Administrative Growth and Grant Payouts in Nonprofit Foundations: Fulfilling the Public Good amid Professionalization?

Date01 September 2014
Published date01 September 2014
Amanda J. Stewart has more than 10
years of experience working in nonprof‌i t
organizations ranging from small, local
efforts to large, international organiza-
tions. She is a doctoral candidate in the
Department of Public Administration and
Policy at American University. Her research
interests include nonprof‌i t management
and foundation behaviors. She holds a
master’s degree in social work from Boston
College and a bachelor’s degree in business
administration from Birmingham-Southern
Lewis Faulk is assistant professor in the
Department of Public Administration and
Policy at American University, with expertise
in nonprof‌i t management and nonprof‌i t
f‌i nance. His research focuses on several
aspects of nonprof‌i t management and
f‌i nance, including competition in the sector
for f‌i nancial resources, government and
foundation grantmaking, and factors that
inf‌l uence nonprof‌i t f‌i nancial health. He has
a doctorate in public policy with a concen-
tration in nonprof‌i t and public management
from the joint PhD program in public policy
at Georgia State University and the Georgia
Institute of Technology.
630 Public Administration Review • September | October 2014
Public Administration Review,
Vol. 74, Iss. 5, pp. 630–639. © 2014 by
The American Society for Public Administration.
DOI: 10.1111/puar.12231.
Amanda J. Stewart
Lewis Faulk
American University
e Tax Reform Act of 1969 remains the core govern-
ing policy for the U.S. foundation sector, primarily for
its qualifying distributions mandate, which ensures a
baseline spending of foundation assets toward charitable
purposes. However, implementation of this policy required
additional foundation administrative resources and con-
tributed to signif‌i cant professionalization of the founda-
tion sector.  is article focuses on the payout requirement’s
potential paradox of accountability, as administrative
expenses can be counted toward fulf‌i lling foundations’
qualifying distributions. Using a 14-year panel of
grantmaking foundations, the analysis seeks to understand
whether professionalization, measured by operating and
administrative expenses, contributes to or crowds out
grantmaking. Findings indicate that professionalization of
the foundation sector has a small
yet practically and statistically
signif‌i cant positive association
with foundation grantmaking.
From a policy perspective, the
current structure of the qualifying
distributions mandate does not
appear to lead to a crowding out
of grant allocations as administra-
tive expenses grow.
Many questions persist concerning what is
gained and lost in the nonprof‌i t sector’s
professionalization given its civic and
mission-driven roots. While professionalized practices
may be accompanied by ef‌f‌i ciency and accountability
gains in the production of tax-exempt public goods,
professionalization may also detract from nonprof‌i t
organizations’ mission focus (Hall 1992; Smith and
Lipsky 1993; Suárez 2011). Previous research on pro-
fessionalization in the sector has primarily considered
service-providing charities. In this article, the focus is
instead on a distinct class of nonprof‌i t organizations
that have been understudied in this regard: private
grantmaking foundations.
For philanthropic foundations, the Tax Reform Act
(TRA) of 1969 remains the core governing policy
for the foundation sector.  e payout policy serves
as an accountability tool to ensure that foundation
assets do not accumulate uncontrolled or directly
benef‌i t individuals related to the foundation. Yet the
TRA introduced potential paradoxes of profession-
alization and accountability for foundations. Part of
the legislation requires foundations to distribute a
certain percentage of assets each year for charitable
purposes (“qualifying distributions”) to ensure that
foundations provide substantially public rather than
private tax-exempt benef‌i ts. However, the resulting
tax code allows foundations to include “reason-
able and necessary administrative expenses” as part
of mandatory qualifying distributions (Internal
Revenue Code 4942[g][1][A]). Over time, a trade-
of‌f between foundation profes-
sionalization and charitable
grant distributions could
develop if administrative costs
crowd out grants within the
f‌i xed percentage of assets spent
each year.  is analysis seeks
to understand whether there is
such a trade-of‌f between pro-
fessionalization and charitable
Professionalization may lead to greater charitable
grantmaking through greater organizational capac-
ity, or, alternatively, professionalization may decrease
grantmaking levels because administrative expenses
are allowed in the payout amount.  ese oppos-
ing hypotheses are tested by analyzing the impact
of administrative expenses on foundations’ grant
distributions over time in order to understand the net
impact of professionalization on the organizations’
primary mission-related activities. As charitable, tax-
exempt organizations, foundations are both internally
accountable to their mission and externally account-
able to taxpayers for their tax-exempt status (Moore
and Ryan 2006). External accountability leads to a
principal–agent dilemma wherein foundation boards
and staf‌f s may shirk on public benef‌i t expectations,
Administrative Growth and Grant Payouts in Nonprof‌i t
Foundations: Fulf‌i lling the Public Good amid
Over time, a trade-of‌f between
foundation professionalization
and charitable grant distribu-
tions could develop if admin-
istrative costs crowd out grants
within the f‌i xed percentage of
assets spent each year.

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