Modernizing the 990-PF to Advance the Accountability and Performance of Foundations: Part 2

(John Craig is executive vice-president and COO of The Commonwealth Fund. Craig is chair of the Nonprofit Coordinating Committee of New York, and a former chair of The Investment Fund for Foundations (TIFF). He serves on the boards of the TIFF Education Fund, the Greenwall Foundation, the International Women's Health Coalition, and the National Center for Law and Philanthropy, and on the investment committee of the Social Science Research Council.)

The full essay on which this post is based appears in The Commonwealth Fund's 2010 Annual Report.

In my previous post I discussed some concerning flaws of the Form 990-PF, the tax return filed annually by private foundations. To address these flaws, I present some guidelines to consider for modernizing the 990-PF – a modest proposal, if you will:

The return should prod foundations to use web sites to report information on their programs and performance that cannot be readily conveyed on a tax return. The Foundation Center reports that only 26 percent of foundations have web sites. Surely in the Internet age, maintenance of a site that discloses basic information on the foundation's activities, governance, and management should be a fundamental test of accountability. Foundations should be allowed to detail their charitable activities by linking to their web site. Such sites enable far more comprehensive, timely, and accessible reporting of this information than a tax return can ever achieve.

One of the biggest obstacles to e-filing is the return's Part XV requirement to list detailed information on all grants. Foundations should be able to meet the requirement by providing a link and by participating in the Foundation Center's web-based Grantsfire and eGrant Reporting program, which allows foundations to post information on grants nearly in real time or submit such data to the Center on a regular basis. This step would allow raw data on grants by individual foundations to be available on their web sites, while cleaned and structured data would be available through the Foundation Center's electronic databases.

The reporting of expenses should be disaggregated functionally. Doing so would enable users to readily identify what part of the foundation's expenses is devoted to grants and direct charitable activities, grants administration, endowment management costs, unrelated business costs, and general administration.

The major missing gap of endowment investment performance should be filled. Requiring all foundations with assets of $10 million or more to report the net investment returns on their endowments for each of the last four calendar quarters would quickly produce a comprehensive time series on endowment returns that could be parsed by foundation size, intended life expectancy, and other variables to enable reliable peer benchmarking.

The basic return should be as short and uncomplicated as possible, and written in plain English. Essential tax code terminology should be provided parenthetically. The calculations of the required payout, payout shortfall, and excise tax on investment income should be concise and presented in a format easily followed by lay users. Secondary information should be requested in supplemental schedules. The requirement to list individual securities in the endowment portfolio should be replaced with one aimed at revealing any worrisome concentration of the endowment in a few securities—say, amounting to more than 5 percent.

The Commonwealth Fund estimates that with these and other revisions, the annual cost of filing its 990-PF would fall from $18,000 currently to around $10,000—and its return would be more informative.

A revised 990-PF would also improve the principal databases for monitoring foundation activities. Nevertheless, the size and diversity of the foundation sector, the perils of the IRS using limited data to promulgate performance benchmarks, and serious IRS resource constraints lead to the conclusion that the foundation community itself should take primary responsibility for ensuring transparency, accountability, and best-practice adoption. Among the most promising approaches for helping institutions meet these goals is the Foundation Center's web-based Glasspockets project, which is increasing understanding of best practices in foundation transparency and accountability by drawing on information that foundations make available online.

As Foundation Center President Brad Smith argues, greater transparency is the best means to protect the freedom that philanthropies need to pursue their missions. Modernization would make the 990-PF an even more valuable instrument for promoting transparency and accountability and would strengthen the sector's own self-regulatory efforts to ensure effective use of the nation's philanthropic resources.

— John Craig