Economics of the Nonprofit Sector - Introduction

1. Economics of the Nonprofit Sector - Introduction

2. Introduction • Syllabus • Class format Key topics: • Funding mechanisms employed by nonprofits/charitable organizations • The relationship that exists between the government sector and the Nonprofit Sector • Details of the organizational characteristics of effective and ineffective charitable organizations • New forms of philanthropic organizations • The implications of agency problems and possible solution • Comprehensive analysis of how charitable organizations are assessed

3. Funding of Nonprofits • Four major sources of funds and funding • Individual • Corporate • Foundations • Bequests • Altruism(?) • Donor control – do donors get what they want?

4. What Motivates Giving • Individuals: • Altruism • Social Stature • Warm-glow • Businesses: • Altruism of Managers • Profit Motive • Foundations • Altruism • Social Goals

5. Giving in US is much higher • Possible reasons: • Have more money • Is charity a an income superior good? • Protestant tradition • Crowding out much less significant

9. Discussion • New Tax Law and Deductibility • 2 things working against charities – raising of cap to $24,000 • Far fewer people will itemize • Limiting of deduction on real estate taxes also will discourage itemization • Fear – will reduce giving • Should donations be tax-deductible?

10. Should Charitable Giving be Tax Deductible? • Motives for giving are varied • Warm glow of giving • Social stature • Altruism • Guilt • Deductibility makes a difference, but not a large one

11. Giving Still Far Higher in U.S. • Europeans (as noted) regard philanthropy as unnecessary, since the government is taking care of social issues • Extremely high tax rates leave people with little money to donate • Protestant tradition • Those in need were an obligation • Giving was a requisite part of faith

12. Corporate Giving and Social Stature • Why corporations give? • Part of advertising, and should be taken as such • Milton Friedman’s comment on corporate philanthropy! • CEO’s worry about social stature • If others are giving, I must give or be viewed negatively • Altruism is seldom in play

13. The Odd Case of Bequests • Donor is surrendering any control over donation • Can try to control from beyond the grave – usually fails • Case of the Annenbergs • Conservatives whose money is used for all sorts of progressive causes • A warning to anyone who chooses to set up a foundation with a bequest

14. Looking Towards Meeting #2 • Familiarize yourself with Blackbaud Index, the Chronicle of Philanthropy, Giving in Numbers • These are major sources of data on charitable giving and philanthropy • Read Ott & Dicke, Chapters 10, 13 and 22. • Read Van Slyke and Brooks piece and McClelland and Brooks • Student Presenters:

15. Meeting 2 – Giving by the Numbers • https://givingusa.org/wp-content/uploads/2017/06/Giving-USA-2017-Infographic.jpg • http://www.npt-uk.org/philanthropic-resources/uk-charitable-giving-statistics

16. What is an Effective Charity? • We have all been taught the bake sale with 5% overhead is morally superior to the professional fundraiser with 40% overhead • Dan Pallote, founder of AIDSride TED talk (2013) • https://www.ted.com/talks/dan_pallotta_the_way_we_think_about_charity_is_dead_wrong

17. So what is a good Nonprofit? • What criteria might we use? • Financial approaches • Efficiency (Program Expenses/Total Expenses) • Fundraising efficiency • Program Expense growth • “Nonfinancial” approaches: • Stakeholder approach • Impact analysis

18. Benchmarking • How does a nonprofit do versus its cohorts • Most significant Change • Case study approach • How was a particular individual or group helped, and how well was that done • Cross-comparisons are difficult

19. Problem………….. • Nonprofits not required to provide this data • Sparsely available on websites and at Charity Navigator • How would you then judge one nonprofit versus another?

20. Readings on Aspects of Well-Run Nonprofits • Ott & Dicke – Chapter 10, The Fundraising Process (Lindahl) • Planning for fundraising: • SWOT analysis (corporatism creeping in) • Strengths, Weaknesses, Opportunities, Threats • Analysis • Based on SWOT outcome, setting of goals • Operating, endowment, capital (facilities) • Establishing an Action Plan • Including cultivation and solicitations • Cultivation of long-term donors

21. Fundraising Approaches – The Plusses and Minuses • Mailing campaigns – expensive, low response rate • Phone – less costly, very low response rate • “Galas” or other events • Typically only 50% goes to cause • Utilization of existing donor base

22. Fundraising Tactics…… • Seed money • Matching gifts • Comparison to above • “herdfunding” or crowdfunding • Giving circles • High-information solicitation

23. Evaluation of Fundraising • Steps • Achievement of goals within certain constraints • Achieved within a reasonable time • Frugality – were goals achieved without spending large proportion of raised funds to conduct campaign • Don’t want to end up on this list:

24. Worst Charities

25. Ott & Dicke, Chapter 13 – Foundations (Boris) • Types of Foundations • Private foundations A private foundation is a legal entity set up by an individual, a family or a group of individuals, for a purpose such as philanthropy or an object legal in the economic operation. The Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion in assets.[1] However, most private foundations are much smaller. Approximately two-thirds of the more than 84,000 foundations which file with the IRS, in 2008, have less than $1 million in assets, and 93% have less than $10 million in assets.[1] In aggregate, private foundations in the U.S. control over $628 billion in assets[1] and made more than $44 billion in charitable contributions in 2007 -Tax Laws more stringent: Deduction limited to 30% of income

26. Tax laws get at heart of deductibility issue • Foundations and Nonprofits are not supposed to be making money • If it becomes apparent that an organization is focused on interest/investment income rather than philanthropy…… • Limitation on deductions partly to control for this

27. Public foundations A public foundation is also called a grantmaking public charity. They raise money from the public (individuals, corporations, and other foundations) to provide grants. The IRS does not consider these as private foundations since their base of support is typically broad. Community foundations are recognized as “public”. Tax Laws less stringent: Donations up to 50% of income

28. Government Foundations • Funded through tax dollars • Fund through grant-making process

29. Foundation Governance • Corporate Governance • Donor • Small Foundations – managed by family and small set of donors • Administrator • Board makes decisions on funds – Administered by small professional staff • Director • Executive Director manages funding process • Presidential Model • Managed primarily by Nonprofits CEO • ? Impact on the administrative costs of nonprofit?

30. Ott & Dicke (Drapkin and Hayden), Chapter 22 • Managing Volunteers • Nonprofit sector typically highly dependent on volunteers • Lowers cost of operation – makes nonprofit expenditures a lower proportion of donations • Authors note the complexity of the volunteering population • ex. Coerced versus free-will – Operation Hope! • Politically motivated volunteerism • Volunteers are not “free”, as supervision consumes staff time • Authors note that increased lifespan produces a larger pool of potential volunteers • Government programs such as AmeriCorps are providing more outlets for volunteering

31. READINGS • 3 of 5 assigned readings are primary data sources for information on nonprofits and charitable giving: • (Reading 2) Blackbaud Index (charitable giving report) • Provides statistics on charitable giving by source, purpose and by method by which it was raised • Major findings are the rapidly rising importance of online giving, along with a trend towards giving towards “international affairs” causes • Blackbaud targeted more towards nonprofits managers, less towards researchers

32. Voluntas – Patterns of Household Giving in the UK (Banks and Tanner) • Uses Family Expenditure Survey • Data for 1995 v. prior period (1978->) • Notes that giving has been on the decline (page 170) • And significant differences by age group – the older give more, as do the more well-off • Formulates a model of giving using accepted variables

33. Develops an Empirical Model of Giving • Don’t want to get into the weeds too much…… • Uses a Probit model (yes or no, rather than total giving) • Uses income, age, homeownership, whether white-collar or blue-collar, location and years (see table III)

34. Key Results……………………….. • Giving rises with: Income, age, level of education • Giving falls according to regions and years • Remember how regression works…..Effects are independent • So, giving rises with income when age, education are held constant

35. Results not Particularly Surprising • These are the variables we would expect to have an impact • Could easily add in government spending (to measure crowding out) and some other variables

36. Reading #3 • Chronicle of Philanthropy • Comprehensive data on giving, including corporate giving (key corporate donors) • Includes the Philanthropy 400 – interactive database of organizations • Filtered by cause, location • + information on America’s top donors • Considered the premier source of data

37. Reading #4 • Conference Board, Giving in Numbers • Best source of data on corporate giving • Gives numbers by industry cross-referenced with cause • E.g. what firms in the petroleum industry give to artistic causes • Figures help illuminate corporate goals: • Firms with P.R. problems (tobacco firms) might give to causes that are highly visible and enlightened (the arts) • Firms that need highly trained labor might give to educational causes Further Reading: LeClair, M. and Gordon, K. (2000), “Corporate Support for Artistic and Cultural Activities: What Determines the Composition of Corporate Giving?” Journal of Cultural Economics, 24(3), 2000.

38. Article presentation • Van Slyke and Brooks • “Why do People Give?” • Point of article is to understand what motivates giving, and how nonprofit managers can use that information • Authors note that philanthropy is no longer just a private concern – part of civil society • Competition among nonprofits for donors’ dollars is increasing • And, through the tax code, the public IS paying for part of each nonprofit’s budget • Article focuses on which strategies work for which donors

39. Page 201 notes that the increasing availability of data means that nonprofit managers have much more information to utilize in setting strategies (e.g. Giving USA) • Page 202: Factors that correlate with giving • Age, gender, religiosity, income, wealth (difference?), taxes and volunteerism

40. +Tax Implications – note that if you do not itemize, the tax deduction is of no value • Up to 50% of AGI – anything near this will get you audited! • Authors then apply empirical test to determine what variables best determine giving (Page 308) • >>>brief explanation of regression……

41. Results on page 309 indicate that the following are significant: • Income, age, Christian (5%), college-educated, married, nonwhite (5%), civically active, volunteer • Rest are at 1% level • These can become the basis for targeted fund-raising • Authors note that in some cases, the results may simply indicate that potential donors had never been approached.

42. Looking towards next meeting • Class Discussion on Effective Charitable Organizations • Visit Charity Navigator and Charity Watch • Pick one charity that is highly ranked and another that is poorly ranked • Find out why! • Literature: • Bradshaw, P., Hayday, B. and Armstrong, R. (2007), “Nonprofit Governance Models: Problems and Prospects,” • Bekkers, R. and Wiepking, P. (2011). “A Literature Review of Empirical Studies of Philanthropy: Eight Mechanisms that Drive Charitable Giving, • “How to Determine if a Charity is Effective,” online at: http://online.wsj.com/news/articles/SB10001424127887323977304579000433238565634

43. Effective and ineffective nonprofits – Meeting #3 • TOPICS: • Fundraising – methods and effectiveness • Fundraising costs as a percentage of donations (or budget) • Effectiveness of programs • Who benefits in short- and long-run • Management accountability and reporting • Dedication to charter – do nonprofits follow the intentions of their donors (financers)?

44. Case Studies – The Best Charities (source: CS Monitor)

45. Examination of American Red Cross • Website includes state goals and pricinples • +Governance Documents • Committees: • Audit and Risk Management Committee • Quality and Regulatory Compliance Subcommittee • Board of Trustees of the Endowment Fund • Compensation and Management Development Committee • Executive Committee • Governance and Board Development Committee

46. Posted Ethical Rules by which the organization is run • Strict guidelines and oversight have protected the organization from scandal • 92.2% of raised funds go to programs • Volunteers used extensively to keep costs down • Auditing process includes external oversight • Does not explain how ARC “redirected” funds post-9/11

47. The Bad – Angel Food Ministries • Georgia-based nonprofit that used donations to buy food at wholesale and sell it to the needy at bargain prices • Operated out of numerous churches • At pinnacle, Angel Food was providing discounted food to 500,000 families • Problem: Cash-based business with poor accountability • Also: Run entirely by close circle of family members with no external auditing process • Cash was siphoned off to purchase cars, real estate and even a private jet. • Raided by FBI in 2011 – had received substantial federal funding ($7 million), so federal government got involved.

48. Ultimately led to jail time for those involved • Most unfortunate part was loss of service to ½ million beneficiaries • Other very bad nonprofits: • Foundation for New Philanthropy (Ponzi scheme) • United States Navy Veterans Association – Collected $100 million dollars over 10 years –no charitable activity of any kind

49. Readings for the week • Ott & Dickey (Eadie): Chapter 2 – Governance Models • Boards may be high impact or at arms length • Meddlesome or arms length • Authors note (page 20) that boards of small organizations may find it difficult to separate themselves from day-to-day operations of the entity, instead of providing oversight. • Ideally, boards should provide oversight on: • Strategic questions • Operational questions • Accountability questions – is the organizational accountable to its stakeholders and the broader public

50. Four “Streams” of governance identified by Eadie • Board self-management (who serves and what is expected of them) • Planning stream: strategic goals, annual budgets • Performance oversight and monitoring stream • External stakeholder stream – How to communicate with donors and the community