New Study on Foundation Expenses Hopes to Inform Congressional Debate

Community foundations spend a larger percentage of their total program budgets on overhead than private and

corporate funds do, says a new report that provides an in-depth look at foundation spending.

The report says community foundations spend 8 percent of their charitable distributions on salaries and benefits, office space, and other operating costs, while private philanthropies spend 7 percent, and corporate grant makers, 6 percent.

Corporate foundations have the lowest ratio of overhead to charitable spending because their parent companies often pay for salaries and office equipment, the report says.

The study examined informational tax returns from 2001 — the most recent year data were available — for the 10,000 largest foundations in the United States. The philanthropies, none of which were named in the study, accounted for 78 percent of foundation giving, or $24-billion, that year.

An interim report about the study, which was conducted by the Urban Institute, the Foundation Center, and GuideStar, was released last summer and focused on private foundations (The Chronicle, August 4, 2005). The new report includes more information on corporate and community funds.

The study looked at expenses that foundations count toward the federal rule that requires them to spend a minimum of 5 percent of their assets annually on charitable purposes. (Since community foundations are exempt from the requirement, the study examined their expenses and overall program costs, including giving.)

Grant makers are allowed to include expenses, such as salaries and benefits, office space, and publication costs, to meet the 5-percent standard.

But the Senate Finance Committee, which is drafting legislation to curb abuses in the nonprofit world, is considering regulations to change the way such expenses are allocated in response to news reports of foundation executives’ receiving compensation and travel perks that were deemed excessive.

‘Not a One-Size-Fits-All Field’

The researchers who conducted the study said they did so in part to provide information to members of Congress as they weigh any changes.

Elizabeth T. Boris, director of the Urban Institute’s Center on Nonprofits and Philanthropy, in Washington, said the study’s findings will show lawmakers that foundations operate in diverse ways, which would make establishing new rules a challenge.

“I hope they have a better sense of the variety in foundations out there,” said Ms. Boris. “It’s not a one-size-fits-all field.”

Factors that affected a foundation’s operating costs included whether the organization supports charities overseas, provides fellowships to individuals, or operates its own charitable programs, such as conferences and research projects. Such efforts tend to be fairly labor intensive and carry high costs.

Nearly one-third of the grant makers said they had no operating or administrative expenses. The funds that did have such costs together spent at least $1.9-billion on them.

A significant portion of such spending went to pay salaries and benefits for staff members. Almost 34 percent of the foundations in the study said they paid employees or trustees, spending more than $800-million on compensation in 2001.

Compensation to staff members and trustees accounted for the largest portion (46 percent) of the amount private foundations spent on operating costs. By comparison, corporate funds spent 12.1 percent on compensation, and community foundations spent 36.3 percent.

Among the study’s other findings:

• Almost 21 percent of the organizations compensated their board members, with private funds most likely to do so. In total, the compensated trustees working for foundations in the study received $111.6-million in 2001. The median compensation was $7,750, meaning that half made more and half made less. The highest-paid trustee earned $211,538.
• About 7 percent of the groups hired a financial institution, law office, or other company to serve as a trustee. The median compensation for such groups was $39,049, but the amounts varied widely. Five of the institutions earned more than $1-million while serving on a foundation board, while 191 received more than $100,000 each.
• Among the 1,005 philanthropies that reported paying a chief executive, executive director, or president on its staff, the median compensation was $100,209.

The study was paid for by the Charles Stewart Mott and Ford Foundations.

The report, “Foundation Expenses and Compensation: How Operating Characteristics Influence Spending,” is available free at http://www.urban.org/url.cfm?ID=311281.