Does $471 Billion Deserve Respect?
June 30, 2021 | Michael Poliakoff
Generosity continues to define the American people. Last year, in the wake of the COVID-19 pandemic, charitable giving surpassed $471 billion. This new milestone was announced with well-deserved fanfare and extensive media coverage. What happens after the check is cashed, however, receives far less attention.
Few donors understand their legal recourse when a charity ignores—or blatantly disregards—the terms of their gift agreement. Though philanthropy has grown in both scope and complexity over the past three decades, the laws governing the charitable sector remain mired in a time gone by. Oversight of gift agreements remains the domain of state attorneys general, and donors are rarely granted standing, or the authority to bring a lawsuit, to enforce the terms of a gift agreement.
With a myriad of other responsibilities, however, state attorneys general have little capacity—or interest—to oversee the 1.63 million registered charities in the United States. Empowering donors, in certain circumstances, to bring lawsuits to enforce the terms of their gift agreement would ease this burden and strengthen charitable oversight.
Earlier this month, the Ohio Senate passed bipartisan legislation that would make sweeping reforms to higher education in the state, including a provision to modernize donor standing. Senate Bill 135, sponsored by Senator Jerry Cirino (District 18), updates Ohio’s version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), potentially moving the state from one of the weakest to one of the strongest when it comes to the protection of donors’ rights. The bill passed by a margin of 31 to 2, with 13 cosponsors representing both parties, and now awaits further consideration by the Ohio House of Representatives.
The Ohio bill provides a limited, reasonable expansion of donor standing. A donor to a state institution of higher education can notify the attorney general of any violations of the gift agreement. If the attorney general does not respond after 180 days, donors have standing to bring a case before the courts to enforce the terms of their gift. The bill gives donors six years from the time that they discover a violation of the gift agreement to file a complaint.
Such a measure is commonsense, and sadly necessary. Institutions of higher education are not alone in their willingness to flout donor intent, but they are among the worst repeat offenders. Arguments against donor standing have tended to rely on scare tactics and faulty reasoning. Critics question whether superfluous lawsuits will overwhelm the courts, or that donors will make their gifts contingent on unreasonable restrictions, or that distant relatives will be able to rewrite donor intent. A brief examination of each of these concerns in turn reveals why none are prohibitive of a reasonable expansion of donor standing.
It seems unlikely that allowing donor standing would flood the courts with vexatious litigation. Expanding donor standing does not mean that every donor will be able to sue an institution for the misuse of any gift at any time. To limit the number of eligible donors, legislation should include guidelines such as a threshold amount, a time frame, and potential remedies.
Setting a threshold amount will limit the number of donors eligible to sue. Iowa already allows standing to donors who have given more than $100,000 to an endowment, and yet there is no evidence that this has led to a flood of litigation against nonprofits in Iowa.
The proposed bill in Ohio limits the remedies available to the courts, taking the possibility of damages off the table. Without a financial incentive to enforce a gift agreement, donors will only pursue legal recourse when a serious violation of intent has occurred. The motives would be principled rather than pecuniary.
Nor does it seem likely that donors would give gifts with absurd or impossible strings attached. In higher education giving, both parties negotiate the terms of a gift agreement, but at the end of the day, the school can decline a proffered gift. A donor gives because he or she trusts that the school will honor the terms under which the funds are awarded. The school should decline gifts that run counter to its mission or interests.
An ongoing dispute in Ohio illustrates the issue. Michael Moritz made a gift of $30 million to Ohio State University (OSU) in 2001 to support endowed chairs, form an unrestricted fund for excellence and innovation, and establish 30 full-tuition scholarships annually. In recognition of Michael Moritz’s generosity, OSU named the law school in his honor. Years later, his son Jeffrey Moritz discovered that the school had awarded only up to 16 Moritz Scholarships each year and had taken an undisclosed fee to finance fundraising efforts.
At this juncture, Ohio State University claims that the nearly $10 million set aside for scholarships in Michael Moritz’s gift was never sufficient to support 30 annual scholarships. Surely that should have been addressed 20 years ago.
Some donors may propose eccentric ideas, but the school is free to decline terms they find impossible or onerous. Truly absurd gifts are few and far between. The unfortunate reality is that schools are more often reluctant to fulfill the terms of standard gift agreements, and without sufficient oversight, there is little to prevent the misuse of funds when it occurs.
Would expanding donor standing to include heirs give distant relatives the ability to interfere with donors’ gifts? In his testimony before the Ohio Senate on the new bill, Bruce McPheron, Ohio State University’s provost, argued against the need for revisions to UPMIFA. He maintained that “the bill undermines a donor’s ability to fully control how his or her donation is used by giving the donor’s family members and professional administrators the right to reinterpret the donor’s intent after he or she has passed away.” Given that the bill is written so that no plaintiff can reap a financial windfall from such a suit, this scenario seems unlikely. On the contrary, the plaintiff would need to devote considerable time and personal resources to protect a loved one’s charitable intent, with no personal profit at stake.
State attorneys general have shown little appetite for enforcing restricted gift agreements, yet they retain sole oversight authority. Passing legislation that creates a limited expansion of donor standing will strengthen public oversight of charitable gifts and allow attorneys general offices to focus on their priorities.
This article originally appeared in Forbes on June 28, 2020.