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Posts Tagged ‘nonprofits’

In their rush to gain an end of the year tax deal, elected leaders postponed hard choices. In the process, they denied the government the revenues it needs to either respond to unforeseen crises or deliver on promises made.

At the same time, wary corporate decision-makers reported that uncertainty over tax and fiscal policy had discouraged them from creating jobs or making R&D investments essential to prosperity.

As self- imposed constraints limit the agility of these two important sectors, a third—the non-profit sector—worries that the 2010 Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act may have a cascading effect, further impoverishing state and local governments, shifting the burden of providing social services from the public to the non-profit sector. Moreover, its leaders fear that the estate tax provisions may reduce incentives for wealthy individuals to make the no-strings-attached donations and bequests that free the sector from the constraints of politics and markets.

Our tax structure has long reflected the value we place on the nonprofit sector’s ability to take risks and try out new ideas without fear of political or market reprisals. Income and inheritance taxes have encouraged donations and bequests, as well as the creation of tax-exempt foundations. As a result, our nation has a diverse charitable sector comprised of grantees and grantors who are tackling issues at home and across the globe. Free from the need to garner votes or generate profits, they needn’t test the political winds before offering services to the most marginalized Americans. Their reach extends to the developing world, where they have created or supported “social enterprises” with for-profit business models for providing off-grid communities with renewable sources of energy. And, globally they have even entered into public-private partnerships to effect high policy, as Warren Buffett did in making his $50-million gift to the UN’s politically-hampered and resource-strapped International Atomic Energy Agency. That grant will help to create a “nuclear fuels bank” upon which states committed to nonproliferation can draw to meet their energy needs.

Whether the tax deal will limit the freedom of non-profits to achieve such salutary outcomes is a matter of intense debate. But, it is up to us to ask and answer that question before the law’s review in 2012. An election year is a particularly poor time for political risk-taking. Policy-makers will need to be armed with the facts, and buttressed by a clear and unswerving sense of the sector’s purpose.

First the data: The law extends several provisions that can affect charitable giving—and provides time to gather data on their effect. It extends Bush-era tax cuts at all income levels and continues favorable treatment of capital gains and dividends. It delays a requirement that high-income tax-payers reduce their itemized deductions, including for charitable gifts. It exempts older taxpayers from treating up to $100k gifted to charities from their IRAs as taxable income. But, what worries some nonprofits is the 35% cap it places on inheritance taxes, while exempting estates of $5m or less. Many analysts argue that these estate tax provisions will remove incentives for bequests as well as giving-while-living aimed at reducing the size of the taxable estate. Others contend that estate tax considerations play a negligible role in the decision to give, but can influence the size of the gifts made. They draw on the 2004 predictions of the Congressional Budget Office, which anticipated a drop off in the number and size of bequests. Indeed fewer dollars were donated in this way during the phase-out of the estate tax, from 2008-2009. But, that year’s economic contraction is likely to have had far greater effect. More time in an improved economic climate can yield more data on which policymakers can base future choices.

And, the purpose – As we undertake that analysis, it is essential that we come to a shared view of the reasons for charitable organizations, and their tax-exempt status, in the first place. Americans value nonprofits because they can take actions and generate ideas that may be unwelcome, unpopular, and unprofitable in the short run, but produce true societal benefit over time. In the process, they can help identify and tackle truly hard problems when others cannot. Among the hard problems nonprofits can help address is the need to get our country on a financially sustainable course. Nonprofits have already contributed by sounding the alarm, providing analysis and offering policy options.

The deficit dilemma has helped to highlight the hurdles political and business decision-makers face when it comes to calling for sacrifice. Elected officials must respond to caricatures of their views repeated in 24 hour news-cycles. Business leaders are required to produce shareholder value as measured in quarterly returns. The nonprofit sector may be the only one that can afford to ask tough questions, test novel solutions and build consensus from the ground up.

In considering our tax laws in 2012 our goals should be straight-forward: to regain our ability to solve problems as a nation. Preserving the nonprofit sector’s freedom to help tackle society’s next hard problem is an essential first step.

—Jane Wales

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If Congress were to double or triple the private foundation excise tax, asks Joel Orosz of Grand Valley State University, “does anyone truly think that there will be a groundswell of support for foundations” that resist? In a March 10 guest post to the Center for Effective Philanthropy blog headlined “Déjà vu (or 1969) All over Again?”, Orosz suggests it’s too late for foundations to react effectively to stem a possible backlash against the sector. Still, the philanthropy professor counsels foundations to take steps on their own to improve practices, including training employees to be more professional and more accountable to nonprofits.

Orosz is just one of several commentators recently suggesting that a growing populist fervor in society isn’t just anti-government, but anti-institution—and a threat to philanthropy, one that can’t be summarily dismissed and should propel changes. For example, in Small Change: Why Business Won’t Save The World, Michael Edwards wrote that foundation leaders will vociferously resist and complain about the many suggestions he makes in the book calling on Congress to require more transparency and accountability from foundations. But Edwards, a senior fellow at the think tank Demos and the leading skeptic of philanthro-capitalism, says that public and political pressure will eventually build and force changes in the sector. Similarly, in a February 25 Chronicle of Philanthropy opinion piece, the Hudson Institute’s William Schambra argued that philanthropy’s increasingly business-minded approach is at odds with the populist mood of the American public on both ends of the political spectrum. He thinks the tide is turning against foundations.

To help improve the situation, Thomas David of the Community Clinics Initiative argues that foundations should show they’re making sacrifices in this economy along with everyone else. It should not be a time of hunkering down, cutting grantmaking, trimming staff and expenses or focusing on re-growing endowments. Instead, David writes in an essay published by Grantmakers in Health (GIH) that foundations should make some big bets, ease up on control of grantees and practice mission-related investing. In other words, take risks that put them on the line in ways that might tangibly, not just symbolically, benefit nonprofits in a time of need. More specifically, David advises foundations to increase their grantmaking this year—even if they’re one of those already exceeding 6 percent payout. He complains that over the past couple of decades, foundations have evolved to become more risk averse than ever; they’re so focused on assets that growth is their priority, not giving.

David’s hard-charging essay is just one of several included in Taking Risks at a Critical Time, released in March in tandem with GIH’s 2010 annual meeting. Foundations hesitate, according to this publication, in part because of an over-reliance on proven practices, unwarranted anxiety about engaging in public policy and avoidance of failure of any kind, despite the fact that a healthy proportion of failures in a grant portfolio is a sign that a foundation is successfully venturing in new territory. The lead essay includes examples of “risk taking in action,” efforts to improve health.

Tom David is not optimistic, however. He essentially calls foundations fair-weather friends to nonprofits: “It is at times like this that nonprofits, who like to think of foundations as allies in their struggles, have learned not to count on their friends when they need them most.” I wonder. It is not the role of foundations to support nonprofits based on need, but rather based on merit, because doing so fits a larger strategy—one that produces a social benefit. I have a good deal of faith that foundations will do their best to achieve that end. But the way in which they do it must take into account the public mood, and even distrust that these observers so powerfully describe. No institution is being given a pass, particularly one that is seen as opaque while claiming to advance the public good. “Trust us” has never been an adequate response to doubters.

—Jane Wales

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Jane Wales, World Affairs Council President and CEO, is now blogging for the Huffington Post. Read her most current blog, about what philanthropists can do to meet the needs of lower-income Americans, here.

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Are your grantees spending too little on overhead? Or are they under-reporting how much they actually spend on such expenses? Chances are, both, according to the Bridgespan Group. In an article in the Fall Stanford Social Innovation Review, the nonprofit consulting firm’s Ann Goggins Gregory and Don Howard write that nonprofits under-spend and under-report operating expenses because they feel anti-overhead pressure, especially from funders. Although nonprofits need to be more assertive in reporting how much it costs to run their organizations, Gregory and Howard say that funders should take the initiative to stem what they call a “vicious cycle” that is “slowly starving” nonprofits. Based on Bridgespan’s research, foundations generally only allow overhead or indirect expenses to total 10 percent to 15 percent of each grant, when the true cost percentage is likely to be twice that. And this compares to an average for-profit rate around 25 percent of total expenses. In fact, the authors cite a survey reporting that most funders realize their overhead allocations don’t adequately cover grantees’ needs, but they proceed as usual anyway. The authors call for a coordinated, sector-wide effort to put pressure on foundations to curb their unrealistic expectations about overhead.

Beyond confirming a wealth of prior research that finds an unhealthy obsession with low overhead costs in the sector, this article underscores the general need for foundations to be more actively engaged in candid and realistic discussions with their grantees. There is a crucial need for more general operating grants, especially given the difficulty many nonprofits are having staying afloat during the recession.  However, this need for general operating support will not fade as the economy recovers.

–Jane Wales

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The Foundation Strategy Group just released a report culminating a year of  interviews with leaders in the field on evaluation in the nonprofit world.  The report, From Insight to Action, finds that foundations are undergoing a fundamental change in the way they use evaluation. “A shift in thinking has broadened from “What was the impact of our grants?‘ to ‘What do we need to know to increase our effectiveness?’ ”  The report finds that evaluation is most useful when it is used to answer three questions:

* How can we better plan our work?
* How can we improve implementation?
* How can we track progress toward our goals?

Foundations are increasingly moving toward real-time evaluation, and measuring progress in their field of interest, rather than the isolated impact of their specific grants.  There is increasing emphasis on a culture of learning, and of delegating more aspects of evaluation to grantees, who are much better placed to understand and gather data on indicators in the field.

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