|
The oversight and watchdog functions performed by Congress, the IRS, offices of state attorneys general, and the media are beneficial, in that they can lead to corrective action in cases of real misbehavior. Their effectiveness is weakened, however, by misperceptions or inadequate understanding of key aspects of the foundation sector: its recent growth, its structure and heterogeneity, the operating styles of different foundations, and information available on foundations' activities.
Recent Dynamic Growth
The economic stagflation of the 1970s, combined with 1969 federal regulations that established disincentives for the formation of foundations and mandated annual payout rates exceeding market returns, produced an essentially stagnant foundation sector. As a result, the number of organizations remained stable at roughly 22,000 from 1975 until 1980. The long bull stock market of 1982-2000, the large number of new fortunes created in the same period by the technology revolution and economic growth, and a more favorable federal regulatory environment from 1980 onward produced a major new wave of foundation formation: the number of foundations grew from 23,770 in 1982 to nearly 65,000 in 2002. Today, almost half of foundations with assets of $1 million or more were formed after 1989 (more than 10,000 institutions).
Two features of the recent growth in the foundation sector have significant implications for an appropriate regulatory apparatus for the sector. First, foundation formation is no longer the preserve of the super-rich, as it largely was in earlier eras. Foundations are now established by individuals of comparatively modest wealth, with a resulting explosion in the number of foundations with assets under $5 million, and even $1 million.
Second, even as the sector has been "democratized" with respect to the relative wealth of founders, it has also become far more diversified geographically. The share of foundations in the Northeast, for example, fell from 38 percent in 1982 to 31 percent in 2002, and the Midwest, from 27 percent to 25 percent, while the share in the South rose from 22 percent to 26 percent, and the West, from 13 percent to 17 percent. Among the seven states with the most foundations, Florida replaced Massachusetts between 1980 and 2002, joining New York, California, Illinois, Texas, Pennsylvania, and Ohio. Even within the seven states accounting for 50 percent of all foundations, growth differentials over the 22-year period were marked: California's growth rate was highest, at 226 percent, and New York's was lowest, at 91 percent.
A "Small Firm" Sector
A peculiar feature of the foundation sector is the extent to which assets are concentrated in a small group of institutions: 41 foundations with assets exceeding $1 billion account for 32 percent of all foundation wealth, and 161 foundations with assets between $250 million and $1 billion account for another 17 percent.
By contrast, small foundations (those with assets between $1 million and $5 million) and very small organizations (with assets less than $1 million) hold only 7 percent and 3 percent, respectively, of the sector's wealth. They are, however, extremely numerous. Small foundations number 14,004, and very small foundations, 43,212. The average endowment assets of small foundations is $2.2 million and of very small foundations $270,000. The high annual payout rates of these foundations (14 percent and 28 percent, respectively) reflects the fact that many of them are "pass-through" entities used as charitable giving conduits in the donor's lifetime. Some of these small institutions are destined to become very large as the result of donor bequests, but the very limited number of foundations currently with assets of $250 million or more indicates that most small and very small foundations will remain so.
|
