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Michigan's Dangerous Attempt to Distort Donors' Intentions

2006, Chronicle of Philanthropy

The collapse of the American auto industry and the long-term decline of Detroit calls for new economic thinking and the infusion of capital.

But a few Michigan state legislators and the attorney general believe there's an easier fix: simply requiring charities and foundations that were created in Michigan to divert money to the state.

In June two state legislators took the first step in trying to force the Ford Foundation to spend money exclusively in Michigan.

They introduced a bill that tells state courts how to determine the intent of charitable donors. The bill requires courts to assume that donors who created charities and foundations in Michigan wished to keep all of their money in state and to spend it the same way forever.

The legislation reflects dissatisfaction among some Michigan residents that the Ford Foundation, which was started by the automaker Henry Ford, supports democracy and relieves suffering elsewhere when there is plenty of suffering to be relieved right in Michigan.

Michigan's attorney general, Mike Cox, is investigating the organization, saying the grant maker has ignored the Fords' philanthropic desires, but reportedly has offered to end his investigation if the foundation agrees to make 20 percent of its grants to Michigan charities.

The approach by Mr. Cox and lawmakers is not just wrongheaded the proposed legislation is completely unworkable and if passed might well cause Michigan to lose more philanthropic resources than it would gain. The legislation would also set a dangerous precedent for lawmakers and attorneys general in other states, some of whom have already demonstrated an unhealthy willingness to take control of assets intended for private charity.

Charities are built with private money. If donors had wanted advice from state legislators on how to spend their wealth they would have asked, donated their money directly to the state, or lobbied for higher taxes.

Of course, it doesn't always make sense to follow a donor's intent to the letter, not least because most foundations and charities exist in perpetuity, and perpetuity is a very long time. Sometimes donors give money for purposes that become obsolete, as when a medical foundation works to cure a disease and succeeds.

Fortunately, legal procedures that have been in place for centuries provide some flexibility for foundations to alter their missions when they become outmoded.

Those procedures, however, are administered by the courts, not by state legislatures that might feel tempted to claim money for government programs, and certainly not by attorneys general who might want to advance their political ambitions.

The Michigan legislation would require courts to discern a donor's intentions by looking at the spending patterns from the first years in which a charitable organization operates. And if that's not sufficiently troubling, it also says that a donor's choice to establish a charitable organization in Michigan means that he or she wants to give primarily within the state.

That is a blatant usurping of donors' wishes and ignores the fact that by setting up charitable institutions, donors demonstrate a clear intent about how grant- making decisions should be made. They set up institutions that by their nature are governed by trustees or directors, not by legislators or attorneys general.

Should this ill-conceived bill pass, out-of-state foundations will figure Michigan's problems can be solved by Michigan foundations and stop making new grants to Michigan charities.

Prudent donors will know better than to set up a foundation in Michigan. Instead they will select jurisdictions where trustees will have the flexibility to respect donors' wishes and the knowledge that they can go to court if and when those wishes become obsolete.

Lawyers and advisers to potential donors will  and ethically must  advise their clients about the rigidity of Michigan's rules.

Many lawyers will simply encourage their clients to choose more reasonable and flexible jurisdictions when they create foundations.

In fact, the Southeastern Council of Foundations has already invited the Ford Foundation to relocate to its region. In a letter to Ford, the council's president, Martin H. Lehfeldt, said states in his region would welcome Ford with "true Southern hospitality" and regulators would not impose any restrictions on Ford's grant making. "They would simply assume that your presence could assure them of a neighborly share of your philanthropy," he said.

For donors who insist on establishing foundations in Michigan, lawyers will draft language designed to avoid the worst effects of the legislation, but they can- not completely skirt them. Even skilled lawyers cannot avoid the bill's requirement that the place where a foundation was created and its early giving patterns are "prima facie evidence" of a donor's intent.

What's more, foundations that were already in operation, whose donors could not have foreseen the bill, have no such alternative. They will simply have to follow the law or leave the state.

Michigan is not the only state where a provincial approach to seizing charitable assets has taken hold. State legislators and attorneys general elsewhere have tried to substitute their judgment for the judgment of private donors. In Pennsylvania the attorney general stopped the Hershey trust from diversifying and substantially augmenting its investment portfolio because it might have hurt the Pennsylvania economy. In New York, the Legislature appropriated the assets of nonprofit insurers that became for-profit.

Charities and foundations need to be accountable.

Oversight by attorneys general is necessary and desirable. Donors' desires should be respected. But an attorney general should never bully. Measures to promote adherence to presumed donor intent should never become a pretext for substituting legislators' judgments over the judgments of a charity's trustees.

States that abuse their powers will see donors, foundations, and other charities flee to more-sensible jurisdictions.

Harvey Dale is a professor of philanthropy and the law at New York University and director of the National Center on Philanthropy and the Law there. Jill Horwitz is an assistant professor at the University of Michigan Law School.