How Should Philanthropies Respond to Emergencies?

By Maribel Morey

Earlier this year, several foundations including the Ford, Kresge, Knight, and Community Foundations committed $366 million to help lift Detroit out of bankruptcy, and this July, the city’s retirees will be voting on the bankruptcy plan. As this date nears and more and more retiree groups support the plan, the foundations’ pledge seems closer to reality. It is time for foundations to turn to the question of how they will view this moment of philanthropic and civic engagement in the months and years to come.  

On the one hand, the foundations have explained publicly that they are working in the Detroit bankruptcy process to “enable Detroit and its citizens to focus on the task of renewing this great American city” and that the proposed plan will accomplish this by helping “the City honor its commitments to its retirees and preserving an extraordinary community cultural asset, the Detroit Institute of Arts (DIA).” On the other hand, the bankruptcy court’s disclosure statement released earlier this month notes that the foundations required that their funds be applied directly toward the city’s pension obligations. While the current plan preserves the DIA, the foundations’ funds are being used exclusively for the pensions.     

The court documents make the foundations’ intentions in Detroit clear. However, these foundations seem reticent to publicly expose their singular commitment to rescuing a failing public pension program. This need not be. Reflecting on the history of philanthropy, there is both justification and precedent for such a decision. Specifically, former Carnegie Corporation President Frederick P. Keppel’s 1930s writings on the role of philanthropy in American life suggest that foundations can view their pledge to Detroit pensioners either as an emergency one-time charitable donation or as the beginning of philanthropy-government collaboration in securing a public good throughout the United States. Far from inconsequential, this distinction is important. One-time gifts, while arguably appropriate, do not necessarily dictate future funding patterns. By contrast, framing the pledge as part of a larger philanthropy-government engagement has the potential to involve the foundations in a long-term project of great, national significance. 

The son of two Irish immigrants, Frederick P. Keppel was born in 1870s Staten Island. After years serving as an administrator at Columbia College and later assistant secretary of war, the 47-year-old Keppel became president of one of the wealthiest foundations in the world, the Carnegie Corporation of New York. In 1911, the gilded age tycoon Andrew Carnegie had established the organization with a $135 million endowment.

Decades earlier in The Gospel of Wealth (1889), Carnegie had explained why wealthy individuals in a capitalist society should become philanthropists. Not only was it their duty to give back to the society that helped them become wealthy, but it would also help to stave off criticisms about the unequal distribution of wealth in a capitalist society. If this criticism grew, Carnegie explained that the masses would vote to redistribute society’s wealth through taxes and a state bureaucracy would take charge of this redistributive project. This would be an unwelcome development both for men of wealth and for society as a whole. Compared to a state bureaucracy, Carnegie argued that individuals who proved themselves savvy businessmen by making their own fortunes were best prepared to redistribute a society’s excess wealth. The idea, of course, was that these individuals knew how to make money, so they would know best how to spend it on behalf of their fellow citizens.

In his 1930 publication The Foundation, then Carnegie Corporation President Keppel could not have disagreed more with Carnegie, who had passed away in 1919. Unlike the corporation’s founder, its president perceived donors to be a hindrance to the utility of foundations. Donors had strong, charismatic personalities that prevented trustees from developing their own, dispassionate and reasoned analyses for distributing funds. Likely thinking about Carnegie’s friends and colleagues who still sat on the Corporation’s board, Keppel wrote: “It may be that a full generation must elapse before the policies of any modern American foundation may be profitably discussed, since, from the nature of the case, decisions must tend to reflect the wishes of the donor if still living, or during the years immediately following his death, the influence of his personality as his friends and trustees remember it.” So long as these foundations' founders lived, their boards of trustees would continue to make emotional, rather than dispassionate and reasoned, funding decisions.

In writing The Foundation, Keppel gave thought to both the existing and ideal organization, its procedure, and its goals in a democratic society. In a way, he was preparing the way for the next generation of trustees who would not have known their organizations’ donors personally and who consequently could create independent practices and policies. In particular, he warned that foundations’ purpose should be “constructive rather than palliative” and should have “to do with education, scientific and social progress.” Unlike charitable organizations, the Corporation’s president suggested that foundations should have the unique role of investing in the progress of education, science, and more broadly, of society.

Three years later, Americans were in the midst of the Great Depression and watching the effects of the recent installation of the Third Reich in Germany. That year, the Rockefeller Foundation had mobilized a program of emergency work designed to be of utility to the U.S. federal government, funding studies on government statistics and information services and of population distribution. Far from serving as investments into the long-term advancement of knowledge, such funding decisions were designed to meet the short-term needs of American bureaucrats in Washington. In the words of the Foundation’s president, the organization simply could not remain “indifferent to pressing current problems.” Among those other urgent problems was the passage of the Third Reich’s Civil Service Law of April 1933 which dismissed scholars on the basis of being Jewish or of having conflicting political beliefs. Having already invested in many of these scholars’ contributions to scientific and social progress across the Atlantic, the Rockefeller Foundation scrambled to find them university placements in the United States and Europe.

Reflecting on the work of foundations in his 1933 Annual Report, Keppel reconsidered his recommended foundation policies. In moments of genuine emergency conditions, he acknowledged that trustees and staff would find it almost impossible to isolate themselves from considering the immediate needs of their fellow men and to fund exclusively projects aimed at furthering humanity’s long-term progress. He wrote:

In normal times there are certain risks which a foundation is better adapted to take than perhaps any other agency—the risk of being called impractical and visionary, of waiting till the Greek Kalends for results, the risk of making mistakes, even costly ones, in the hope of ultimately contributing something of value to mankind. In days such as those through which we have been passing, however, that complete detachment which would assign for possible future usefulness sums which might otherwise relieve desperate present necessity is too much to ask of any board of trustees, or for that matter of any executive.

Much as the Rockefeller Foundation’s President reasoned in his own Annual Report that year, Keppel explained that foundations were justified in acting like charities in moments of desperate immediate need. However, once this moment subsided, Keppel reminded his colleagues that they “must never forget that their real responsibility lies deeper. It is for them to determine what in the long run represents the wisest use of the funds at their disposal.” Foundations should not forget that this lapse into relieving the immediate survival needs of individuals was only to be temporary.

Returning to the contemporary Detroit pledge, it is clear that foundations have dealt before with moments of desperate immediate need, and then, as now, they broke from their general mission statements as philanthropies. In 1933, Keppel helped explain why this slip was expected and justified. Today’s foundation trustees who have committed to rescuing retired city workers in Detroit can find comfort in his words. In such moments of desperate need in the lives of everyday individuals caught in the cross-fires of social, political, and economic chaos, organizations dedicated to the welfare of mankind are expected and justified—if only temporarily—to fall into the role of charities with humanity’s short-term needs in mind.

Rather than as a moment of emergency charitable donation, however, perhaps foundations would like to remember their Detroit pledge as part of philanthropy’s broader mission to promote social progress. In this vein, they can continue to understand their pledge to pensioners as part of a longer-term commitment to Detroit and the surrounding region. Or, they can return to Keppel’s Foundation, which offers a blueprint for understanding the pledge as the seeds for a broader, nation-wide philanthropy-government collaboration on establishing a public good. 

In Foundation, Keppel quoted his colleague Beardsley Ruml, who was then a foundation trustee and an assistant to the chair of President Herbert Hoover’s Emergency Committee for Unemployment, when explaining the recommended dynamic between philanthropies and government agencies: “In general, private funds are most appropriately used for work of a novel or experimental character, or for activities which are not generally accepted as a public responsibility.” Such experimental work included the Rockefeller organizations’ funding of public secondary education in the Southern United States and the Carnegie Corporation’s funding of public libraries throughout the country. At the time that these philanthropists and their organizations initialized these funding practices, public education and libraries were not firmly established as public responsibilities. Once Americans acknowledged these services as public goods and taxed themselves in order to finance them, Keppel explained that foundations then should start stepping aside. However, not too soon, Keppel warned. It is useful “for a time at least, to have a certain amount of ‘privately supported work of similar character as an aid in maintaining high quality and efficiency of operation in public work.’” The Carnegie Corporation’s president noted that philanthropy-government collaboration should continue, at least for a few years thereafter, if only to assure that the institutions continued to provide high quality, efficient public services.   

Much as the Rockefeller organizations did with public secondary schools and the Carnegie Corporation with public libraries, today’s foundations can look to preserve and protect city and state pensions throughout the country until Americans accept public responsibility for them. Arguably, this means that they should remain involved in funding these retirement plans until Americans are so committed to protecting and paying for city and state pensions that they safeguard them altogether from legal and political vulnerabilities such as federal bankruptcy proceedings. 

The question, of course, is how foundations can go about achieving this national goal. For starters, we can all acknowledge that the reason pensions in Detroit are vulnerable to bankruptcy proceedings is because Congress, bankruptcy judges, and the rest of us who condone this system are making them so. This is a man-made reality that can be unmade as quickly as it was created, simply by having Congress amend the bankruptcy code or by encouraging bankruptcy judges to construct different analyses of the eligibility of public pensions for Chapter 9 discharge. On this last point, Detroit bankruptcy court Judge Steven W. Rhodes could have presented a different argument in his eligibility decision. There, he ruled that pensions were like all other unsecured claims and subject to the bankruptcy code’s priority rules. Rhodes would have been distinguishing himself from years of precedent and the plain text of the bankruptcy code, but he could have determined that the state’s contractual obligations to working- and middle-class individual retirees should be distinguished from those of financial creditors and monoline insurers such as Bank of America, UBS, Dexia, EEPK, Syncora, Assured, and Ambac. This distinction could have been justified by raising one’s eyes above the written texts and observing the social and economic reality: That the former and latter groups are not similarly situated to absorb the risks of market failure or government mismanagement. 

Such forms of legal reasoning could have exempted pensioners from the bankruptcy proceedings. And of course, these would have been courageous analyses, because the bankruptcy code itself makes no room for these distinctions. However, such arguments would have placed a bankruptcy judge well within the tradition of 1920s and 1930s legal realists who took note that courts’ doctrinal analyses of negative market externalities were blind to actual, social and economic inequalities. Rather than a citywide bankruptcy, these earlier jurists and legal scholars analyzed the risks and costs of an industrializing society’s railroad and factory accidents. Irrespective of idealized forms of legal analysis and the binding force of precedent, legal realists acknowledged that some groups were better situated than others to absorb the risks and subsequent costs of an industrializing society. In the words of the celebrated legal realist Benjamin N. Cardozo, who was then in 1921 an appellate judge and later would become a U.S. Supreme Court Justice: “[W]hen the social needs demand one settlement rather than another, there are times when we must bend symmetry, ignore history and sacrifice custom in the pursuit of other and larger ends. From history and philosophy and custom, we pass, therefore, to the force which in our day and generation is becoming the greatest of them all, the power of social justice.”

As members of American society, we should acknowledge that we are not powerless individuals governed by static rules, but rather, the very individuals who make, remake, and reason through the rules that govern us. If foundations commit themselves to financing public pensions—much as earlier foundations funded public secondary education and public libraries before Americans committed themselves to securing and paying for them as public goods —then they can start by educating Americans about contemporary bankruptcy law, how it can be amended, and what they have at stake in securing public pensions from any future threats. In other words, foundations can view their Detroit pledge as the first step towards a long-term commitment to seeing Americans commit themselves to city and state pensions as publicly-supported and securely-safeguarded public goods. 

In the coming months, philanthropic managers and trustees will discuss their pledge to Detroit’s pensioners and likely will try to make sense of it. With Keppel’s reflections in mind, they can feel assured that there is precedent and justification for this pledge: They just need to decide how they want to remember it. 

This pledge was made in a moment of national economic emergency, and, in such moments, Keppel noted that philanthropies have functioned (and perhaps will continue to function, from time to time) as charities relieving individuals’ immediate needs. If philanthropic organizations, however, want to memorialize this moment as one of actual philanthropy, they have options. They can continue to argue that their aid is going towards both pensions and the DIA as a means of ensuring the long-term health of Detroit. This argument confirms their commitment to a certain long-term vision of societal progress and, by blending pensions and the arts, deflects criticism that they are serving the role of civic savior for Detroit pensioners. From this lens, foundations are in Michigan to preserve the long-term vitality of a city and of a region.    

Alternatively, the foundations can make their support of pensioners blatant. In this case, Keppel’s Foundation suggests the blueprints and significance for such a gesture. Much like the Rockefeller organizations with public secondary education and the Carnegie Corporation with public libraries, the foundations today could perceive their pledge of support for city pensions in Detroit as one step in securing an important public good throughout the United States. Much like in these earlier cases, they would commit themselves until Americans would take on the responsibility of safeguarding public pensions themselves. This is a longer, and more nation-wide project than perhaps they had imagined, but it would be a meaningful one.

Clearly, foundations have some thinking to do. And far from remaining passive observers, the rest of us should chime in and opine on how we think foundations should understand and remember their Detroit pledge. After all, these conversations have the potential to affect the future of city and state pensions across the country.   

This article available online at:

http://www.theatlantic.com/business/archive/2014/05/how-should-philanthropies-respond-to-emergencies/362109/