that do govern philanthropy are barely enforced, which is why the fraud perpetrated by those four cancer charities was undetected for years.

This lax oversight is out of step with the times and is an invitation to corruption. It also makes it hard to answer the simplest questions about charitable giving, such as what society is getting for the $40 billion in tax breaks donors receive annually. Were the millions that have gone to the Clinton Foundation, instead of the Internal Revenue Service, well spent? We have no way of knowing.

A look at the Clinton Foundation’s fundraising has also opened a window on another big problem with modern philanthropy: how inextricably entwined it has become with politics and ideology. While the Clinton Foundation is at least focused on aiding the world’s poor, so-called charitable contributions go to think tanks and advocacy shops that engage in de facto partisan warfare. Donors can get the same tax break for bankrolling a libertarian push to abolish food stamps as they do for giving to a food pantry.

Philanthropy still does enormous good, perhaps now more than ever. But it’s alarming how in an era of high inequality, private funders have a growing say over central areas of civic life like education and public parks, and how this influence is often wielded against a backdrop of secrecy. This year, for example, a school reform group in Philadelphia offered $35 million to help that city close a funding gap, but demanded the right to open more charters as a condition and wouldn’t disclose its donors.

This secrecy can’t go on, and it won’t. There has been a push in recent years to hold nearly every sector of American life to tougher standards of accountability, from professional sports to finance to medicine to higher education. The same scrutiny needs to be applied to philanthropy.

Philanthropy reform should aim to achieve four broad goals. The first is bringing more transparency to charitable donations. While it may be OK to allow anonymous gifts to some kinds of nonprofits - say, a hospital or the opera - groups that work to sway public policy, or are led by former public officials, should disclose where their money is coming from.

Second, and related, we should end the charade that all philanthropy is somehow charitable. Donors should get varying levels of tax exemption, or none at all, depending on the actual public benefit provided by a nonprofit, measured independently.

Third, foundations and other philanthropic funds should have to give away tax-exempt dollars at a faster rate. Right now, foundations must give away only 5 percent of their endowment every year, and donor-advised funds have no payout requirements at all. Husbanding endowments in this way doesn’t make sense when trillions of dollars in new funds are set to flow into philanthropy in coming decades. A higher payout rate, say 10 percent, would put such money to work faster and ensure that the immediate hit to the Treasury would be offset by more near-term benefits for society.

Fourth, and most challenging, there needs to be a better accounting of whether philanthropic dollars are effectively spent. Quite apart from the question of the enormous public subsidy, which will amount to more than half a trillion dollars in the next decade, it’s problematic that there’s no way to assess the performance or impact of such a large, rich and influential part of American society. Ideally, the philanthropic sector would take the lead in finding ways to assess itself - but with the threat of regulation clearly in the background.

A final point: None of these reforms will make much difference without strong watchdogs to oversee philanthropy and nonprofits. It’s time to create a new federal bureau to police this sector, much as Britain has a national Charity Commission. State law enforcement officials must also do a better job of enforcing state-level laws.

Tocqueville was right when he said that a vibrant civil society is a unique strength of American society. But that doesn’t mean spending public money without asking where it’s going. All the powerful institutions in American life need vigilant oversight, and philanthropy is no exception.

David Callahan is the founder and editor of Inside Philanthropy, a news website for the non-profit sector.

© 2015 The New York Times