School Foundations: Big Business and Risky Business

School Foundations: Big Business and Risky Business

other variously named school-related entities have proliferated throughout the nation. While there is no precise data on the number of such organizations existing nationally, one estimate put the number at around 5,000 in 2001[2] which, if still accurate today, would represent approximately one such organization for every three of the 16,000 or so school districts[3] in the United States. Undoubtedly, the number of educational foundations has increased dramatically since the estimate was given.

Today, foundations are often incorporated as not-for-profit corporations under state law and hold tax exempt status under Section 501(c)(3) of the Internal Revenue Code. Foundations are often large organizations with wide mission statements that involve the organizations more deeply in the financial, educational, and administrative activities of the community schools. Many foundations have boards of directors and officers. They sometimes own property, including buildings and motor vehicles, and they have offices. They have bank accounts. They have employees. They contract for services. They are governed now by charters, bylaws, and, in many states, statutes that attempt to regulate certain aspects of their activities[4]. In short, foundations are now quite complex and are much more intertwined with the schools and the community.

Furthermore, it is no longer a matter of a simple meeting some evening over coffee and cookies. Rather, in the wake of serious budget constraints affecting schools nationwide, foundations have stepped up to become financing sources for the schools they seek to serve. Foundations are now big businesses, providing schools with community dollars raised from corporate donors or through activities such as sporting events, house auctions, craft fairs, and the like. Nor is the amount they contribute “chump change”. Giving USA, a public service initiative that reports on the sources of charitable giving in the US, estimates increases in monetary donations to both education and foundations[5]. Such funds have supplemented the schools’ ability to provide textbooks, computers and other electronic equipment, art classes, and athletic equipment. It has even been reported that foundations have paid for buildings[6] and even employees.[7]

With size and complexity comes risk. There is no doubt that foundations and their directors, officers, and employees now face the danger of liability in a number of areas, including corporate governance, contract disputes, vendor/vendee relationships, employment practices, personal injury, and others.[8] Furthermore, foundations today stand precisely in the midst of unsettled and sometimes divisive views of how schools should be administered and financed. For example, foundation funding has been criticized (and also praised) on grounds that it emphasizes local control over state control of education and allows the politicians to ignore the state’s funding obligations, leaving the schools poorer in the long run.[9] Other critics contend that foundation funding adds to the already existing disparity between rich schools and poor schools[10] or that it can lead to conflicts of interest (where school board, teachers, administrators, or board members sit on the board of the foundation) and even corruption. One foundation providing scholarships for public school students to attend private schools (sort of a private voucher system) stepped right into the private vs. public school controversy.[11] Others have gotten themselves involved in Title IX issues.[12] Such hot button issues often lead to expensive litigation and possible liability.

When foundations are incorporated, a measure of protection is provided for directors, officers, employees, and volunteers. The individuals may be shielded from the debts and liabilities of the corporation, and while some states grant statutory protection to certain individuals[13], such protections are not always fool-proof. Foundations may obtain additional protection through the purchase of insurance separate from the school district. Currently available types of coverage for foundations include

  • Directors & Officers/Errors & Omissions
  • General Liability
  • Employment Practices Liability
  • Motor Vehicle Liability
  • Crime
  • Special Events Coverage

The bottom line is that volunteering for service to a foundation is serious business because today such foundations are serious. They have much to offer to their schools and their communities and the potential for foundations is still being explored and developed. Volunteering to serve is also riskier business than ever before because the potential for litigation and liability has increased markedly from those early “coffee and cookies” days.

 


About the Author

Gary Lockwood is a former partner in the Chicago law firm of Locke Lord (formerly Lord, Bissell & Brook), a founder and former partner in the Chicago law firm of Walker Wilcox Matousek LLP, and a founder and current partner in The Lockwood Law Firm P.C. Throughout his career, Gary has worked extensively in the areas of school law, foundation law, directors & officers liability, insurance, and reinsurance. Gary served 10 years as an elected member of the Board of Education of Elementary School District 15 in McHenry, Illinois. He was chair of the former Business Insurance Committee of the American Bar Association’s Business Law Section. He has authored several articles on various aspects of business insurance and has been a speaker on various issues of professional liability at panels and seminars throughout the United States.


Sources

Top of Page

[1] Havens, Mark M., Beyond Money: Benefits of an Education Foundation, School Administrator, August 1, 2001, Volume 58, Issue 7, 2001 WLNR 9644738.

[2] See Article, Paying For School-As Funding Shrinks, Districts Rely More and More on Local Groups to Fill the Gap, Indianapolis Star, July 20, 2005, 2005 WLNR 27014626.

[3] Source: U.S. Dept. of Education, National Center for Education Statistics (2018).

[4] See, e.g., Nevada Revised Statutes 388.750; Indiana Statutes 9-18.5-15-6.

[5] Giving USA, “Giving USA 2018L Americans Gave $410.02 Billion to Charity in 2017, Crossing the $400 Billion Mark for the First Time”, GivingUSA.com, June 13, 2018.

[6] Havens, Mark M., Beyond Money: Benefits of an Education Foundation, School Administrator, August 1, 2001, Volume 58, Issue 7, 2001 WLNR 9644738.

[7] Overall, Michael, Foundations Aid Struggling Schools, Tulsa World, September 6, 1998, 1998 WLNR 7503505.

[8] See, e.g., Scott v. East Alabama Educ. Foundation, Inc., 417 So.2d 572 (Ala. 1982) (corporate organization); Pinkins v. Stempinski, 2012 WL 3581359 (Cal. App. 4th Dist.) (defamation, civil rights violation, breach of fiduciary duty); American Federation of Teachers-Oregon, AFT-CIO v. Oregon Taxpayers United PAC, 208 Or. App. 350 (2006) (state RICO statute); Seipp v. Wake City Bd. of Ed., 132 N.C. App. (1999) (personal injury/negligence).

[9] Overall, Michael, Foundations Aid Struggling Schools, Tulsa World, September 6, 1998, 1998 WLNR 7503505.

[10] See, e.g. article, Paying for School-As Funding Shrinks, Districts Rely More and More on Local Groups to Fill the Money Gap, Indianapolis Star, July 20, 2005, 2005 WLNR 27014626.

[11] See Nadelstern, Eric, Debate Over Vouchers, New York Times Abstracts, October 31, 1998, 1998 WLNR 5674576.

[12] See Simmons, Deborah, Booster Clubs For High School Sports Face Title IX Scrutiny, The Washington Times, November 16, 2010.

[13] See, e.g., Illinois’ General Not-For-Profit Corporation Act of 1986, at 805 ILCS 105/108.70.