A Letter from the President

On March 2, 1901, Andrew Carnegie completed one of the most significant financial transactions in American history by selling the steel empire he had built to J.P. Morgan for $480 million. What Carnegie did with that money—at that time, one of the largest fortunes in private hands—arguably set the stage for all of current-day philanthropy: he used it to support knowledge and its diffusion through endeavors ranging from gifts to libraries and universities to the “relief of needy writers.” But perhaps most importantly for future generations, he devoted his wealth to the establishment of more than 20 philanthropic organizations, including Carnegie Corporation of New York.

In a 1911 letter to the original trustees of the Corporation, Carnegie wrote, “My chief happiness…[is] that even after I pass away the welth [sic] that came to me to administer as a sacred trust for the good of my fellow men is to continue to benefit humanity for generations untold.” Embedded in Carnegie’s words is an understanding of an important distinction about investing in the public good that has become blurred over time: the difference between charity and philanthropy. Charity, which is derived from the Latin word carus, meaning dear, has a long religious history: for Christians, Muslims and Jews, for example, it has meant giving immediate relief to human suffering without passing judgment on those who suffer. Philanthropy has a more secular history and comes from the Greek word philanthropos, meaning love of mankind. Carnegie Corporation was created to carry out philanthropy, which Andrew Carnegie said should aim “to do real and permanent good in this world.”

As this issue of the Carnegie Reporter goes to press, there is a bill before Congress (part of the Charitable Giving Act, or HR7) that I think will further confuse charitable relief with philanthropy. Specifically, the proposed legislation seeks to change the rules governing how much money foundations must disseminate annually in order to retain their tax exemptions. Currently, foundations must spend a minimum of 5 percent of their assets each year, a figure that may also include administrative expenses such as salaries and rent. (I should note here that foundations can—and often do—spend more than that in times when the economy is robust but do not have the option of spending less in years when investments and endowment values decrease.) The bill Congress is considering would require that some administrative expenses be removed from the equation so that the entire 5 percent would be spent on grantmaking; administrative costs would become a separate part of a foundation’s budget, driving up its overall annual payout. However, the only foundations that would be affected by the legislation are independent foundations, which carry out their work, in part, by making grants to the thousands of grassroots charities across the nation. Operating foundations, for example, which often run programs that support the religious, educational, artistic or charitable strategies their boards dictate—and which are governed by a 3.5 percent payout rate—would not.

There are a number of factors behind this move by Congress, including the downturn in the economy that has left many nonprofit organizations in need of additional funding and recent
revelations about alleged spending abuses by some foundation executives, but its effect on private foundations could be great. Significantly increasing payout could force foundations to spend their endowments faster than they can be maintained by careful investments. As Sherry Magill, president of the Jessie Ball duPont Foundation ex-plains in a recent letter to the Chronicle of Philanthropy, “With a 5 percent annual payout, private independent foundations must achieve an annualized rate of return of 10 percent or they will by definition erode principal over time. To support a mandated annual payout higher than 5 percent would require an annual rate of return in excess of 10 percent, which is impossible to sustain in today’s markets and nearly impossible to sustain over the long term.” In this regard, I believe that donor intent—the choice of the individual or family endowing a foundation to either completely disburse its assets or to continue on to serve the needs of the future—must be respected. It would be inappropriate of Congress to circumvent a donor’s wishes.

Certainly, there have been abuses by some foundation personnel and we welcome all efforts to ensure that they are put to an immediate end. But denying foundations the ability to assemble a staff of the best, most qualified people to manage programs and administer funds is not the solution. As assistant New York State attorney general William Josephson wrote in a recent letter to Congressional representatives, “If the public policy goal is to reduce or eliminate excessive private foundation administrative expense, [the proposed legislation] will not necessarily achieve this result…the money [foundations] spend on administration insures their professionalism.” In addition, foundations such as Ford and Rockefeller that have international offices and operations may decide to reduce them or even shut them down in order to decrease their overhead costs. That would be a pity.

If all foundations are treated equally—religious, operating and private—I'm certain that reasonable leaders can find compromises concerning what constitutes administrative expenses and overall payout. It is my deeply held belief that American philanthropy is a valuable and caring partner to America’s myriad nonprofit organizations; we support their efforts, applaud their determination to always do better and do more, and will continue to work with them to improve the life of the nation for many decades to come..”

Vartan Gregorian
President

Copyright information | Masthead | Carnegie Corporation of New York web site