Economics of the
Nonprofit Sector Introduction
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
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 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
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
$48.1 million
State Troopers
$38.6 million
8.9%
$36.9 million
7.8%
$34.4 million
4.6%
$28.9 million
0.7%
8
9
10
National Veterans
$70.2 million
Service Fund
Children's Cancer Fund
$43.7 million
of America
Children's Cancer
Recovery Foundation
$38.5 million
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 twothirds 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 increasing
3. And, through the tax code, the public IS paying for part of each
nonprofit’s budget
4. 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/SB10001424127887323977304579000433238565
634, 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)
PERCENTAG SALARY &
PUBLIC
E OF TOTAL BENEFITS
WISE
CHARITYWA
SUPPORT IN EXPENSES OF
GIVING
TCH‡
MILLIONS SPENT ON HIGHESTALLIANCE
GRADE
(2011)
PROGRAMS PAID
‡‡
†
OFFICIAL†
RANK
NAME
WEBSITE
TOTAL
INCOME IN
CATEGORY
MILLIONS
(2011)
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
NO RATING
STANDARDS
3
Catholic
Charities USA
catholicchari Social
ties.usa.org services
4,422.8
679.2
79.6
$265,356
NO RATING
MEETS
★★★★
STANDARDS
4
United Way
unitedway.or Social
g
services
4,139.9
3,903.2
90.6
$763,394
NO RATING NO RATING ★★★★
5
American Red
Social
redcross.org
Cross
services
3,453.0
945.9
92.2
$568,594
A
MEETS
★★★
STANDARDS
6
The Salvation
Army
3,203.8
1,697.6
84.0
$216,182
A / A–
MEETS
NO RATING
STANDARDS
salvationarm Social
yusa.org
services
CHARITY
NAVIGATOR
†
Examination of American Red
Cross
•
•
•
•
•
•
•
•
•
Website includes state goals and priciples
+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” (view of bad CEO) or distant
• 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 passivereactive 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
• Good charity versus bad
• 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
Journal Readings
• Innovations Journal article
• Models of nonprofit governance
• Authors argue there is no agreement on the best nonprofit
governance model
• Opportunity to innovate
• Uses Canadian health care system management as model
• Originally organized as a network of networks
• Interpretive (how individuals come to view power structure within
nonprofit), political (contested) models
• Authors end up examining four models (page 18) and the benefits of
each in terms of effective management (diagram)
• Discussed on page 9 onwards
• Policy Governance Model – tends to be top down
• Board monitors CEO – may fail if Board and CEO at odds
• Constituent model: Diverse power model (inclusive)
• Entrepreneurial Board – Focus on bottom-line to exclusion of other issues
• Cellular Model – extensive involvement of multiple constituent groups
• May lead to push-pull that is difficult to accommodate
• Authors then provide a hybrid model that (they assert) combines the
best of all these four forms
Bekkers and Wiepking article
• Literature review on drivers of giving
• Narrow down to 8 drivers (not sure if efficacy is really that
important)
•
•
•
•
•
•
•
•
Need
Solicitation
Costs/Benefits
Altruism
Reputation
Psychological Costs/Benefits (self Image)
Values
Efficacy (do my donations actually make a difference?)
• Most of article then refers literature related to these issues
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 campaign
for a designated charity
• I will be handing out assignments
• Work will be presented next week