Still in the Dark: Why Philanthropy Remains a Black Box

When I started Inside Philanthropy 18 months ago, I was certainly interested in the age-old questions about transparency and accountability in the sector, but I can't say I was preoccupied with them. To me, the most exciting stories are about how funders are trying to solve big problems, often in new ways. I still think that, and IP tries to tell those stories every day at a moment when more smart funders are doing more cool things than ever.

Over time, though, I've become ever more frustrated by just how hard it is to learn what philanthropists are really up to or who in this sector is having the most impact.

Compared to earlier times, I know the sector is doing a better job of assessing itself. And I know that more answers are now available to certain questions, like how grantees perceive funders, what kinds of collaborations are most successful, how best to evaluate grants, and so on. All that's a good thing, and the pioneers of that work—like the Center for Effective Philanthropy—have moved the ball forward in impressive ways.

I know also that many larger foundations have made a point about increased transparency and openness about their work, and that many other funders have also joined a “transparency movement” led, in part, by the Foundation Center, with its admirable Glass Pockets project. Again, great progress, and I can think of a number of foundations that are especially transparent, like Hewlett. Other bright spots include Transparify, which has pushed think tanks to reveal their donors, with some success.

So why does our team at IP feel so often frustrated in covering the sector? And why am I among those calling for a much bigger push for transparency and accountability, as I did recently in the New York Times?

Because none of these efforts go nearly far enough. The sector largely remains a black box, and answers to some of the most basic questions about philanthropy are still elusive.

If you don't think philanthropy is maddeningly opaque, it's because you're deep inside the system. Everyone who's outside has a different view. Consider just three questions that can’t be answered:

Where Are Philanthropic Dollars Going Right Now, and Who’s Writing the Checks?

This should be an easy one, right? And, yes, if you want to know how foundations gave away their money in 2012 or 2013, you can find out by looking at their 990s. But if you want to know what they gave money to last year—or God help you, the first quarter of this year—good luck. While many of the top legacy foundations now have up-to-date grants databases, it’s hard to know what the vast majority of foundations—including some pretty big ones—have been funding in the past 18 months. That’s a problem when philanthropic dollars are often deployed to influence fast-moving policy debates that impact millions of people.

Of the top 25 U.S. grantmaking foundations, perhaps half release grants info in real time, and things only get worse as you go down the list. I couldn’t even get my hands on the 990 for 2013 from one of the biggest U.S. foundations, the Susan Thompson Buffett Foundation, until a few months ago—only to learn that it had raised its giving by a third, moving $450 million in grants, mainly for reproductive rights. One of the bigger environmental funders of recent years, the Kendeda Fund, is fueled by anonymous money, just as much climate denial work has been funded anonymously.

The transparency story is a tale of one step forward, two steps back. The situation has grown worse, not better, thanks partly to the explosion of donor-advised funds, partly to the rise of big new opaque foundations, and partly to the growth of ideological giving that wants to stay secret.

The National Christian Foundation, which manages myriad donor-advised funds, some of which back right-wing causes, made $662 million in grants in 2013, most of it untraceable to particular individuals. How much will it give away this year? Ask me in 2017. On the left, the Tides Foundation, which moved $128.8 million out the door last year, lists its grantees for 2014, but good luck getting a clear sense of its donors and their motives. All told, donor-advised funds made $10 billion in grants in 2013, a huge leap from six years earlier, with a lot of this money moving in a non-transparent way. How much did DAFs give away last year? Five months into 2015, we still don’t know.

Meanwhile, of course, the law allows individuals to write big direct checks to nonprofits that don’t have to be declared by either the donor or the nonprofit. If you’re a hedge fund billionaire who wants to secretly bankroll the fight to preserve low taxes on capital gains by giving millions to conservative think tanks, no worries. Even better, your fellow citizens will help pick up the tab for your crusade, thanks to the charitable tax exemption.

Which Foundations Get the Most Bang for Their Buck?

In recent months, I’ve written a few posts about administrative costs at foundations. I wrote about how Ford’s overhead costs in the past decade total over $1 billion, and how staff at the top 10 foundations are paid some $600 million annually.

Now, maybe that money is well spent because all those smart program officers work to leverage foundation dollars and achieve more impact. Or maybe it’s not well spent because, as many argue, the staff-intensive model of program grantmaking model is actually less effective.

Regardless, nobody knows the answer to the question of which foundations get the most bang for their buck—and, by extension, what kinds of grantmaking strategies yield the highest dividends. The Center for Effective Philanthropy, for all its groundbreaking work, isn’t offering up the answer to this $50 billion question. Nor is the Foundation Center, which also does so much great analysis. And those annual benchmarking reports on administrative costs and salaries by the Council on Foundations don’t tell us the thing we most need to know—which is whether investments in overhead are commensurate with the impact achieved.

Is the question of foundation efficacy unanswerable? Or is it that the foundations that foot the bill for nearly all assessment work don’t want it answered in a public, comparative way? I don’t know.

What I do know is that there is now a strong infrastructure for assessing the efficiency and impact of nonprofits, thanks to groups like Charity Navigator, Guidestar, and GiveWell. Funders love this stuff, but seem to have zero interest in turning such tools on themselves in a way that could be illuminating to outsiders.

We have reported on NCRP’s ambitious new assessment effort, Philamplify, and we like the annual studies by Grantmakers for Effective Organizations, "Is Grantmaking Getting Smarter?" But Philamplify’s resources are limited and GEO doesn’t name names or pass judgment on particular funders. Who actually are the smartest grantmakers? We all have our favorites, but right now, your opinion is as good as mine.

Underlying all this work is a fundamental tension: Every group assessing philanthropy is supported by the foundations they scrutinize. But, really, how hard can anyone hit their benefactors?

To be sure, funders do have loads of interest right now in collaborating and sharing lessons, which is great. We’ve written in the past year about two such exciting new initiatives, the Fund for Shared Insight and the Open Philanthropy Project. And, as mentioned, there’s been lots of good new work in listening to grantees and evaluating programs. But the outputs of this work are often complex and nuanced, written for insider audiences and, not infrequently, kept confidential.

Anyway, none of this is the same as publicly describing who, exactly, is stretching dollars the furthest for impact, and how. In turn, until questions of efficacy can be answered in more concrete, open, and comparative ways, there will never be a way to really criticize the sector’s wasteful laggards.

Foundations may think this a great setup—who doesn’t want power without accountability? But it carries big, long-term risks for the sector.

What Does Society Get for Billions in Charitable Tax Expenditures?

Again, your guess is as good as mine on this question, because no independent authority—say, the Congressional Budget Office or the GAO—has sought to analyze the benefits of tax breaks for charitable gifts. Meanwhile, the U.S. Treasury has estimated the cost of charitable tax expenditures over the next decade, pegging it at around $740 billion.

That’s serious money in an age when we’re kicking people off of food stamps and yanking away Section 8 vouchers. But despite all the endless discussion of the charitable exemption, we still don’t know whether these tax expenditures are worth it, compared to other ways the government might manage public money.

To take an example from yesterday: John Paulson’s $400 million gift to Harvard will likely cost the Treasury many millions of dollars at a time that Pell grants are being cut. Is that okay? Maybe or maybe not, depending upon the projected benefits of that subsidy to America’s richest university. What’s remarkable is that we now don’t have a way to project or analyze those benefits.

Broadly speaking, while we know it's largely the wealthy who make use of the charitable tax exemption, we don’t know the distributional effects of these tax expenditures in terms of which communities or groups get benefits. We can answer that crucial question in regard other huge tax breaks, like for housing and healthcare, but we’re flying blind on the charitable tax exemption. What’s more, we’re flying blind into the biggest giving spree in history, with a slew of mega-billionaires likely to die in the next few decades. The estate tax revenues lost due to charitable gifts will become ever more eye popping.

How long can this jig go on? Who knows. Maybe the federal government will keep losing billions in revenue without anyone really asking what society is receiving in return. But if you’ve spent any time studying long-range federal budget projections, you’ll likely doubt such complacency can last. It’s a very grim picture, with discretionary domestic spending falling for as far as the eye can see. Every tax expenditure will, eventually, come under more scrutiny, and we’re seeing that already.

If the philanthropic sector wants to keep its preferential treatment, it’s going to have to make a much stronger case for itself at some point.

We live in an age of skepticism, remember, and public trust in institutions has fallen in recent decades. The charitable sector is doing better than certain other sectors, but it hasn’t been immune from the overall trend, and recurrent scandals make things worse. As of March 2008, 70 percent of Americans said that charitable organizations waste “a great deal” or “fair amount” of money. I’d cite more recent data, but I can’t find any. Why aren’t funders interested in learning more about what the public thinks about philanthropy? There’s another good question.

Now, you might like to think that a high-profile fraud at cancer charities or problems at the Clinton Foundation should have nothing to do with private endowed foundations or donor-advised funds, which are entirely different creatures. But in the public’s mind, this is all one big, hazy realm, and one that seems like a playground of an increasingly distrusted upper class. If a populist meteor does strike the sector, it’s not likely to distinguish between philanthropic life forms.

***

As for possible reforms to improve philanthropy and pry open the black box, there are plenty of ideas floating around, some bolder than others. But even the mild ones—say, including administrative expenses in the five percent payout or collecting demographic data on grantees—tend to generate fierce and reflexive pushback.

That’s not so smart. Why? Because we’ve seen this movie before, a bunch of times. An insular sector pats itself on the back for its modest efforts at self-regulation while the anger of outsiders slowly rises to a boil. The sector thinks it’s different, and special, and that its free pass is good forever. (Professional sports comes to mind right now.) Then, because of some scandal, the party comes to a screeching halt, with a worse outcome that might otherwise have been the case.

The bottom line: You can embrace reform as a way to improve philanthropy to ensure more transparency and increase its impact. Or you can embrace it as a way to outrun the accountability juggernaut that eventually comes for all sectors, today more than ever.

Take your pick, but let’s get a real conversation going about how to make some changes.

Related: