The Risks of Sunshine

Early last month Dan Saftig, president of the Iowa State University Foundation, sat in his office reviewing a list of 8,400 donors, who contributed a combined $2.6-million in May. The records contained the names of donors, the dollar range of each donation, and the designated use for each gift.

But Mr. Saftig was not reading his own copy of the records. He was looking at a local newspaper’s Web site, where anybody could find the same information.

For Mr. Saftig, the moment marked the end of a three-year battle by the foundation, which raises money for Iowa State University, to keep donor names and other records confidential. The Des Moines Register requested the documents soon after the Iowa Supreme Court decided in February that the foundation performs a government function for a state institution, and so its records must be open to the public. The newspaper plans to continue to run the donor lists on its Web site every month.

“It’s a slippery slope,” Mr. Saftig says of the public’s access to the foundation’s records. “It can certainly put us at a competitive disadvantage, because now any other nonprofit has easy access to our donors.” And many publicity-shy donors, he suspects, may take their money elsewhere.

The situation in Iowa is playing out at university-related foundations across the country, as fund raisers scramble to adapt to newfound attention from lawmakers and the public. Congress has spent more than a year investigating abuses among nonprofit groups, pushing charities and foundations of all kinds to improve their governance and be more accountable. In the past three years, several college-affiliated foundations, including those of Iowa State and the Universities of Colorado, Georgia, and Louisville, have experienced more public scrutiny of their practices, spurred by scandals at the institutions they support or by legislation and lawsuits brought by advocates for open government.

At a time when taxpayer support for public colleges is declining, putting pressure on the institutions to find money elsewhere, foundation officials worry that opening their books will lead potential donors to give to other charities, including private colleges, that can guarantee their privacy. As a result, some university-related foundations are not waiting for state lawmakers or judges to decide what is subject to freedom-of-information laws and instead are crafting proposed legislation to protect trade secrets and benefactors’ personal financial information.

“Folks are rethinking where to draw the line and being more proactive,” says David Bass, director of the National Center for Institutionally Related Foundations at the Council for Advancement and Support of Education. “They’re realizing that before they may not have been subject to freedom-of-information laws, but now they have to clarify policies about what they will disclose, before they’re confronted with requests that take them off guard.”

Let the Sun Shine In

College foundations were originally created as entirely separate, private nonprofit organizations so that they could be exempt from the state regulations -- including open-records requirements -- to which their affiliated public institutions were subject.

The majority of public colleges across the country have used private foundations to raise and manage donations for decades -- some since the late 19th century -- but little interest was paid to the work they do, until now.

“One of the primary drivers of interest in private foundations has been their success in raising a lot of money,” Mr. Bass says. “Often foundations don’t promote themselves. They step into the background while promoting the universities they support, which can lead to suspicion.”

Interest in Iowa State’s foundation was first piqued around 1996, when the university’s Agricultural Foundation (a separate entity from the ISU Foundation) successfully petitioned a district court for permission to sell a 240-acre farm bequeathed by Marie F. Powers, whose family had worked the land for more than a century. She had stipulated in her will that the university maintain the farm in perpetuity, but, foundation officials say, because she never contacted the foundation about the bequest before her death, she was not aware of the university’s policy to divest itself of farmland (a point that some involved in the situation have disputed, saying that the Agricultural Foundation had been contacted about her wishes years before she died). Her total bequest, which also included some cash, was valued at $1.3-million.

The court allowed the farm to be sold, and part of the proceeds were used for an animal-science facility. The rest of the money was given to the ISU Foundation by the Agricultural Foundation, for endowed scholarships, including one in agronomy.

Fearing that the money was being funneled to areas of the university that Ms. Powers had not intended to support, a Des Moines resident, joined by a former manager of the Agricultural Foundation, sued the ISU Foundation in 2002 to make its records public. The case ended up in the Iowa Supreme Court, which unanimously ruled that the ISU Foundation was “performing a government function, and therefore its records are subject to disclosure.”

At the time the foundation was already devising a new public-information policy, which calls for releasing donors’ names, the range of each donation, and how the money is to be used. The policy allows for anonymous gifts at a donor’s request, and permits the foundation to keep secret its fund-raising plans; employee information beyond name, title, and salary; student information; and anything regarding trusts and annuities administered by the foundation, unless they are actual gifts.

The Iowa court decision did not go so far as to deem the foundation a public agency, but it put the burden on the organization to prove that certain information was exempt from open-records requests under state law. The creation of its new public-information policy, the foundation hopes, will stave off judicial interference. The foundation’s decision on a given record can be appealed to a state court. If the court rules in the plaintiff’s favor, the foundation has to pay the costs.

“If you are a government body and know it from the start, you have a structure in place for public documentation,” says Lisa Eslinger, vice president for finance at the ISU Foundation. “We have to create that.”

Chilling Effect

Mr. Saftig, president of the foundation, says striking a balance between earning the public’s trust and protecting the privacy rights of big benefactors is a challenge.

“We are not in any way encouraging donors to request confidentiality, but one of the results of this may be that more donors say, Don’t you dare release my information,” he says. “I’m hearing a bit of drumbeat about anonymous gifts from significant donors.”

As in most states, Iowa law allows donors to request anonymity and does not allow personal financial information, such as their net worth, to be released. But Mr. Saftig and leaders of other college-related foundations say it is often difficult to convince prospects of that.

And if major benefactors start requesting anonymity, it lessens the ability of the institution to publicly tout their big gifts -- a marketing strategy that many in the industry say encourages others to give.

Mr. Saftig recently received a request for the complete donor record of one of the foundation’s most generous benefactors. Although the foundation is not legally required to release any information about donations made before May, he considered the request. “My inclination was not to release that information,” he says. “And the donor said, ‘If you’re forced to release it, I will not make another gift, ever.’”

Donors have many reasons for not wanting their gifts to be made public, especially when it comes to deferred gifts, like bequests. Sometimes family members don’t know that the person has left a fortune to an institution in a will. Others don’t want people to know that a donation went to a specific department or scholarship.

The University of Minnesota Foundation worked with state legislators in the early 1990s to pass a bill that keeps donor information private. As a result, the organization receives fewer requests for anonymity, says Gerald B. Fischer, its president. Those who do want to remain unnamed, he adds, usually have compelling reasons for doing so.

“Most who request confidentiality are people who live modestly but have had circumstances that have nothing to do with their lifestyle that allow them to make major gifts,” he says. “They don’t want other charities soliciting them, and they don’t want others to know they’re able to make a $1-million donation.”

The success of institutions in getting deferred gifts may well rest on the success of state laws in shielding the donors’ personal financial records. Such gifts, highly sought after in fund raising, can take years of cultivating relationships to negotiate, because of the delicate, personal nature of the donation. Donors must be willing to hand over almost all of their financial information, including wills and estate plans.

Roger C. Underwood, an Iowa businessman who has already given the ISU Foundation more than $1-million, worries about going ahead with a deferred gift after the Supreme Court’s ruling. “I’m concerned about the process behind securing those gifts and what is in and out of the files,” he says. “I’m proceeding with more caution than I would have before.”

Mr. Underwood, who is also a member of the foundation’s board, says he does not believe that any higher-education foundation is asking to keep information private that should be public.

“Foundations have to respectfully work on behalf of their donors,” he says. “And that’s not because they think they’re a special class or anything. They’re protecting an important part of educational funding.”

Legislating Privacy

Not everybody buys the argument that donors will flee to other charitable causes. Thomas M. Clyde, an Atlanta lawyer, has represented the Georgia First Amendment Foundation and the Atlanta Journal-Constitution in their battles against recently enacted legislation that protects the names of individual donors to the University of Georgia but denies anonymity to those who do at least $10,000 worth of business with a public university within three years of making a gift.

“I’ve never seen any evidence that requiring disclosure really stops donations from coming in,” he says.

Mr. Clyde doesn’t think Georgia’s new law goes far enough in disclosing university-related foundation records. His concern stems from an investigation by the Journal-Constitution this year revealing that 499 corporate donors to the Georgia Tech Foundation in the past five years did at least $166-million in business with the institution during the same period. The lawyer would rather see a policy that makes public not only corporate but also individual donors.

“Public colleges should be run with the same scrutiny as any other public institution,” Mr. Clyde says. “It would be far better for everybody to remove any risk of quid pro quo.”

Steve Wrigley, the University of Georgia’s senior vice president for external affairs, says it helped write the legislation in response to concerns from supporters about releasing donor financial records. The intention, he says, was not to keep donor names secret, but to make sure that requests for anonymity were supported by law.

“We needed to provide some protection to donors, especially the information we have on their financial status,” he says. “The law allows us to do that, whereas in the past it was unclear.”

Mr. Wrigley and others who raise private funds for the university believe that the protection that the new law provides is giving them a competitive advantage over other charitable causes. “For people who are making significant gifts, they have multiple charitable interests that don’t always include UGA,” he says. “A number of key donors felt good that the bill passed.”

But Mr. Clyde, the Atlanta lawyer, says public colleges already have a competitive advantage in the form of state money -- a pool of funds that is not available to private colleges. He sees a danger in having less transparency because there is no way of knowing who is giving money to what parts of the university, and what their motivations may be.

“If you create a secret relationship, you also create the opportunity for improper relationships,” he says.

‘Nothing’s Sacred Anymore’

Without open records, some fear that foundations and the colleges they support will not follow through on the wishes of donors and will use the money for the wrong purposes. That was the case last year at the University of Colorado at Boulder, when it was discovered that private funds were being used to foot the bill for coaches’ country-club dues instead of scholarships.

Legislation was passed this year in Colorado as a result of the problems involving the University of Colorado Foundation’s funds. The new law, which was supported by foundation officials, requires that the organization open financial records but protects the names of donors.

The scandals have also forced the foundation to undergo at least three internal and external audits while restructuring its operation to comply with the new legislation. The foundation has also produced a new public-information policy that explains the information it is obligated to disclose (such as that on IRS Form 990), what it voluntarily discloses (financial statements and investments, for example), and what is protected from disclosure by the new law (personnel records and private donor information).

“This has all brought clarity to our status and reporting requirements,” says Michael M. Byram, president of the CU Foundation. “Ambiguity gets you in trouble, clarity doesn’t.”

Because the Boulder campus has been embroiled in controversy for the last year, leading to the resignation of the university’s president, Elizabeth Hoffman, Mr. Byram concedes that fund-raising totals will be down.

But the tough times have forced the foundation to do some soul-searching, and in the end there will be no choice but to have “clear and clean” records, he says.

“We’re not sugarcoating anything,” he says. “I don’t think anybody revels in the attention we’ve had in the last 18 months. But as difficult as it is, it’s allowed us to define our roles, educate the public on who we are and what we do. Nothing’s sacred anymore.”

Mr. Saftig, of the Iowa State University Foundation, agrees that the controversies have provided an opportunity to show the public the role that foundations play in higher education.

Despite the turmoil, he notes, his foundation still gathered a record number of donations, raising $20-million more in the 2005 fiscal year than in the previous year. The outcome of the recent legislation and court cases in other states will have broader impact on the entire philanthropic community, he believes.

“How all of this plays out should be of great concern for all nonprofit groups,” Mr. Saftig says. “It’s not just foundations. Any public institution that has fund-raising records, any institution that raises money for a government entity, should be watching.”

http://chronicle.com Section: Money & Management Volume 51, Issue 47, Page A27