August 2001 was a typical summer month in the United States. The weather was hot and humid; the economy, though falling from its 1990s heights, was still in good shape; and despite signals that terrorist groups might be plotting, stories about shark attacks dominated the news media. His controversial election notwithstanding, President George W. Bush enjoyed the backing of a majority of Americans.
But in the White House, aides were hard at work trying to re-formulate one of the administration’s top priorities: providing more federal support to faith-based and community organizations addressing difficult social problems, especially those affecting young people and the poor. And that almost led to a federal effort to create community foundations in each of America’s approximately 3,000 counties.
Originating in Cleveland in 1914, community foundations were designed to give a large number of donors the opportunity to combine small gifts into a permanent endowment that could be used indefinitely for a range of local philanthropic purposes. Conventional trust funds typically served narrow objectives, such as providing scholarships for particular types of students for set periods of time, while “community chests,” the forerunners of today’s United Ways, used the contributions they received to meet the immediate needs of local charities. By contrast, community foundations aimed to offer a means for less wealthy givers to jointly invest and administer their donations, and thus enable them to reap the benefits of size, flexibility, and longevity that the very wealthy could obtain by creating private foundations (like the one Cleveland’s own John D. Rockefeller had recently created). Moreover, community foundations could concentrate on using their funds and expertise on local problems, providing at least some resistance to the nationalizing tendencies that were already beginning to affect philanthropy and government.
Community foundations were meant to be, as one observer later put it, “an agile servant.”
Community foundations were meant to be, as one observer later put it, “an agile servant,” grantmaking organizations that could raise and spend donations efficiently on a wide and changing mix of community concerns. That was why they appealed to the presidential aides close to a century later.
Launched at a White House press conference soon after inauguration, the “faith-based and community initiative” was encountering unexpectedly strong opposition. Conservative religious groups expressed concerns that government funding would entangle their programs in bureaucratic red tape. Though the Clinton administration had sympathized with the idea, liberal organizations, ever alert to possible violations of the Constitution’s ban on public support for religion, objected to giving government money to programs infused with spirituality, as the Bush initiative proposed. Many of those experienced in dealing with social problems doubted that the groups sponsoring these kinds of programs had the ability to use federal grants effectively.
By August, the legislation for what had been one of President Bush’s signature programs had bogged down in Congress. To get it moving again, the aides (as well as this author, awaiting Senate confirmation to become CEO of the Corporation for National and Community Service) were assembling a “Communities of Character” tour for the President in October. In addition to a series of speeches and other public events, the plan included amending the proposed legislation in response to its critics, as well as new measures aimed at strengthening it.
Among the items under consideration was a federal effort to dramatically increase the number of community foundations. Since they were not religious organizations, community foundations could receive government aid without risking legal challenges, and they had the record-keeping abilities that receiving public money requires. Since they supposedly worked with a wide range of charities in their communities, including faith-based ones, they could channel these funds to organizations ready to make good use of them. Modelled on an effort by the Lilly Endowment to stimulate the growth of community foundations in Indiana, the plan would have involved a series of matching grants to counties that wanted to establish them.
At the time, approximately 600 community foundations existed in the United States, concentrated in the Northeast and Midwest. From the creation of the first one in Cleveland, they had grown slowly through the 1960s, but their numbers began to spurt in the following decade. Part of the reason was the 1969 Tax Reform Act, which classified community foundations as “public charities,” enabling donors to take more generous tax deductions—and be subjected to fewer administrative requirements—than would have been the case if they had set up their own foundations. In addition, the Ford Foundation and other national grantmakers saw community foundations as a vehicle for continuing the Great Society’s anti-poverty efforts, which had been losing support in Washington, and allocated substantial funding to strengthening their capacity.
Starting in the 1990s, the growth rate accelerated further. The number of community foundations nearly doubled during the decade, and their giving, in inflation-adjusted dollars, almost tripled. Although they still accounted for less than ten percent of all grantmaking, they were expanding more rapidly than private foundations, despite an influx of high-tech fortunes into the latter. Moreover, much of their funding went to help children, youth, minorities, and the “economically disadvantaged,” precisely the groups the Bush administration wanted to assist.
In program areas such as human services and education, the differences in spending from the donor-advised fund versus unrestricted community foundation funds are small.
So it is not hard to understand why increasing the reach of community foundations seemed such an attractive idea. (Private efforts were also under way at the time to encourage former Soviet-bloc nations and developing countries to create community foundations.) Their growth continued, though more slowly, during the first decade of this century.
At the same time, donations to community foundations began to change in character. Rather than coming from small, unrestricted gifts by local residents, increases in the size of community foundations started to depend on large gifts restricted in their uses to concerns stipulated by their donors. Starting at the beginning of the 1990s, the number of these “donor-advised funds”—and their share of community foundation assets—began rising. In 2007, the Council on Foundations estimated, community foundations contained 49,000 donor-advised funds. Its survey of 137 of the largest foundations showed that one third of their total assets were held in them, and 62 percent of their grantmaking—$1.3 billion out of $2.1 billion—came from them. Overall, reports CF Insights, donor-advised funds averaged over 40 percent of the gifts community foundations received and grants they made in 2012, “a trend that has been consistent over the last few years.” For some, such as the Silicon Valley and Greater Houston Community Foundations, they were even more significant.
Among the reasons for the growing reliance on donor-advised funds was competition from “charitable gift funds” created by for-profit companies like Fidelity Investments. Started in 1991, these accounts have been popular, since they allowed clients to transfer assets, tax-free, to special accounts from which they could make charitable gifts. In 2012, the Fidelity Charitable Gift Fund had $7.5 billion in assets, and made over $1.2 billion in grants, making it far larger than any community foundation and bigger than most private foundations.
In program areas such as human services and education, the differences in spending from the donor-advised fund versus unrestricted community foundation funds are small. In fact, the percentage of endowments paid out in grants is generally higher among donor-advised funds. Moreover, at most community foundations, elaborate agreements specify just how much power donors and their families have to “advise,” and when their gifts may be incorporated into the unrestricted endowment, if they have not already been spent.
Community foundations, in other words, have changed a great deal since the first one was started a century ago. Yet judging from the willingness of givers to support them, they remain an attractive philanthropic option for many people. Whether or not they would have proved capable of expanding to deal with the challenges the Bush administration planners had in mind for them was never tested in the end. Before the idea of a federal program to increase the number of community foundations went anywhere, the 9/11 terrorist attacks occurred. President Bush set out to rally the country for a far different and more urgent cause.
As one of the aides told his colleagues, a “Communities of Character” tour no longer seemed necessary. After 9/11, Americans were demonstrating that such communities were plentiful. The continued growth of community foundations a century after their founding testifies to that as well.
Leslie Lenkowsky is professor of practice at Indiana University, where he teaches courses on philanthropy and public policy. From 2001 to 2003, he served as CEO of the Corporation for National and Community Service.