Something for the Little People

The Twin Cities-based Northwest Area Foundation has a $450 million endowment to use on charitable programs. So why has it been nearly invisible for years?

"This is evidence of the most extreme frustration I've ever heard of," says Pratt. "People are just completely fed up, and they're speechless, and they're going to let the lawyers do the speaking."

The Northwest Area Foundation now faces a second legal battle stemming from the Yakima project. Mario Vargas, who worked on the Washington-state effort until he was fired in June, filed a lawsuit in March charging that the grantmaker illegally discriminated against him. He is seeking more than $75,000 in damages.

The Northwest Area Foundation's goal is to help alleviate poverty. Its mission is to give away money. So how has the foundation pissed off so many people? "It's not malevolence," argues Pratt. "It's just ineptitude."


In 1996 Karl Stauber set out to revolutionize philanthropy. The newly installed president of the Northwest Area Foundation was fresh from a stint in Washington, DC serving as an undersecretary at the U.S. Department of Agriculture, and the experience convinced him that traditional philanthropy had become obsolete.

The Northwest Area Foundation was established in 1934 by Louis W. Hill, son of the famous railroad baron. It was initially modeled on East Coast- and Chicago-area philanthropies set up by other industrial titans following the implementation of the federal income tax in 1913 to dispense their wealth--and ease their tax burdens. These foundations established a paradigm in which they often funded experimental projects in the hopes that, if they proved successful, the government would then provide the money to implement them nationwide. Everything from Head Start, which began as a Ford Foundation program, to the practice of painting white lines on the sides of highways, started out as philanthropic initiatives.

The Northwest Area Foundation emulated this model. In the ensuing decades it evolved into an eclectic grantmaker, funding everything from the arts to sustainable agriculture programs. When Stauber took over the reins there were 39 different philanthropic initiatives in place.

What he concluded during his tenure in the Clinton administration, however, was that the federal government was no longer prepared to fulfill its role in this philanthropic equation. "I argue that the world changed in 1994," says Stauber. "With the balanced-budget agreement we basically went from a 50-plus-year period of an expanding federal government to, I don't think I'm going to see, on the domestic side, an expanding federal government for the rest of my career."

Stauber is speaking from a conference room in the foundation's offices in the Drake Marble Building, a former marble factory on St. Paul's west side. He wears a forest-green cardigan sweater over a white oxford shirt, along with charcoal gray pants. Steel-rimmed glasses frame his bearded face. As he speaks, Stauber occasionally crosses his legs, wraps his hands around a knee, and lets his eyes roll skyward in search of inspiration. The overall impression is more campus intellectual than Washington power broker.

"People talk about philanthropy being the [research and development] field for the federal government and for state governments," says Stauber. "Well, if the federal government is out of the business of being activist on domestic policy, then foundations are producing a product that nobody wants to buy. So what we decided to do is to try and figure out a different way."

Unfortunately Stauber didn't know what that new way of philanthropy might be. He had concluded that the present system was broken, but he wasn't sure how to fix it. In order to find out, the Northwest Area Foundation initiated a painstaking process of studying how to proceed in its grantmaking. Focus groups, organized by the public-relations firm Himle Horner, were conducted in all eight states where the foundation had operations. Roughly two dozen policy papers--on issues such as health care, education, and poverty--were researched and written by staff members. More than 600 movers and shakers, from teachers to former governors, were sought out for advice. The methods of other grantmakers were scrutinized. A consultant was even hired to write a report about this soul-searching process.

In the meantime, nonprofit groups were left scratching their heads as to what exactly the foundation was up to. "I raised red flags at the beginning, saying, 'The way you're communicating this, people do not understand what you're doing,'" Pratt recalls. "'You need to be clearer. You're not doing the foundation a service right now.'"

Some staff members grew weary of the seemingly endless self-analysis as well. "I thought that we were spending way too much time talking to each other," says Tripp Somerville, who left the foundation in early 1999 after nine years. "We did not have a transparent process that anyone outside of the office could understand."

The long incubation process also caused potential problems with the Internal Revenue Service. Private foundations are required by law to spend, on average, five percent of their endowments on charitable purposes annually. Because the Northwest Area Foundation had essentially suspended its grantmaking--existing commitments were honored and longtime grantees were given a one-time severance check--there was very little money going out the door. Between 1996 and 2000, the foundation's average payout was just 4.6 percent, according to IRS documents. Even this is misleading, however. Private foundations are given wide leeway in what they can count as charitable expenses. Salaries, travel expenses, and legal bills are among the costs routinely counted as part of the five-percent payout. In the 2000-01 fiscal year, the Northwest Area Foundation reported spending $4 million on charitable pursuits, but less than $3 million of this was actually allocated in grants.

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