Despite such unpleasantness, donors are increasingly putting restrictions on their gifts, says Ann Kaplan, director of an annual survey that tracks giving to educational institutions for the Rand Council for Aid to Education. She tracks this phenomenon by looking at the percentage of unrestricted gifts or donations that have no strings attached and that are used to fund buildings and equipment. She compares this with the total amount of money raised. The resulting percentage has declined steadily over the past 30 years—from 21 percent in 1969 to only 9 percent in 2003. The survey’s participants represent about one-quarter of the country’s 4,000 institutions of higher education that receive 85 percent of their annual funding through voluntary support.
TOP VIEW
Donations to universities have risen every year since 1970. Today, donors are increasingly requesting control over the use of their endowments by forging pre-gift contracts and giving incrementally. Conflict follows when donors attempt to demand a seat on committees charged with hiring professors, chart a department’s curriculum or choose scholarship recipients. |
Colleges and universities do remain popular charity recipients. In 2003, total giving to educational institutions came to just under $24 billion, after rising gradually every year since 1970, when they amassed $2 billion. But as the nonprofit sector has become increasingly competitive, universities are finding it difficult to resist the “long arm of donors,” explains Peter Frumkin, associate professor of public policy at Harvard’s Hauser Center for Nonprofit Organizations. Fifty years ago, there were 100,000 nonprofits, Frumkin points out; today, there are some 1.6 million. Still, donor engagement is as old as charitable giving itself. Early philanthropists such as John D. Rockefeller and Andrew Carnegie were demanding and aggressive in both their business and philanthropic ventures, Frumkin notes. “Carnegie preached the gospel of giving your money away while you’re still alive, and watching it and making sure it creates ladders of opportunity.” Meanwhile, Rockefeller delegated due diligence to philanthropy assistants. One of those advisors, Abraham Flexner, is credited with revolutionizing the poor quality of medical education in the United States, Robert Bremner writes in his classic 1960 social history American Philanthropy. The Rockefeller Foundation grants that Flexner disbursed “were not free gifts, but hardheaded investments, made on the condition that the recipient would raise an equal or larger sum . . . and institute improvements in facilities and instruction,” according to Bremner. According to the IRS, a gift is only tax deductible when it is irrevocable and the donor expects nothing in return after the asset is given. “Nothing in return,” as it turns out, is the gray area where tensions may arise. A donor can still say, for example, “I want to be involved and engaged with the institution as to how the gift is being utilized,” says John Taylor, a fund-raising consultant who helped draft the CASE Management and Reporting Standards that nonprofits use to determine which donations are tax deductible. But donors cannot take the money back after it is given because they have already received a tax deduction, he says.
| In 1995, Yale University returned a $20 million gift from alumnus donor Lee Bass because of a perceived threat to the university’s academic freedom. |
Experts say that pre-gift contracts are really the best and one of the only forms of control available to donors for avoiding unwanted conflicts that result in returned donations. These agreements emphasize hammering out details before proceeding with an endowment. “Before the check is handed over, all topics, restrictions and conditions are fair game,” donor advisor Rafferty says. This is especially true for alumni giving, says Sterling Speirn, president of the Peninsula Community Foundation, which manages philanthropic funds and connects donors and nonprofits in the San Francisco Bay Area. Speirn laments the typical donor who never realizes that he needs a pre-gift contract. “Donors tend to come at this in a pretty trusting way because they so identify with their alma mater.”
Lassonde’s final contract with the University of Toronto, for example, stipulated that both undergraduate and graduate programs, as well as the endowed chair, be named after him. So far, so good. The agreement then stated that if the funds were “subjugated to other engineering causes,” or if the undergraduate program failed to be implemented after a period of about five years, the school would return all the money, with interest. This clause caught university officials off guard. “Nobody’s ever asked for their money back before” was the reaction, Lassonde says, adding that the contract “is just there as a fail-safe.”
Donors can also retain some control by giving incrementally, rather than all at once, Rafferty notes. “It gives them a chance to see whether the charity and the donor maintain the level of communication and accountability that both sides anticipated when the deal was struck.” Financier and mortgage banker Peter T. Paul structured his pledge of $10 million to the University of New Hampshire in 2001, when he endowed chairs in space science and developmental psychology. Paul decided to endow in installments over 10 years, providing for current use.
“Indirectly, I’ve got lots of control,” he says. “I do not have to pay them if they really make me mad.” But Paul, a 1967 alumnus, adds that that outcome is unlikely. Like Lassonde, he and the university nailed down their agreement on paper before he signed on the bottom line.
Illustration by Jim Frasier.Shelley Pannill Stein is a business journalist based in Santa Monica, Calif. She has worked for AFP in Paris and was a senior reporter with Forbes ASAP, covering entertainment, technology and the media. shelleypstein@yahoo.com
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