The Real Madoff Scandal: Charitable Hoarding

Of all the shocks of the Bernie Madoff heist, perhaps none was more stunning than the list of victims. Among them were several Jewish foundations and many of our community’s most prominent nonprofits. The losses were staggering, and in some cases crippling.

Yet the real Madoff scandal isn’t the losses; it’s that our community was sitting on vast pools of accumulated wealth, much of it used to little effect. Madoff had his secrets to keep, but so, in fact, did many foundations and endowments. They had money to spend, and they didn’t spend it. Now it’s gone.

Everywhere in the Jewish community we hear of crises —in Jewish literacy and continuity, in a lack of social action and awareness, in a failure of the synagogue and the rabbinate and so on. Yet all this time, there were individual donors and philanthropy executives sitting on large pools of money that could theoretically have been used to help address many of our biggest concerns. As a community, we now live so much for perpetuity that we fail to deal with the present.

I used to think that the rise of Jewish endowments and foundations represented the pinnacle of our life here in America — financial success combined with organizational stability and careful foresight. Now, it appears, we are simply incompetent as a community, having so badly matched what we have with what we need. Either we refuse to deploy our assets to our needs, or our needs, as we define them, are in fact not that pressing. Either way, it is a stunning indictment.

Thanks to tax incentives that encourage their growth, philanthropic foundations have ballooned over the past decade. According to a report from New York’s Foundation Center, foundation assets doubled from $330 billion in 1997 to $669 billion only 10 years later. In their 2007 monograph, “A Study of Jewish Foundations,” Gary Tobin and Aryeh Weinberg note that Jewish foundations have experienced similarly rapid growth. (Full disclosure: Tobin has been a client of mine.)

Most foundations, however, do not spend the bulk of their money, instead storing it away, granting only a small portion to charities each year. “Most foundations with larger assets give away about 5 percent, the minimum required by federal law, which most foundations see as a ceiling, not a floor,” Tobin and Weinberg write.

Similarly, endowments, which also expanded with flush economic times, “rarely withdraw more than 5 percent or 6 percent of their assets per year,” as The Chronicle of Philanthropy reported.

True, endowments have their value. James Tisch, who has previously served as president of the UJA-Federation of New York, defends them strongly. “Endowments allow institutions to survive in bad years,” he told me. “Most organizations don’t have nearly enough after their annual campaigns to make it.”

I don’t disagree. There are many institutions that would close if not for their endowments, which most, thankfully, diversified.

But having an endowment of large enough size to do what Tisch describes is a double-edged sword. It does let you out of the annual campaign rat race. But it also removes your sense of urgency.

If Jewish donors were truly ambitious, they would demand philanthropic extinction. They would give money to organizations only if endowment funds were also put to work. They would launch foundations with a built-in ticking clock: Perform, or else. In short, they would operate as if Madoff were managing their money and that one day it would all be gone, anyway.

That model would involve more risk, more spending, more activity and certainly less for future generations. It would be akin to taking away trust funds from the grandchildren so they actually have to work for a living.

Fine. Jewish donors know that you don’t gain reward without some measure of risk. That’s true in philanthropy, just as it is in business. Yet many Jewish donors still give to the same old causes, the same old institutions, in the same old ways. No wonder so many got burned by Madoff. They followed the crowd on everything.

In Judaism, every 50th year is considered a jubilee year, when we are commanded to return land to its original owner and to let our fields lie fallow. Why not transpose that commandment to our endowments and foundations?

Let us resolve: Every 50 years, our community’s stored wealth must be spent, and its charitable assets depleted. After that, we can begin the work anew — yes, with fewer assets, but with a greater capacity for creativity and success.

Reprinted by permission of The Forward

Noam Neusner is the principal of Neusner Communications, LLC. He served as President George W. Bush’s principal economic and domestic policy speech writer from 2002 to 2004.

Q & A With Paul Castro

Paul S. Castro, executive director of Jewish Family Service (JFS), has spent his career working on behalf of the disadvantaged and disenfranchised. The 22-year JFS veteran, who became chief executive in 2000, has watched the agency grow exponentially over the past couple decades. Under his direction, JFS has worked aggressively to diversify its funding sources and has increased its endowment from $2 million to more than $7.4 million. JFS, which employs 430 full- and part-time employees at 25 locations throughout Greater Los Angeles, offers counseling, supports the elderly and disabled, provides housing for the homeless and feeds the hungry, among other services. The agency helps more than 60,000 people annually. Castro, a genial man who holds a law degree from Loyola University, said he is proud to oversee JFS as it celebrates its 150th anniversary. With budget cuts looming, though, his joy is tempered. As government tightens its proverbial belt, Castro worries it is the poor who will get squeezed the most. He spoke to The Journal about JFS’ prospects in these tough times.

The Jewish Journal: What are JFS’ most interesting new initiatives?

Paul Castro: Our most interesting new initiative is called a NORC, or Naturally Occurring Retirement Community. A growing segment of the senior population are now "aging in place" in their own neighborhoods. They want to live independently in their own homes, so the NORC will bring our services to them, creating a virtual retirement community. As the baby-boom generation ages, I believe the NORC concept of independent living will become the norm. We are one of just a few pilot programs in the country, supported by a grant from the federal government.

JJ: What are your biggest concerns?

PC: My biggest concern is whether we will be able to raise sufficient funds to keep the safety net strong for the thousands of people who rely on us. My biggest frustration is trying to convince our policymakers to look beyond the dollars and cents and see the implications of severe cuts in social programs. A strong safety net is good social and fiscal policy. For example, it’s much cheaper to provide in-home care to seniors than place them in nursing homes.

JJ: Do you find it ironic that more people than ever need JFS services because of the faulty economy yet government funding is getting slashed?

PC: For the social service community, this is the "perfect storm." At the center of this storm is the growing demand for services. A slow economy has made donors more conservative in their giving and low returns on investments have forced many foundations to cut their grants significantly. And now government is struggling to close funding gaps that are in the billions.

JJ: If funding gets dramatically slashed, how will JFS respond?

PC: It depends on where they cut and how much. But significant reductions in funding would mean reductions in services. There is no way around that, but we’ll do our best to maintain the highest level of service we can.

JJ: What services has JFS cut in the past couple years?

PC: We have made some cuts in our counseling programs. Funding for counseling has diminished or remained flat for a number of years now. Our costs continue to go up while our revenue lags farther and farther behind. We are seeing more clients who can’t pay and fewer clients who have insurance. It is a challenging situation, but we have no plans for future cutbacks.

JJ: How is JFS changing the way in which it lobbies Sacramento?

PC: We need to be proactive in protecting our clients and we can’t do it alone. The key is to build coalitions. I recently attended a meeting in Sacramento with representatives from The Federation’s Jewish Community Relations Committee, the Jewish Public Affairs Committee and other social service agencies. The purpose of this meeting was to build a coalition to fight cuts in MediCal.

JJ: How has JFS managed to survive 150 years?

PC: JFS has survived by continually adapting to change. As an organization we have been fortunate to have strong lay leadership with a vision of a responsive and proactive JFS. Whether helping a poverty-stricken community during the Great Depression or resettling refugees after World War II, JFS has persevered in its mission to strengthen and preserve individual, family and community life. I believe this tradition will carry us over the next 150 years.