 oundations have been the subject of much scrutiny over the last year on Capitol Hill, in the offices of state attorneys general, and in the media. Amidst numerous calls for increased regulation of the sector, leaders of the foundation community have attempted to respond to the challenges posed. Yet, so far, relatively little of the attention has focused on the positive role most foundations play in society—and how to avoid damage to strongly performing institutions while ensuring accountability throughout the sector. Many people, both inside and outside philanthropy, believe that a closer, more comprehensive, and much more thoughtful examination of the regulatory structure governing foundations is warranted.
Many forces account for the increased scrutiny foundations are encountering today. These include the well-documented misbehavior of some nonprofits and private foundations; (1) inadequate understanding of the varying operating practices of private foundations; heightened attention to the accountability of all governing boards following the Enron and other corporate scandals; preference in some quarters for higher foundation spending rates to meet immediate social and cultural needs; and dissatisfaction of some observers with the programs foundations choose to sponsor. Those factors contributed to the 2003 passage of the Charitable Giving Act (H.R. 7) by the House of Representatives. As originally drafted, the bill would have prohibited foundations from counting most intramural spending toward their federally required annual payout. Such a change would have substantially increased the payout requirement for many foundations, leading to major erosion in the purchasing power of their endowments over the next 20 years.
Prior to the bill's passage, however, the House leadership worked closely with foundation representatives to rethink the handling of internal expenses. Reflecting the compromise reached, the version passed by the House in September 2003 permitted the allocation of certain internal expenses and the administrative costs associated with them—for research, program development, and communications, for example—toward the payout requirement. The Senate and House were ultimately unable to reconcile their respective legislation on charitable giving in 2003, and the bill did not become law. Nevertheless, the compromise was an important step toward better congressional understanding of foundations and the nature of their work.
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