By Sue Santa, Senior Vice President of Public Policy, The Philanthropy Roundtable

Imagine that you are the founder or president of a foundation. You receive a letter from a federal agency questioning the racial make-up of your board and challenging how you allocate your charitable giving. How would you respond? 

You might ask “Who are you to tell me how we should donate our money or what my board looks like?”

According to certain Congressmen—and even some figures in the philanthropic sector—your response would be quite wrong. The government, they argue, has a right to greater scrutiny of how foundations or charities are governed and disperse funds.

Underpinning their claims is the “public money” rationale. This idea suggests that the assets of foundations and other nonprofits belong to the government or the public because of these organizations’ federal tax-exempt status, state charters, or oversight by state attorneys general. In effect, the charitable sector has traded its autonomy for tax preferences.

Legally, are the assets of foundations and other charities “public money”?  The Philanthropy Roundtable recently released a new report, How Public is Private Philanthropy? Separating Myth from Reality, that finds the answer is “no!”

Evelyn Brody, Professor at the Chicago-Kent College of Law, and John Tyler, Secretary and General Counsel of the Ewing Marion Kauffman Foundation—authors of this report—provide a comprehensive legal analysis of the “public money” rationale. After meticulously dismantling the three legal arguments supporting it, they find that it collapses under legal precedent and does not justify proposals for more intrusive government or public regulation.  

They conclude the following:

• Having a public purpose does not require that foundations serve the same ends as those of government or that they benefit all members of the general public. As long as foundations do not serve any person’s private interests, they are within their rights to pursue their own varied missions without any specific government direction.
•  Being chartered by a state does not make a foundation a governmental entity or a “state actor” and subject to state direction.
• The federal tax exemption and charitable tax deduction are not subsidies and the forgone tax revenues do not constitute “public money.” Individuals and businesses routinely receive tax preferences –such as IRAs and 401(k)s­­– but are not considered governmental entities, nor are their assets treated as government property.

This analysis could not be more timely. Traditionally, the government has limited its oversight of philanthropy to preventing fraud, self-dealing, and partisan activity. But, over the past decade, a movement has sprung up among activists, legislators, and policymakers to curtail philanthropic freedom by regulating foundation governance, missions, and operations.

Their proposals include racial quotas and limits on the number of directors on tax-exempt boards as well as requiring philanthropies to adopt under-defined goals such as “representativeness” and “social justice.”

This report underscores the legal basis for a continued limited relationship between government and philanthropy. The authors do not advocate no regulation but stress that the “public money” rationale should not be used to justify increased government regulation.

What do you think?

The Philanthropy Roundtable is a national association of individual donors, corporate giving officers, and foundation trustees and staff that aims to help them achieve their charitable objectives. For more information please visit www.philanthropyroundtable.org.