ermanently endowed private foundations that work directly with grantees to develop projects, carry them out effectively, and communicate results to policymakers and institutional leaders have a long record of accomplishment in this country. "Value-added" foundations like The Commonwealth Fund perform an important function by underwriting policy research, service delivery experimentation, and infrastructure development within their fields — health care, in the case of the Fund. As professors Michael Porter and Mark Kramer described in a seminal 1999 Harvard Business Review article, other permanent, value-added private foundations play comparable roles by informing discussion and encouraging service innovation in other sectors.
Despite their importance in American society, the debate around the recently proposed Charitable Giving Act of 2003 (H.R. 7) revealed serious misunderstandings about the role and finances of value-added foundations. Congress received strong encouragement from a variety of quarters to increase the required annual payout for private foundations to a level inconsistent with the maintenance of their purchasing power over the long term. Congress also heard that the administrative expenses of most foundations are too high and was urged to impose a provision that would have placed an especially heavy burden on foundations that devote internal resources to program development, monitoring, communications, and research — effectively increasing their payout requirement.
In the end, Congress was unable to take action on charitable giving legislation in the session that closed in December 2003 but may well resume its deliberations in 2004. It appears that, had Congress taken action in 2003, it would likely have chosen not to increase the basic payout requirement and to enact an administrative expense measure that, properly implemented, would not severely penalize well-managed and productive foundations incurring appropriate intramural expenditures. Whether Congress will maintain that course should it enact charitable giving legislation in 2004 remains to be seen. In any event, the misconceptions revealed by the debate should be unsettling to anyone with a commitment to improving social policy and practice. It seems clear that foundations should do more to promote a fuller understanding of the financial realities that govern their existence, the strategies and management practices that make them effective, and the role they play in society.
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