Foundations, the PEER Report and IHL Proposals for Change
By Anne Swearingen
There’s been a lot of news lately about the Mississippi Legislature's Joint Committee on Performance Evaluation and Expenditure Review (PEER) Report on the MUW Foundation.
Also in the news is the Mississippi Board of Trustees of State Institutions of Higher Learning (IHL), which governs the eight state colleges and universities, and its announcement of proposals for stronger and more specific oversight rules for university foundations in the state of Mississippi. According to Leah Rupp Smith, spokesperson for the IHL, the Board's proposed changes to university foundation guidelines have been in the works since the PEER 500 Report was released two years ago.The fact that the changes were announced so soon at the PEER MUW Foundation Report was released is apparently a coincidence.
The PEER Report and the IHL proposed guidelines changes underscore the importance of alumnae and alumni familiarizing themselves with foundations and how they operate.
Public v. Private Foundations
A foundation – for hospitals, colleges and universities, religious organizations and more -- is a permanent fund established and maintained by contributions that provides financial aid to certain charitable interests and is generally supported by gifts for such purposes.
Although the MUW Foundation refers to itself as a private foundation, only the IRS gets to make that determination.
Generally, public charities are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities. They have an active program of fundraising and receive contributions from many sources, including the general public, government agencies, corporations, private foundations or other public charities. They receive income from investments of those funds for the organization’s exempt purposes, or actively function in a supporting relationship to one or more existing public charities.
Private foundations, in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs. A private foundation does not solicit funds from the public. Examples of private foundations include the Bill and Melinda Gates Foundation or the Robert Woods Johnson Foundation.
A foundation is presumed to be private unless it meets one of four criteria defined by the IRS: it is a support organization to a public college or university, among other public entities; it receives more than one-third of its support from gifts, grants and the like, and receives not more than one-third of its support from investment income; it is organized for and controlled by another public charity; or it is operated exclusively for testing for public safety.
According to this definition, The MUW Foundation meets the first of the criteria and therefore is not a private foundation:
• As in the definition of a public foundation, it has an active program of fundraising and receives contributions from other sources. It also receives income from investments of those funds.
• Unless its governing instrument contains special provisions in addition to those that apply to all organizations described as 501(c)(3) s, a private foundation cannot be tax exempt nor will contributions to it be tax deductible.
A foundation must make its IRS Form 990 (or tax return) available to the public. It is not required to make public its contributors’ names or addresses. The MUW Foundation’s 990s are available, although not from the Foundation’s Web site.
The PEER Report
When the results of the PEER Committee’s investigation of the activities and business practices of the MUW Foundation were announced, response from the Foundation’s board chairman was immediate – disagreement with the report’s serious findings. The IHL Board, however, proceeded to develop proposals to incorporate the relevant recommendations into new affiliation agreements for all university related foundations in the state.
The PEER report defined the primary purpose of the foundations and other entities affiliated with the state universities as “to engage in raising and managing funds and/or other activities consistent with the mission and priorities of their respective affiliated institutions.”
The IHL Board said that university foundations should – at a minimum – provide public copies of audited financial statements, operating agreements with the universities, strategic plans and policies, among other records.
Also among the recommended requirements, that:
• affiliation agreements outline how all gifts, grants, endowments and other assets are accepted and accounted for, the methods and procedures to be used in determining how the income related to those assets is to be computed and distributed to the universities, and the terms and conditions under which any portion of such assets or the income may be used for the operating or other expenses
• all gifts made to the university be accounted for and ownership maintained by that university
• the records be maintained separately from the records of the affiliated institution
Also, that the foundation
• prepare annual financial statements of its condition
• only accept or solicit gifts for the benefit of the university that are consistent with the university's mission, goals or objectives;
• manage all funds in its control in a fiscally sound and prudent manner
• establish and maintain a conflict-of-interest policy
• outline the method under which all gifts, grants, endowments and other assets are accepted and accounted for, the methods and procedures to be utilized in determining how the income related to those assets is to be computed and distributed to the universities, and the terms and conditions under which any portion of such assets or the income related thereto may be used for the operating or other expenses
• establish appropriate maximum limits on the period of time for which it shall enter into contracts for professional, advisory, or other personal services
Additionally, the affiliation agreements will require notice if:
• The foundation or any of its officers and directors have failed to comply with any conflict of interest requirements created by applicable state or federal law or by the governing documents or procedures of the foundation;
• Any state or federal regulatory body begins any investigation of any matter that may have a significant financial or regulatory effect on the foundation or upon its status as a tax exempt organization; or
• The foundation has contracted with or entered into any business or pecuniary relationship with any of its board members, other than a full-time employee or any foundation controlled directly or indirectly by the board member, which would reasonably be expected to provide for payment or benefits to that person exceeding the value of $50,000 in any calendar year. The previous sentence creates a duty for the foundation to report any such transaction but does not suggest or imply that all such transactions are either prohibited or permitted.
The IHL noted as well that affiliation agreements must provide for the right of the board to require information from any of the foundations or to examine records.
MFAeA’s Concerns
Mississippi’s First Alumnae Association believes strongly in transparency – from the MUW Foundation as well as from MUW’s administration and appreciates the thoroughness of the PEER investigation and the IHL Board’s quick response to take corrective action.
Although foundations should have conflict of interest and confidentiality agreements for all board members and employees, such confidentiality should not extend to how the foundation invests and spends the funds with which it has been entrusted. Many of the funds are earmarked for specific purposes. The public has a right to know that the wishes and intentions of donors are being honored and that all foundation business is being conducted in a manner consistent with IHL policy and all applicable state and federal laws.
The impact of the recommendations of the PEER Report will not be finally realized until the IHL’s new affiliation proposals have been completed and put in place at all Mississippi’s institutions of higher learning. The end result should be that foundations boards will have a greater appreciation and understanding of their fiduciary responsibility to donors and the integrity of the funds entrusted to their oversight.
Letting more “sunshine” in will help rebuild trust with donors, and in so doing promote increased giving to foundations.
Straw Man; a logical fallacy that is committed when an opponent simply ignores a person's actual position and substitutes a distorted, exaggerated or misrepresented version of that position…sometimes called the “Red herring” fallacy for the belief that a fish dragged across a trail will mislead hunting dogs….also called smokescreen.
When foundations oppose more stringent IHL oversight by arguing that they must protect donor’s anonymity, they commit the strawman fallacy. MFAeA members individually and collectively are asking – not for the names of those who give money to the foundation – but how the foundation accounts for and spends the money. MFAeA has not asked for donor names and understands and respects the need to keep that information confidential. The association has repeatedly asked for an accounting of and access to association funds deposited in the foundation.
EDITOR’S NOTE: W alum Anne Swearingen is the Director of Communications for the Community Foundation of Greater Memphis.
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