JURIST Guest Columnist Brian L. Frye, conceptual law professor at University of Kentucky College of Law, advocates Arts Foundations increasing their spending and doing their part to help public arts charities stay afloat. . . .
Everybody knows that the Coronavirus pandemic is an economic catastrophe. Small businesses are already failing and people are losing their jobs. The government can and should do everything possible to mitigate their suffering. But in at least one economic sector, there is another option.
The arts sector is struggling for the same reason many other sectors are struggling. Its lifeblood is ticket sales, and all public events are canceled. Many small arts organizations have already folded, and many more are on the verge of bankruptcy.
But the arts sector is also unique because it consists primarily of charitable organizations. And some of those charities have vast amounts of money. They just aren’t spending it. Now is the time.
The overwhelming majority of charitable organizations in the United States are grassroots public charities, small organizations with small budgets, run by a small number of people. But the overwhelming majority of charitable assets belong to private foundations, organizations created by wealthy people to support charitable causes.
Essentially, a private foundation is a pot of money that exists for the purpose of funding public charities. Federal law requires private foundations to distribute 5 percent of their assets every year, on pain of heavy fines. Ideally, those distributions are grants to public charities, although some disreputable foundations spend heavily on “administrative expenses,” including salaries.
In practice, the 5 percent distribution requirement enables private foundations to distribute only their investment income. Investment income tends to exceed 5 percent, especially if you have a lot of money to invest. As a consequence, private foundations can exist in perpetuity, and even increase their endowment over time.
But 5 percent of assets is only the minimum distribution. Nothing prevents foundations from distributing more. Indeed, some private foundations intentionally distribute more than 5 percent, in order to spend themselves out of existence.
In this moment of crisis, arts foundations should immediately increase their financial support of the organizations they fund. Indeed, I believe the trustees of those foundations have an obligation to increase funding and save organizations that are on the brink.
One of the fiduciary duties of a trustee of a charitable organization is the duty of obedience, or the duty to make decisions in light of the charitable purpose of the organization. The only charitable purpose of an arts foundation is to fund arts organizations. When arts organizations are struggling to survive, arts foundations have a duty to keep them afloat. They have the money, and now is the time to use it.
Some arts foundations have already started to recognize this obligation. For example, the Warhol Foundation has eliminated restrictions on the use of grant funds. While that is a start, it isn’t nearly enough.
I think every arts foundation should immediately double every grant it made for 2020. If an organization was worth funding, it’s worth saving. Yes, it will cut into the endowments of arts foundations. But that is precisely the reason they exist in the first place, to ensure that rainy day funds are there when they are needed.
If arts foundations don’t step up to the plate now, it will call the justification for their existence into question. They have no value or purpose other than funding the arts. Now is the time. “Hic Rhodus, hic saltus.”
Brian L. Frye is a conceptual law professor (IP, PR, nonprofits, art law, legal history) at University of Kentucky College of Law. Brian is also a “Securities artist” and a host of the Ipse Dixit Podcast.
Suggested citation: Brian L. Frye, Arts Foundations Must Do More Right Now, JURIST – Academic Commentary, March 26, 2020, https://www.jurist.org/commentary/2020/03/brian-frye-arts-foundations/
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