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A number of steps could be taken to improve the federal government's oversight of the foundation sector and make the regulatory process more modern, simple, and efficient.
A Major Overhaul of the 990-PF
The Foundation Financial Officers Group (FFOG), an association of the chief financial officers of a wide range of foundations, including most large entities, is currently testing a proposed new set of Financial Reporting Standards, with the hope that those standards might ultimately be incorporated into a revised 990-PF.
The major innovation of the FFOG proposal would be to ask foundations to allocate their expenses across four categories:
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Direct Public Benefit Activities, including external grants and programs directly operated by the foundation, such as fellowships, intramural research and evaluation, communications, grantee forums and joint work with grantees, technical assistance to governmental bodies, social services, arts performances, historic preservation, museums, and other programs with significance beyond the foundation's grants programs; |
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Grantmaking Activities, including resources dedicated to selecting grantees, monitoring the progress of projects, evaluating programs, and meeting regulatory requirements regarding grants; |
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General and Administrative Activities, including the overall operation of the foundation and work not directly connected to any of the other three categories; and |
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Investment Management Activities, representing the costs of internal investment staff and other expenses associated with management of the foundation's endowment. |
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In addition to providing helpful guidelines for those allocations, the FFOG proposal would also define expense elements more clearly than does the current 990-PF, make needed corrections in requested expense elements, and ask foundations to identify their operating style as low engagement, medium engagement, or high engagement.
A recent test of the proposed FFOG format by 34 foundations, including The Commonwealth Fund, indicates that this innovation provides a much clearer, more accurate picture of how foundations allocate resources to accomplish their missions than does the existing 990-PF format (see adjacent figure). (7) It is to be hoped that, after a period of testing, the IRS will move rapidly to adopt this modernized approach to data collection. As suggested by Betsy Buchalter Adler, chair of the Exempt Organizations Committee of the American Bar Association's Section of Taxation, a redesigned 990-PF could also address, in question form, most of the governance and management concerns raised by the recent SFC discussion draft. Questions could easily cover such topics as whether or not a foundation has a conflict-of-interest policy (and if not, why not), internal governance practices, and a process for determining executive compensation. This approach would put pressure on institutions to develop appropriate policies and implement best practices. It would also help the IRS and state attorneys general to target their audit resources—without slipping into micromanagement of individual institutions.
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