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

• DOI: http://doi.org/10.1111/puar.12231
• Date: 01 September 2014
• Published date: 01 September 2014
• Author: Amanda J. Stewart,Lewis Faulk

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

College.

E-mail: mandijstewart@gmail.com

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.

E-mail: faulk@american.edu

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

purpose.

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

Professionalization?

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.