DATELINE: June 25, 2008, Chicago
Several California-based foundations just set a bad precedent. The California legislature was considering legislation—Assembly Bill 624—that would have required foundations with assets of $250 million or more to make certain disclosures regarding diversity. The focus of the disclosures was on board and staff diversity, as well on grant recipients. It had been established that the required disclosures would impose significant and costly compliance burdens on the affected foundations. See our previous post: The California Legislature Should Pass Assembly Bill 624: Then Private Entities Might Finally Teach Overzealous Regulators A Lesson or Two, Feb. 2, 2008.
In order to head off the legislation, ten foundations have agreed to make multiyear grants to charitable organizations that provide services to...
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low-income and minority communities. The grants will be in the millions of dollars. To be clear, we have no issue with supporting organizations that serve low-income and minority communities. What we object to is how the California legislature achieved the result.
Unlike Senator Grassley and his crusade against college endowment practices, those behind the California disclosure legislation were not complaining that the foundations were hoarding assets. Instead, the proponents of the legislation believed that some grant recipients are more worthy than other grant recipients. In our view, that is none of their business. Foundations are private corporations and their assets are private property. The federal and state governments have no business dictating the recipients of foundation grants, except to the extent that federal and state law require that charitable assets be used for charitable purposes.
It is not surprising that this proposal and the agreed-upon solution originated in California, a state which is constantly in the news concerning ever-expanding social needs and chronic problems in raising tax revenue to meet those needs. The settlement is nothing more than an unfunded government mandate. The state can't support services to low-income and minority communities so it has effectively forced foundations to do so by giving them a choice between draconian regulation or ceding control of some of their assets to the state.
We are willing to make the following bet: There will be other proposals introduced in the California legislature that propose onerous burdens, with the sponsor hoping that she can trade tabling the proposal for a "voluntary" action on the part of the private sector target. By compromising, the ten foundations have sold the hangman the rope that will be used to hang them over and over again. They may have quelled the immediate threat, but in two or three years, the legislature will be back with a a new measure. How about an excise tax on all foundation salaries in excess of $50,000 or a requirement that at least two members of a foundation's board be members of the California legislature? That should buy a settlement that the foundations will make grants to charities controlled by relatives of legislators.
What the foundations should have done was reincorporate in a state that respects private property, closed their California offices, and ceased making grants and running programs that benefit residents of the State of California.
We strongly advise those wealthy individuals living in California who are considering establishing a foundation to form and locate the foundation in a state other than California.
We have no problem with regulators and legislators demanding that charitable assets be used for charitable purposes. We have a lot of problems with regulators and legislators picking charitable beneficiaries by holding a gun to the heads of private property owners. Since when do legislators make better resource allocation choices than the private sector?
One thing is for sure: California legislators are smarter than Michigan legislators. Michigan failed in its efforts to force the Ford Foundation to support Michigan-based charities.
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