Philanthropy policy reform

I think philanthropy needs to spend more time on digital policy issues.  Regular readers of this blog have heard that from me for years.

But digital policy is still - despite my years of trying - not on the agenda of philanthropy policy actors. Tax law is their number one issue. Outsiders have other ideas. David Callahan made a splash in The New York Times a few weeks ago calling for reform of philanthropy policy. The problems that he sees:

  • Ineffective philanthropic spending
  • Fraudulent use of charitable dollars
  • Hiding behind philanthropic anonymity to fund political action
These are real problems. But they are of different kinds. Effectiveness has to do with practice, fraud is a crime, and the use of philanthropic or nonprofit vehicles to fund political action has to do with differing theories of democracy, how we manage elections, and where we draw lines on free speech. The first one one may be better handled outside regulations, the second type is an enforcement issue, and the third, well, now we're talking policy.

A bit more. Effectiveness is hard to regulate. Especially in a sector that is designed (in the interest of pluralist democracy) to be divergent and self-contradictory; expressive, associative, and a home for minority views, protest, and virtue. A place where the values of effective altruism are, rightly, at odds with those who value beauty and truth. Regulated, standardized, external metrics? Let's take that one off the policy table for now.

Second. Fraud - yes, it's a problem. Made worse by slow reporting timeframes and lack of enforcement capacity. Of course, the decline of local newspapers and investigative journalism hurts here, just as it does in other areas where corruption or fraud can be found. One step that should help (and progress has been made, though it seems stalled at the moment) is to make it easier for third parties to track what's going on. One step toward better not mentioned by Callahan - greater visibility, in faster time, into charitable activities and expenditures. As part of broader open government efforts we should open up the nonprofit/philanthropic 990 reporting forms as well as their organization's financial audits. Put them online in machine readable format so third parties can crunch the data. Nonprofits (Sunlight Foundation, Maplight) do a great job of this on political spending - we need to do it on foundation and nonprofit spending as well. Data visibility doesn't negate the need for law enforcement, but real information in real time plus existing laws, might be what we need to expose and act against fraud faster and more comprehensively. 

Callahan's other two calls - for tiered tax exemptions and increased payout rates - are worth considering. These are legitimate policy issues, even as they are very "inside baseball." Issues of a similar type include the incentives for perpetuity, the different values placed on donations of time versus money, and how we govern exempt organizations. These are all issues that raise the hackles of the vested interests and existing policy players. These groups are not  interested in tiering tax exemptions (or even making sense of the 28 subsections of the tax code) or encouraging organizations to spend more now (and thus, possibly, sunset their endowments - pay themselves out of business). Why? Because when it comes to pushing for new policies - or, more accurately, defending existing ones - more is better. The more enterprises in the sector (read: tax code) - especially if they are distributed across Congressional districts - the better. Existing policy groups know that their political power rests in having everyone - from major universities and hospitals to grassroots policy reform groups - in their tent when it comes to defending the status quo.
 crazy idea - perhaps a red herring: Why exempt the organization and not just the activities? Since all kinds of groups now conduct social and environmental activities, and produce positive outcomes, why not provide incentives for those outcomes?
crazy question - relevant to our times:  Existing incentives and corporate law on nonprofits focus on our use of time and money. What about our uses of digital data? Why aren't we thinking of ways to ensure that donated private data are being used for agreed-upon socially positive purposes?
With 28 subsections of the 501C code - including the now-empty section for professional football leagues - it is time to reconsider the what, how, and why of tax exemption. This is not an inside baseball question about existing statutes or enforcement - it is a democracy-level question about civil society.

Political philosophers (and I know a few) struggle to fit our current regulatory structures into theories of liberal democracies. I'd say it's time to stop trying to fit the theory to the reality. Better to take a good hard look at the reality and see if it makes any sense. There are also a whole set of new activities -  such as social purpose businesses, crowdfunding, and digital activism - that need to be considered. Looking at the detail of tax exemptions and payout is a start - but it's not enough. Cherry picking some issues out of the system may be pragmatic, but that doesn't mean it will lead to better.

Finally, Callahan is on the money (literally) when he points out how political spending and charitable protection are being deliberately braided together. The 2016 American presidential election will surely accomplish one thing. It will demonstrate just how big a loophole for campaign finance the nonprofit sector (specifically c4 and c6 organizations) has become. This is in no one's interest but a few billionaires and some political operatives (and maybe some of the candidates). Here's a place where transparency is probably not sufficient. More needs to be done to prevent the laundering of campaign dollars through nonprofits as well as its corollary, the perversion of nonprofits into secret campaign finance systems. This needs attending to for the sake of both our democracy and...well, our democracy. Both campaign finance and philanthropy - the political and the independent sectors - need boundary lines re-drawn (and enforced).

At the end of it all, Callahan wants a new federal agency to oversee philanthropy. Given that we have two currently broken federal agencies - the underfunded and political punchline that has become the IRS and a deadlocked Federal Election Commission that will do everything in its power to do nothing - I'm less convinced a new agency is the solution. We also have a set of policy groups with heels dug in to defend the status quo system and a set of elected officials dependent on donors.

Here are a few other alternatives, to prime the pump: Maybe the Consumer Finance Protection Board could step in on nonprofit fraud? Maybe the different agencies that oversee schools and corporate fraud (e.g., US ED and student loan debt) could pay closer attention to educational philanthropy, rather than getting in line at the private funder trough?) Maybe those who have ideas for better oversight of nonprofits could join with the recently successful actors fighting back on how the Internet is managed, how intellectual property is regulated, and who makes decisions about personal data? Or those fighting for real campaign finance reform could include some of these concerns? We have 50 State Attorneys General who'd welcome more capacity to fight fraud, the ability to use data and build cross-issue political alliances to shine lights and demand accountability, incredibly talented if woefully thin-on-the-ground investigative journalists, and a frustrated and somewhat disgusted (though neither frustrated or disgusted enough) polity.

The first answer lies not with them, but with us. Count me in to any independent discussion of philanthropic policy - we need to take this on. But to make real change happen? We the people need to care more that these systems aren't working. We need to see the connections - and the harm - between political spending and philanthropy. We need to care about the billions being spent. We need an independent media that can shine more light and uncover other, long-hidden problems. We need to stop thinking that all philanthropy is fine, nonprofits wear halos, celebrities dumping water on their heads will solve our problems, billionaires should run things, all public officials are inept or corrupt, and all technology is democratizing. Democracy takes accountability, visibility, power, and work. Civil society pretty much requires the same. And the former depends on the other.


Bradford Smith said...

Excellent post Lucy with the ample brainpower you bring to such subjects. One small point that I will never tire of making: two large (by sector standards)organizations already pour over the 990 data and produce all sorts of analysis used by grantseekers, researchers, regulators, journalists and others (the overwhelming majority of which is available for free). Those organizations are Foundation Center and GuideStar. We both welcome the advent of machine readable 990s being released by the IRS since it will lower the considerable cost we incur today to transform millions of TIFF files into something that can be manipulated in a database. Whether or not anyone will be able to produce new and unique knowledge from that stream of open data, which transcends the proverbial transit, remains to be seen. The challenge is to create a sustainable flow of data-driven innovation that will lead the sector to higher levels of transparency, efficiency, effectiveness and impact over time.

Bradford Smith said...

Mean to say "proverbial transit app"!