Economics of the Nonprofit Sector - Introduction

Introduction• Syllabus• Class formatKey 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

Funding of Nonprofits• Four major sources of funds and funding• Individual• Corporate• Foundations• Bequests

• Altruism(?)• Donor control – do donors get what they want?

What Motivates Giving• Individuals:– Altruism– Social Stature– Warm-glow

• Businesses:– Altruism of Managers– Profit Motive

• Foundations– Altruism– Social Goals

Discussion• Should donations be tax-deductible?

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:

Meeting 2Ott & Dicke – Chapter 10, The Fundraising Process (Lindahl) Planning for fundraising:

SWOT analysis:Strengths, Weaknesses, Opportunities, ThreatsAnalysis of a well-known local charity

Based on SWOT outcome, setting of goalsOperating, endowment, capital (facilities)

Establishing an Action PlanIncluding cultivation and solicitations

Cultivation of long-term donors

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:

Worst Charities

Rank Charity name Total raised by solicitors Paid to solicitors % spent on direct cash aid

1 Kids Wish Network $137.9 million $115.9 million 2.5%

2 Cancer Fund of America $86.8 million $75.4 million 1.0%

3 Children's Wish Foundation International

$92.7 million $61.2 million 10.6%

4 Firefighters Charitable Foundation

$62.8 million $53.8 million 7.4%

5 International Union of Police Associations, AFL-CIO

$66.6 million $50.4 million 0.5%

6 Breast Cancer Relief Foundation

$63.9 million $44.8 million 2.2%

7 American Association of State Troopers

$48.1 million $38.6 million 8.9%

8 National Veterans Service Fund

$70.2 million $36.9 million 7.8%

9 Children's Cancer Fund of America

$43.7 million $34.4 million 4.6%

10 Children's Cancer Recovery Foundation

$38.5 million $28.9 million 0.7%

Ott & Dicke, Chapter 13 – Foundations (Boris)Types of Foundations

Private foundationsA 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

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

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

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?

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• Politically motivated volunteerism• Volunteers are not “free”, as supervision consumes staff time

• Ott & Dickey note that increased lifespan produces a larger pool of potential volunteers • Government programs such as AmeriCorps are providing more

outlets for volunteering

What Does philanthropy mean?

• https://www.youtube.com/watch?v=tZ5t8xD7qGU

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

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

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.

Article presentation• Van Slyke and Brooks

• “Why do People Give?”

A. Point of article is to understand what motivates giving, and how nonprofit managers can use that information

1. Authors note that philanthropy is no longer a private concern – part of civil society

2. Competition among nonprofits for donors’ dollars is increasing3. And, through the tax code, the public IS paying for part of each

nonprofit’s budget4. Article focuses on which strategies work for which donors

B. 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)

C. Page 202: Factors that correlate with giving• Age, gender, religiosity, income, wealth (difference?), taxes and

volunteerism

• +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……

• 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.

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 assignments:• Bradshaw, P., Hayday, B. and Armstrong, R. (2007), “Nonprofit Governance Models:

Problems and Prospects,” Christopher Bernard• Bekkers, R. and Wiepking, P. (2011). “A Literature Review of Empirical Studies of

Philanthropy: Eight Mechanisms that Drive Charitable Giving, Chris Cahill• “How to Determine if a Charity is Effective,” online at:

http://online.wsj.com/news/articles/SB10001424127887323977304579000433238565634, Jack Delaney

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)?

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

RANK NAME WEBSITE CATEGORY

TOTAL INCOME IN MILLIONS (2011)

PUBLIC SUPPORT IN MILLIONS (2011)

PERCENTAGE OF TOTAL EXPENSES SPENT ON PROGRAMS†

SALARY & BENEFITS OF HIGHEST-PAID OFFICIAL†

CHARITYWATCH‡ GRADE

WISE GIVING ALLIANCE ‡‡

CHARITY NAVIGATOR†

1 YMCA of the USA ymca.net Social

services $5986.1 $823.4 87.4 $441,438 A MEETS STANDARDS ★★★★

2 Goodwill Industries International

goodwill.org Social services 4,437.0 778.0 89.0‡‡ $508,571 A MEETS

STANDARDS NO RATING

3 Catholic Charities USA

catholiccharities.usa.org

Social services 4,422.8 679.2 79.6 $265,356 NO RATING MEETS

STANDARDS ★★★★

4 United Way unitedway.org

Social services 4,139.9 3,903.2 90.6 $763,394 NO RATING NO RATING ★★★★

5 American Red Cross redcross.org Social

services 3,453.0 945.9 92.2 $568,594 A MEETS STANDARDS ★★★

6 The Salvation Army

salvationarmyusa.org

Social services 3,203.8 1,697.6 84.0 $216,182 A / A– MEETS

STANDARDS NO RATING

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

• 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

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.

• 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

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

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

high impact board• High-stakes issues are addressed fully and in a timely fashion• Board members (not bored members) are fully invested in the

success of the enterprise• Board members work effectively with CEO of organization

The “old” model – The passive-reactive board• Board stays out of decision-making process (allows wide

leeway to CEO) until crisis • Then reacts to problem rather than providing leadership• CEO now views board action as interference – defensive posture

inevitable• If CEO and Board are in partnership, this is avoided.

The high-impact board• Requires:• Strong mission statement to provide guidance• Standing committees so the board’s work does not take place 4

days out of the year.

Class exercise• Samaritan’s Purse v. Wishing Well Foundation• Address four issues in group:• Overall and categorical rating of each• Effectiveness• Governance model• Malfeasance – is nonprofit doing anything under-handed? clue:

answer for one of these is “yes”

Ott & Dickey, Chapter 3 (American Bar Association)• Author provides look at impact of Sarbanes-Oxley on

nonprofits• 10 General principles off corporate governance:

• Role of the Board – should provide oversight that ensures effective and ethical management

• Importance of Independent Directors – Directors should not be subservient to management, as is frequently the case when nominated and appointed by management

• Need for an Audit Committee – lack of independent auditing and cross-checking of finances a major source of problems

• Existence of a nominating committee for the Board• Compensation Committee: Independent directors that examine pay

and compensation issues• Should have intervened in United Way scandal

• Complete and accurate disclosure of the financials of the nonprofit

• Appropriate business conduct and ethics codes in place• Executive compensation should reflect responsibilities and

backgrounds of executive - problems arise when Board members are appointed by executives and OK excess compensation

• Procedures should be in place to receive and respond to complaints (ethical, financial)

• Document retention rules should be in place – rules should lay out when documents may be destroyed

Looking towards Next week• Begin look at effective fundraising, including new forms of

securing donations• e.g. Crowd-funding• First cover chapters 10-12 as background (O&D)

• Then, each group will design an on-line fundraising for a designated charity• I will be handing out assignments• Work will be presented next week

Meeting #4 – Designing an effective fundraising model• O&D, Chapter 10 (Lindahl):• The Fundraising Process

• Chapter emphasizes research on process, prospects, etc.• Also, fully understanding one’s own organization, so its goals, etc.

can be explained to potential donors

• Lindahl, Page 119 – goal-setting• Facilities, Endowment and Operating• Some donors may be much more responsive to one type of donation

(e.g. some may only give to facilities improvement)

• Steps:• Cultivation• Fairfield example

• Solicitation

• Types of solicitations:• Planned giving• Major gift solicitations

• Role of Stewardship:• Possible alternative goals of managers

• Self-interest, social status• Good stewardship requires goals of nonprofit are paramount

• Lindahl (page 124) note that a ex post evaluation of how well the fundraising worked is critical

• O&D, Chapter 11 (Pratt) – Analyzing the Dynamics of Funding• Key focus of chapter is on the reliability of fund-raising and the

degree to which the funding binds the hand of the nonprofit• Reliability:

• High: Individual donors, endowments, memberships, rental income, advertising

• Medium: fees for services, continuing government contracts, corporate charitable contributions

• Low: Government grants that are project-driven, foundation grants, corporate sponsorships

• Autonomy:• High: small- to medium-sized individual contributions,

foundations, fees for service, endowments, memberships• Medium: large individual contributions, corporate contributions• Low: project grants, government contracts, United Way support

• Pages 130-31 – Eight forms of funding and resulting reliability and autonomy• Discussion – particularly the issue of government-funded

nonprofits

Giving Circles and “crowdfunding”• What happens when charity becomes a social act?• Chapter12 focuses on giving circles:• Groups that pool resources to leverage donations• Eikenberry notes that these groups are educational in nature,

and that giving becomes part a member’s social life• Giving can be more informed and members can find new ways to

engage with issues they are interested in

• Forms:• Page 136 – Organizational form• Most operate on a “fee” basis (which funds donations)• Large donation groups typically have a more formalized grant-

making procedure• Some are formal groups that meet, some are loose networks

Eikenberry Provide 2 case studies• Shared Giving: Small (16 members) group that focuses on leveraging

individual donations• Started by couple that realized they were giving away a lot of money, but

randomly and in small amounts• Decided to increase the impact of giving by organizing and targeting

contributions• Womenade: 38 giving circles under this name. Join for a small fee

($35) – Money used to provide small donations to women (families) experiencing financial stress• Such as paying an over-due utility bill

• http://www.givingcircles.org/

Benefits of giving circles• Charity as a way of life• Giving is consistent and targeted

• More informed!

• Social aspect encourages participation• List of Giving Circles can be found at:

http://www.givingcircles.org/

Crowdfunding• Means by which to draw in many donors at a very small price

per donor.• Cause and monetary goal posted on the web• Rely upon social contacts to encourage participation• Top ten sites can be found at:

http://www.crowdfunding.com/Example: Kickstarter – seeks individual donations to fund

creative work that otherwise would not be funded (e.g. cinema)

• Crowdfunding also used to fund medical treatment for those with serious long-term illnesses who are in financial stress

• Avoids costs of approaching donors, but visibility is an issue

Literature for Next Time• 9. Heutel, Garth (2014). “Crowding Out and Crowding In of Private Donations

and Government Grants,” Public Finance Review 42, 143-75. (Christina Howell)• 10. Brokaw, L. (2012, November 28). “The ‘Benefit Corporation’ Movement,”

MIT Sloan Management Review. Retrieved from http://sloanreview.mot.edu/artucle/the-benefit-corporation-movement/

(Julie Labbadia)

Class Exercise• Donation effectiveness• Design a website that:• Promotes Cause• Will be easily found by those searching• Details finances of nonprofit• Provides searchable statistics (why?)• Stories of assistance• Mission statement• History• Media resources• Major Donors (why might you want to omit this?)

Web design session

Handout