Economics of the Nonprofit Sector - Introduction

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Economics of the Nonprofit Sector - Introduction

• MPA 430

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Introduction

• Syllabus
• Class format
• Key topics
• Funding mechanisms employed by nonprofits/charitab
  le 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
•  

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Funding of Nonprofits

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

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What Motivates Giving

• Individuals
• Altruism
• Social Stature (signaling)
• Warm-glow
• Businesses
• Altruism of Managers
• Profit Motive
• Foundations
• Altruism
• Social Goals

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The U.S. Philanthropic Sector v. Rest of the World

• Giving much more prevalent
• Much higher proportion of income (2)
• Mostly due to expansion of governmental sector
  overseas
• Crowding Out by govt expenditures
• U.S. history of giving (arising from religious
  organizations)

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Picture of Philanthropic Sector

• Charity Navigator two samples
• Charity Watch

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Discussion

• Should donations be tax-deductible?

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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

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Meeting 2

• Ott Dicke Chapter 10, The Fundraising Process
  (Lindahl)
• Planning for fundraising
• SWOT analysis
• Strengths, Weaknesses, Opportunities, Threats
• Analysis of a well-known local charity
• Based on SWOT outcome, setting of goals
• Operating, endowment, capital (facilities)
• Establishing an Action Plan
• Including cultivation and solicitations
• Cultivation of long-term donors

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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
• Dont want to end up on this list

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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
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• 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 assets1 and made more than 44 billion in
  charitable contributions in 2007
• -Tax Laws more stringent Deduction limited to
  30 of income

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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
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Government Foundations

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

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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?

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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

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What Does philanthropy mean?

• https//www.youtube.com/watch?vtZ5t8xD7qGU

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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

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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 Americas top donors
• Considered the premier source of data

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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.

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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 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 nonprofits budget
• Article focuses on which strategies work for
  which donors
• 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

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• 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)
• gtgtgtbrief 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.

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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/SB1
  0001424127887323977304579000433238565634, Jack
  Delaney

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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)?

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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
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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

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• 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

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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.

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• 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

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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

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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

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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

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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.

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The high-impact board

• Requires
• Strong mission statement to provide guidance
• Standing committees so the boards work does not
  take place 4 days out of the year.

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Class exercise

• Samaritans 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

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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

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• 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

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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 (OD)
• 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

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Meeting 4 Designing an effective fundraising
model

• OD, Chapter 10 (Lindahl)
• The Fundraising Process
• Chapter emphasizes research on process,
  prospects, etc.
• Also, fully understanding ones 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

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• 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

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• OD, 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

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• 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

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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 members 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

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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/

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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/

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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)

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• 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

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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-co
  rporation-movement/
• (Julie Labbadia)

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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?)

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Web design session

• Handout