Question: We want to make a $25,000 contribution to the biology department of a local college. The department has an annual budget of $500,000. We are concerned that instead of raising the department’s budget by $25,000, the college will simply cut its own contribution to the department by $25,000, and make up the difference with our contribution. How can we ensure our gift will really benefit the biology department and not, in effect, be used for other purposes at the college?
Answer: The situation you describe is often called the “fungibilty” problem, or the “push dollar” issue—in other words your $25,000 gift could end up being “pushed” through the budget of the department you want to help, and raise by $25,000 the budget of a department you have no interest in helping. To fulfill donor intent in this situation, it is necessary to “add on” dollars, as one client of mine says. That is, for your $25,000 gift to truly benefit the biology department, its budget would have to be increased to $525,000. This problem has recently been litigated in Connecticut and Iowa. In both cases, the court recognized “fungibility” as a legitimate issue for donors, and it required the recipient organization to do something about it.
The Connecticut case was brought by my client Hartford Art School, Inc., (HAS) against the University of Hartford. The university was formed in 1961 when three local colleges (including HAS) affiliated to create the university. While normal operations over the art school were ceded to the university, HAS never terminated its corporate existence and did not transfer its endowment to the university. Over the years the endowment grew to approximately $10 million. While the relationship between the governing boards of HAS and the university was strained by many issues, one was the add-on dollar issue. The HAS board believed that donors’ intent to benefit the art school would be circumvented if endowment earnings were pushed through the art school budget—that is, if the earnings were simply used to replace the university’s normal allocation of funds to the art school from tuition and other sources.
The university disagreed, objecting to the impracticalities of trying to enforce the concept, such as how to establish the “normal” baseline budget against which the “add on” treatment is tested. Nevertheless the court concluded that an agreement between the two institutions that monies would be used in an “add on” manner was valid and enforceable.
The Iowa case concerned three parties: a testamentary trust (Trust); the Mid-Iowa Council of Boy Scouts of America, Inc. (Mid-Iowa); and Boy’s, Inc., a nonprofit providing resources for Boy Scouts in Oskaloosa, Iowa. The donor specified in his charitable trust that a fixed sum was to be paid annually to Mid-Iowa to benefit Boy Scout groups in Oskaloosa, Iowa, by making them “outstanding when compared with like services provided by cities of the same size.” The Trust distributed approximately $8,000 annually to Mid-Iowa, which deposited the money in its general fund and used it to defray operating costs in all of the 27 cities in its geographical territory—only one of which was Oskaloosa. Mid-Iowa’s allocation for scouting in Oskaloosa was based on a general formula that applied to all scouting programs within Mid-Iowa’s territory. Boy’s, Inc. (with operations only in Oskaloosa), claimed that Mid-Iowa was not using the Trust’s annual distributions in the manner the donor intended, and asked that it receive the Trust distributions directly. Mid-Iowa argued that its distributions satisfied donor intent because Oskaloosa’s (equal) share of Mid-Iowa’s district-wide expenditures exceeded the amount of the Trust’s annual distributions to Mid-Iowa for the benefit of Oskaloosa scouting.
The court rejected Mid-Iowa’s argument because Mid-Iowa would be obligated to provide normal funding to programs in Oskaloosa even if the Trust did not exist. Moreover, the court stated, the donor intended “to give an advantage to the youth of Oskaloosa . . . over and above the benefits received by young people in other communities of the same size.” The court went so far as to remark that Mid-Iowa should have declined to accept the Trust’s funds if it didn’t think it could comply with the donor’s intentions.
So if you want to make sure your donation makes a real difference, consult with your lawyer and specify “add on” treatment.
John M. Horak is an attorney with the Hartford, Connecticut, law firm Reid and Riege, P.C. and a research fellow at the Yankee Institute for Public Policy in Hartford.