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Notes & Comment -- February 1997

Citizen 501(c)(3)

An increasingly powerful agent in American life is also
one of the least noticed


by Nicholas Lemann

Citizen 501(c)(3) ACCORDING to the 1981 edition of The Foundation Directory, the twenty-five largest charitable foundations in the United States at that time together controlled $13.4 billion in assets, and the twenty-five most generous foundations gave away $654 million. The most recent edition of The Foundation Directory, for 1996, puts the assets of the twenty-five largest foundations at $55.2 billion, and the gifts of the twenty-five most generous at $2.2 billion. These figures aren't adjusted for inflation, but the growth of the big foundations over fifteen years is nevertheless remarkable. In roughly the same period the number of foundations of all sizes has nearly doubled, from 22,000 to 39,000. The value of gifts to foundations rose from just under $2 billion in 1980 to more than $8 billion in 1994. Overall, private foundations -- institutions that give money away, as opposed to charities, such as the Red Cross and the March of Dimes, which actively collect it in order to provide services -- have just passed $200 billion in net worth. Their magnitude, along with their desire to affect the course of events in the United States and the world, has made foundations one of the handful of major actors in our society -- but they are the one that draws the least public attention.

The main force at work in making foundations richer has been the boom in the stock market, which is where most foundations' assets are kept. In 1981 foundations successfully lobbied Congress to allow them, in effect, to keep part of their income every year. Then, fortuitously, the stock market took off, and the foundations were able to bank some of their good fortune. Roughly the same economic conditions that are increasing the foundations' assets are also creating more new substantial personal fortunes than this country has seen since the Gilded Age. Many of these will eventually wind up in new foundations, sheltered under clause 501(c)(3) of the Internal Revenue Service code. The two richest people in the world, Bill Gates and Warren Buffett, have both said that they plan to leave the bulk of their billions to charity. Another prominent billionaire, Ted Turner, has publicly chastised his peer group for being too stingy, and so he will presumably be very generous. Foundations established by George Soros, the author of this month's cover story, gave away more than $350 million in 1995.

Another, more particular factor in the growth of foundations is the national trend toward the privatization of health care. The IRS requires that when a for-profit business acquires a nonprofit organization, the proceeds of the sale be used for charitable purposes. A generation ago the vast majority of hospitals, health-maintenance organizations, and health-insurance cooperatives were nonprofit. Today, when one of these is taken over by a for-profit business, a new foundation is usually created. Sixty-four hospitals were privatized in 1994 and 1995, and two hundred more are in negotiations to be sold. The big-ticket items in health-care privatization are not hospitals at all but insurers in large states. When a California insurer called Health Net became a for-profit company, in 1992, the California Wellness Foundation, whose assets now stand at $880 million, was established. When California's Blue Cross completed its conversion to for-profit status, foundations with assets in excess of $3 billion resulted.

Since 1969 the IRS has required that foundations give away a fixed percent of their assets every year. This means that as the magnitude of foundations' assets grows, so must the magnitude of their giving. As foundations have gotten bigger, they have also become more ambitious. Foundations have increasingly sought not just to support culture and scholarship and give alms to the needy but also to generate social and political change.

. . .

For many years conservatives burned with resentment as they watched the big foundations, which have a distinctly liberal cast, use their tax-exempt dollars to fund everything from the civil-rights movement to studies supporting the expansion of the welfare state to disarmament and population control abroad. (A recent article about foundations by Heather Mac Donald in City Journal, the conservative Manhattan Institute's magazine, ran under the line "The Billions of Dollars That Made Things Worse.") Beginning in the 1970s the conservative movement built up its own network of foundations -- smaller but much more aggressive and openly political than the likes of the Ford Foundation, the Rockefeller Foundation, and the Pew Charitable Trust. Conservative foundations have been particularly successful in training cadres of activists and policymakers to serve their causes, by subsidizing books that change the tenor of public discourse (for example, Dinesh D'Souza's Illiberal Education) and supplying the government with policy ideas (the Heritage Foundation's blueprint for the early Reagan Administration, Mandate for Leadership).

Now it's the liberal foundations that resent the conservatives, for having won a more obvious kind of influence through their willingness to play the game less genteelly. The big foundations seem to be responding by becoming more political themselves. The Robert Wood Johnson Foundation was closely associated with the development of the Clinton Administration's 1993 health-care-reform plan; the foundation supplied five members of the task force that promulgated the plan and paid for a series of town meetings where Hillary Clinton built support for its introduction. The Ford Foundation last year contributed $1.4 million to activities aimed at defending affirmative action against political attack. The California Wellness Foundation was considering spending millions of dollars on an "informational" television advertising campaign opposing Proposition 209, an anti-affirmative-action ballot initiative, until California's Republican attorney general did enough saber-rattling to dissuade it from doing so.

After the conservative sweep in the 1994 elections an Oklahoma congressman named Ernest Istook and two of his colleagues adopted an idea from the Heritage Foundation for (to use the favored conservative parlance) "defunding the left": placing severe limits on the money that any nonprofit organization receiving federal funds could devote to political advocacy. The successful liberal campaign against the Supreme Court nomination of Robert Bork, in 1987, had infuriated the right for a number of reasons, one of which was that the campaign had been partly financed by taxpayers' money that had been given to liberal nonprofits. The Istook Amendment was supposed to prevent that from ever happening again. Versions of the amendment were attached to various budget and appropriations bills in 1995 and 1996, but it never became law -- partly because liberal foundations waged a strenuous political-advocacy campaign against it.

Aiming the amendment only at foundations that receive federal grants was a clever attempt to rein in only the liberal ones, because conservative foundations rarely get government money. But according to federal tax law, foundations aren't supposed to attempt to influence political or legislative outcomes, except by providing technical information. This rule is violated widely, and increasingly openly, by both liberals and conservatives. In fact, it's difficult to think of a significant policy initiative taken by the federal government, or voiced in a recent presidential campaign, that didn't have some foundation undergirding.

Last November a Republican member of Congress from Connecticut, Nancy Johnson, who chairs the subcommittee that oversees nonprofit organizations, announced that she would be holding hearings this year on the activities of foundations. Johnson has said that she wants to reopen the issue of advocacy by federally funded nonprofits. She has also endorsed another popular conservative cause: the transfer of social-welfare functions from government to private charities, through federal tax credits for people who make donations to charities that serve the poor.

. . .

What is in a way most remarkable about all this furious action is how little attention has been paid to it. Since the 1980 presidential election the country has made, and largely stuck to, a decision that ours should be a more commercial and less political society. The economy has grown substantially, and holders of big blocks of common stock have gotten much richer; as a result, foundations have become much bigger and stronger players in the workings of the country. The relationship between the federal government and foundations isn't exactly a zero-sum game, but if the share of the society's resources that is commanded by government is limited and those resources are growing, they have to go somewhere; foundations, with the tax benefits they offer, are one of the places they have gone. It's ironic that conservatives, who dislike big government, have by cutting taxes enriched and brought to the fore big foundations, which they dislike even more. President Clinton, bowing to anti-tax sentiment, has significantly cut the budget of the Internal Revenue Service, with the result that what little federal oversight of foundations existed has been reduced, giving foundations a freer hand. The division of the IRS that monitors the activities of foundations has shrunk by more than 10 percent in the past year alone.

The shift in power from government to foundations makes the exercise of that power less visible. It isn't fair to call foundations secretive. But they don't have any of the large, demanding constituencies that other kinds of institutions must keep informed and happy: they have no voters, no customers, no investors. The press, which pays close attention to politics and government through deeply ingrained reflex, largely ignores foundations, or treats them, in a polite but faintly bored tone, as innocuous do-gooders rather than significant actors.

The influence of foundations goes uncharted. The main policy questions about them -- How, exactly, should their economic and political activities be restricted in return for their tax-exempt status? Does the tax exemption still make sense? -- go unasked.

That ought to change. Foundations are becoming so much more significant so rapidly that they deserve to be brought into the company of central institutions whose course is the subject of constant public scrutiny and debate.

Illustration by Lisa Manning


Copyright © 1997 by The Atlantic Monthly Company. All rights reserved.
The Atlantic Monthly; February, 1997; Citizen 501(c)(3); Volume 279, No. 2; pages 18-20.

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