The Best Way to Really Give Away Money

Philanthropist Lewis B. Cullman says "release the pot of gold."

THE WALL STREET JOURNAL
August 20, 2010

The Best Way to Really Give Away Money
by James Panero

Private foundations tend to sit on their pots of gold. They should be spending them down more.

When 40 of America's richest individuals signed the "giving pledge," a challenge set by Warren Buffett and Bill and Melinda Gates to donate half of one's wealth to charity, at least one philanthropist was not impressed. "My opinion is: So what?" says Lewis B. Cullman.

With a record of giving that extends in the hundreds of millions and throughout New York's cultural institutions, Mr. Cullman, who is 91, is alarmed by how the money donated to charity by the very wealthy usually ends up. Locked, he tells me, in private grant-making foundations that may only release a trickle of the billions of dollars squirreled away inside.

Mr. Cullman's argument gets to the heart of the different ways Americans donate to charity. Most of us write donation checks directly to needy causes. Those with greater means set up private grant-making foundations, which hold nearly tax-free assets in endowments—and often give away as little as the government allows.

Under current tax law, private foundations are only required to spend 5% of their endowment per year. Twenty percent of that may go to operating expenses. Since endowment investments historically earn more than what they must give out, foundations may never need to dip into their principal assets, yet are able to feed their own administrative bloat in perpetuity.

Mr. Cullman believes their recent track record proves that private foundations exist primarily for their own self-perpetuation. In the last year, during the economic downturn, many foundations cut their rate of giving because of losses in their endowments. Based on a survey of more than 1,000 foundations, the Foundation Center estimates an 8.4% drop in giving for 2009, in inflation-adjusted terms, the steepest yearly decline since the center began its tracking in 1975.

For Mr. Cullman, this decline in giving in a time of acute need means that foundation administrators are more concerned about the size of their nest-eggs than about their philanthropic mission. He says that foundations should have "released the pot of gold" and increased their donations, even if that means cutting considerably into their endowments.

To force them to action, Mr. Cullman believes, the mandated annual payout rate should be increased from 5%; or foundations should be required to enact "sunset clauses," for spending down their assets in an established time frame. His position, spelled out in his book, "Can't Take It With You," has not made him popular in the world of foundation management. When he mentioned the premise to Vartan Gregorian, president of the Carnegie Corporation, he "almost dropped his glass," Mr. Cullman recalls. "'My God,' he laughed. 'You'll put me out of business.'"

In certain cases, going out of business might make sense. "Many foundations start out with the best of intentions," says Rick Cohen, national correspondent for Nonprofit Quarterly magazine, but "over time they tend to stagnate." Even foundations with built-in sunsets (the Gates Foundation has a 50-year spend-down) are not necessarily protected from administrative top-heaviness.

In the 1920s, Julius Rosenwald, the chairman of Sears, Roebuck & Co., first raised the alarm about foundation bureaucracy. While nothing in the law prevents private foundations from spending themselves out of existence, few big ones do. The Aaron Diamond Foundation was one example in the 1980s, giving away $50 million to AIDS research. The influential conservative John M. Olin Foundation recently completed its own spend down, put in place to prevent ideological drift.

Despite these exceptions, little ever changes in the broad landscape of foundation policy, and the cure may be as bad as the disease. "These are private organizations that ought to have control of the money," warns Leslie Lenkowsky, professor at the Center on Philanthropy at Indiana University. Sunset clauses, if government mandated, may have "unintended consequences," he says, and can not guarantee the money is used most effectively.

Even with diminishing resources of their own, many foundations are already working tirelessly to help their beneficiaries confront the economic downturn. Most experts agree that bad economic times call for increased giving by philanthropic organizations. "We ought to make the payout rule more flexible," says Mr. Lenkowsky. "In down times it should go up. In good times it should go down. It should be a counter-cyclical rule." Adds Rick Cohen: "They have endowments that are rainy-day funds. This is the time to tap them."

According to Fortune magazine, if every member of the Forbes 400 list followed the Gates "giving pledge," the total would be $600 billion--equal to the assets currently in private grant-making foundations. Should these perpetual monuments to yesterday's donors make their own giving pledge and spend down their endowments?

Just ask Lewis Cullman: "When you set up a family foundation and turn it over to bureaucrats, it is not human nature to vote yourself out of existence. It's time to end that, for the good of us all."

Brian Lehrer WNYC: James discusses the new Loft Law

Here is a discussion of the new Loft Law and its impact on artists living in the outer boroughs of New York. Comments here. My essay on the subject will appear in the summer 2010 issue of City Journal.

Strike the Set

CITY JOURNAL
Winter 2010

Strike the Set
by James Panero

A militant union smothers New York theater.

You’ve got to hand it to New York’s stagehands’ union. Local One of the International Alliance of Theatrical Stage Employees (IATSE) has been collective-bargaining the life out of New York theater for over a century. Just how much does this union of carpenters, electricians, and prop masters bleed from city arts organizations? Carnegie Hall’s tax returns for its 2007–08 season suggest an answer.

Dennis O’Connell, Carnegie’s properties manager, has pulled down headline-making salaries from the concert hall for years. Between 2001 and 2003, for instance, his annual salary ranged between $309,000 and $344,000. But for the fiscal year ending in June 2008, O’Connell’s earnings topped $530,000, making him Carnegie’s highest-paid employee after its executive director, Clive Gillinson. Four other stagehands—carpenters James Csollany and Kenneth Beltrone and electricians John Goodson and John Cardinale—came in just behind, with salaries exceeding $400,000 apiece.

The Carnegie payouts received wide circulation in the New York media last fall after being reported in Bloomberg News. Yet the story only hints at a deeper truth well known in the New York arts community—one that affects Lincoln Center, all of Broadway, and numerous other venues. Because of the stranglehold of Local One–negotiated contracts, New York theater owners must all pay a sizable tribute each day just to keep the lights on. The pay rates that Local One secures for its stagehands far exceed the deals struck by other IATSE chapters nationwide, and many employees can pad their base pay with multiple surcharge triggers—overtime, missed meals, and tasks that mandate excessive staffing.

The money comes out of arts organizations’ bottom lines, driving up production costs and ticket prices and inhibiting the evolution of New York theater. “Any programming that does not resemble programming 30 years ago is prohibitive,” explains one theater manager. Pricey union contracts have “absolutely prohibited arts organizations from doing new things, particularly in difficult times.” The contracts also prevent organizations from expanding their reach through advances in technology like webcasting and simulcasts in movie theaters. The Metropolitan Opera had to spend years at the bargaining table to launch its Live in HD program.

The union has established a closed network of unchecked power. (To get a sense of its might, just try to speak to someone on the record.) When Local One workers talk about their “brotherhood,” some of them mean it literally: the chapter president, James J. Claffey, Jr., is the son of a Local One member and counts five brothers in the union. The leadership is predominantly Irish and male, and of the union’s 3,000 members, only about 130 are women. Thanks to a tiered salary structure and a union-controlled promotion system, not all of the members benefit from the big payouts. One anonymous blogger who identifies himself as a rank-and-file member rails against what he calls the union’s “Irish loop” system of preferment: “2500 victims plus the 350 to 500 plus relatives and loop boys (white, Irish, males).”

In better economic times, when theaters were flush, Local One’s impositions were bad enough. Now, as arts organizations are failing in the recession, the union’s compensation packages should receive the same scrutiny as the pay rates of top management. Keep in mind that the high salaries commanded by maestros and executive directors, which can exceed $1 million, were determined in an open marketplace. Could another prop master do O’Connell’s job just as well, and for less pay?

You can’t fault O’Connell: he performs a service and enjoys his legally agreed-upon compensation for doing so. The true blame rests with an arts leadership too weak-willed to fight union demands. The former general manager of the Metropolitan Opera, Joe Volpe, showed that such fecklessness wasn’t necessary. A former stagehand himself, with sons working as union extras, Volpe knew how to play tough against Local One. “At labor negotiations, for example, I can whoop and holler and scream and carry on like a wild man,” he once said. “I’ll shout that they can burn the place down but I’m never going to give in. And I’ll walk out. And their attorney will come over to me later and tell me it was great—that my act really helped him because until then the union was stuck in its position and he couldn’t get them to change.”

While Local One protects the lucky few at the top of the stagehand food chain, many more New Yorkers in the arts, unionized or not, are seeing their positions eliminated or their salaries cut during the current downturn because of unsustainable budgets. Arts leaders, who need to start controlling costs at all levels, also need the backbone to stare down the threat of a Local One strike. And if negotiations break down in the future, the arts community must overcome its unwillingness to cross picket lines for a justified cause that will help all workers. You don’t have to be antiunion to confront the inequity of Local One. You just have to be anti–Local One.

James Panero is the managing editor of The New Criterion.