At the same time, we are relying more and more on the nonprofit sector to supplement government assistance in areas such as feeding the hungry, housing the homeless and providing health services to the poor. Nonprofits have, in effect, become another branch of government. Because we are turning to nonprofits to fill critical needs, the government has an important role to play in both encouraging donations at all levels and in ensuring transparency and accountability so that both donors and beneficiaries remain confident in how charities are run.

Community foundations have long been a vehicle for those who want to engage in philanthropic activity, but do not have the assets or inclination to establish a foundation of their own. Community foundations were among the first to offer donor-advised funds, which allow people to donate cash, stock and other assets to an account, claim a tax deduction and recommend how the assets are distributed.

A 2005 survey by the Chronicle of Philanthropy found that 88 public charities had combined assets of $15.5 billion and distributed $3.3 billion to charity—an increase of more than 20 percent over 2004. But with increased assets comes increased scrutiny. This is why some of the legislative changes under consideration in Congress are necessary to increase public confidence in donor-advised funds.

A bill now making the rounds calls for community foundations to distribute 5 percent of their donor-advised assets each year. This is good public policy. Donor-advised funds should always facilitate getting more funding into the system. Many who work in community foundations, however, claim this law is unnecessary because most distribute more.

Other proposed changes are more troublesome because they seek to restrict the donation of illiquid assets. One proposal would prohibit donor-advised funds from accepting donations other than cash or publicly traded securities. Another would allow funds to accept any gift—liquid or otherwise—but require the gift (other than publicly traded stock) to be sold within one year. If enacted, the government would make it preferable to donate illiquid assets to hospitals or colleges instead of community foundations.

Disperse and Disperse Alike
If there is a public policy argument to be made for changing the valuation and distribution of illiquid assets, the change should apply to all charities, not just donor-advised funds. In any case, the proposed requirement that community foundations distribute 5 percent of their donor-advised assets each year accomplishes the same goals. Instead, this rule would necessitate that illiquid assets not be held too long, nor make up an inordinately large portion of their funds. This would cause undue pressure to meet the distribution requirements of other accounts.

While Congress considers these changes, it should also beef up regulatory oversight of this sector. More than 30 years ago, the IRS began collecting an excise tax from foundations to be used for enforcement. The tax has been levied, but the enforcement fund was never established. We should be using the tax for its intended purpose. Increasing public confidence in the integrity of foundations encourages participation by others and benefits philanthropy as a whole.

I am pleased that Congress is making an effort to stimulate giving and to ensure that charities are operated in an ethical and transparent way. But there is always more that can be done. We need to make sure that the message delivered by John D. Rockefeller to his children is being repeated to our own children. Our nation’s leaders should facilitate charitable giving consistently to ensure that our nonprofits remain strong and effective. We Americans are remarkably generous people. We just need a little motivation and an occasional reminder to develop a lifelong commitment to philanthropy.

Fred P. Hochberg is dean of Milano The New School for Management and Urban Policy in New York. He served under President Clinton in the Small Business Administration.