Once again, Kathryn Vanden Berk reminds us of an important change in the law affecting nonprofits:

In Part VI, the new Form 990 asks if you have adopted three key policies: (1) conflict of interest, (2) whistleblower and (3) record retention and destruction.

The latest issue of her newsletter contains a sample whistleblower policy. An earlier post of the Nonprofiteer’s directs you to a sample conflict of interest policy. Recommendations for a records-retention policy eagerly solicited.

The Nonprofiteer received a follow-up to an earlier posting concerning the disparity between the mileage deduction allowed to employees and that permitted volunteers:

I . . . wrote letters to my senators (no response), the major presidential campaigns (no response), my congressman (form letter response) and the Louisiana Association of Nonprofit Organizations.

I just heard back from LANO today and thought you might be interested in what’s going on at the federal level recently (below and update #2).

Of course, if only a paltry number of people encourage passage, this will die in committee, but one can always hope that nonprofit organizations will advocate for their volunteers (hope springs eternal…) I mentioned the disparity to a staff member of the National Endowment for the Arts at a meeting we both attended recently—she was astounded. Not surprising, as no one appears to really be looking out for volunteers.

Still going to stay on my soapboxJ

Christie Weeks

Ms. Weeks appended a report about a House bill to equalize mileage allowances and an amendment to the farm bill sponsored by Senator Dole (late of the American Red Cross) to raise the volunteer mileage allowance to 40 cents (10 cents below the business rate). (Unclear whether the amendment survived the floor vote on the bill or whether the bill itself will survive a threatened veto.)

The Nonprofiteer is not running for office, so she can say this in the baldest form possible: anything that encourages people to use their cars is a poor idea, and that includes an increased mileage deduction for charity volunteers. Americans already drive too much, and the only good thing about skyrocketing gas prices is that they will do what no amount of moral suasion has managed, which is to get us to drive less–which in turn may reduce our willingness to have young people killed in the Middle East to assure cheap fuel to the rest of us.

Volunteers should be riding public transportation to their charity gigs, as employees should be riding public transportation to their jobs. If the volunteer gigs themselves require driving (e.g. delivery of meals on wheels), then mileage is a component of the charity’s operating expenses, and every individual volunteer (or organized group of volunteers) can negotiate with the charity about what proportion of those expenses should be paid by the charity rather than its volunteers.

But–lest the point get lost in the qualification–it’s time to stop subsidizing driving, at charities or anywhere else.

Lately the Nonprofiteer has been bending the ear of everybody she meets with praise for a community arts nonprofit (The Old Town School of Folk Music by name) based on her experience as one of its students. She was waxing rhapsodic about the School’s amazing energy, a heady combination of welcome and clarity about mission–the guy who runs the coffee shop improvised a song, “Decaf Woman,” while brewing an entire pot just for her–when one of her auditors observed, “Well, that kind of thing comes from the top, doesn’t it?”

Intriguing question: does it come from the top, from leadership that never loses sight of mission and knows how to make sure that no one else does either? Or does it come from the bottom, from a comprehensive culture for which which everyone at the agency feels responsible and to which everyone proudly conforms?

Whichever way the ethos flowed originally, you’ll know an agency has a pervasive culture when a junior person tells the Executive Director, “That’s not the way we do it around here.” At which point you’ll realize: be careful what you wish for.

The Gates Foundation has named a Microsoft Executive as its new CEO. Does this mean that personal loyalty to the donor is the most important quality to be sought in a foundation executive?

Dear Nonprofiteer,

Have you ever heard of funding nonprofits which have cash flow problems by setting up a line of credit guaranteed by deposits made by the group’s supporters? The supporters put their money into a pool, the equivalent of a CD, and can state the terms (i.e.., 1 year, 3 years, etc.). They get a below-market return on their money, but it remains their money and they can take it out at the end of the term. Meanwhile, the nonprofit has a line of credit to get through the fiscal crunch periods.

It’s a system written about by a husband and wife (Linzer by name). I’m skeptical about the plan. I lose on the interest since it’s below what I get in other similar investments, and I don’t get to write off any charitable donation since it isn’t really a donation. Of course, there’s the possibility of losing the money if the nonprofit goes belly up, but that’s unlikely. I just went on a board and made a donation to the group and now am being encouraged by one board member to do this too. It’s not a plan used by any of the groups I’ve ever worked with. Your thoughts?

Signed, Not Clear Where Credit Is Due

Dear Not Clear:

The Nonprofiteer has just become acquainted with the Linzers’ work, which features skepticism about asset acquisition by nonprofits and a corresponding enthusiasm for their use of credit. Though she agrees with the Linzers that many large nonprofits become overly preoccupied with building endowment–wouldn’t it be better to use those funds to accomplish mission?–she doesn’t share their view that nonprofits should operate without any reserve whatsoever, instead using credit to respond to unexpected demands for cash.

Why? Because credit isn’t free, but it is easy. Even with the below-market-rate interest you describe, it costs money to borrow money. Wouldn’t it be better to use those funds to accomplish mission? At the same time, the availability of credit encourages nonprofits to put off the hard work of matching resources with needs–that is, either reducing costs or increasing revenue. Show the Nonprofiteer a Board able to borrow freely and routinely, and she’ll show you a Board that evades necessary fundraising until the debts are nearly overwhelming.

If the agency absolutely positively knows that the money it’s borrowing will reappear in its account three months from now–say, it has a signed grant award letter, but disbursement won’t occur til September–then it makes sense to use a line of credit to cover expenses, repaying as soon as the grant comes in. But it makes even more sense for the agency to redouble its fundraising efforts so it has sufficient income to operate between grants. Asking people to guarantee a line of credit is NOT a substitute for asking them to donate to your cause. If they care about the institution enough to give it money, they should receive the tax advantage that accrues to such generosity; and if they don’t, there’s no reason for them to make a below-market-rate investment.

Again, borrowing money isn’t free. It has a cash cost and an opportunity cost, namely, the opportunity to ask a prospective donor for a gift–because once you’ve asked him for a low-interest loan he’s not going to give you a gift, too. So while judicious use of credit (to take advantage of opportunities that will lapse if not seized immediately) is something every nonprofit should consider, the Nonprofiteer strongly cautions charities to remember that credit is not a substitute for income. Cash flow is all very well; but unless the cash actually belongs to the nonprofit, in fairly short order it’s going to flow in precisely the wrong direction.

In addition, in the Nonprofiteer’s view members of the Board of Directors should donate money and raise money in support of the agency they govern. They should not become its creditors, because that creates a conflict of interest: what’s good for them as creditors (having the agency devote all its energy to repaying the debt) is not what’s good for the agency, which is all they as governors should be concerned about.

So no, don’t make this investment, and don’t encourage the agency to keep borrowing money. Instead of treating the symptom (temporary cash-flow shortage), work with your colleagues on the Board to treat the cause (insufficient income or excessive expenses)–otherwise the agency will never return to financial health.

In the midst of a conversation on the 501(c)Files among skeptics about “venture philanthropy,” the following comment appeared, suggesting that what’s really going on is a sort of high-end shell game and money laundry. The Nonprofiteer extends her appreciation to commenter JP Burnes for his/her provocative notion:

Venture Philanthropy . . . one of the last few tax write-offs or tax advantageous schemes–-or ways to help buddies get rid of dogs or other unwanted investments[?] Here’s how it works . . . . a non profit . . . creates for-profit entities to generate revenue to help support the non-profit parent. But . . . . a for-profit company, a startup in technology, needs an investment from a known brand . . . to make it attractive to other investors. But the known-brand knows it won’t get anything for its investment in the startup. So the primary backer of the startup, a V[enture]C[apitalist], donates a few million to the name-brand’s parent non-profit. The brand then turns around and invests nearly the same amount into the startup……lots of favors all around.

In other words, a start-up business buys credibility by “donating” to a brand-name nonprofit, whose for-profit subsidiary funnels the money back whence it came. The start-up is no richer than it was before, but no poorer, either, and now it’s able to present itself to potential purchasers as an established pillar of the community instead of a fly-by-night operation–particularly if its founder has gotten some ink as one of those amazing “venture philanthropy” creatures who’ve figured out how to make charity unnecessary.

Comments from people who actually understand venture capitalism eagerly solicited!

I don’t know why this wonderful piece from February just showed up in my Bloglines notifier; but the advice contained therein will never be out of date. Carol Weisman’s guidance to those from the business sector who assist nonprofits should be tattooed on the foreheads of nonprofit EDs so their would-be mentors are confronted with them all the time.

Query how much of the condescension from the business world about nonprofit management is actually just men being routinely condescending about women?

Nicholas Kristof highlighted some very impressive young philanthropists in his New York Times column yesterday; but one of his observations made the Nonprofiteer cringe.

The humanitarian prodigies like Ana and Nick are laudable for going beyond simple protesting to help their causes. Today’s young social entrepreneurs come across as more constructive than my generation of student activists, and more savvy about how to accomplish their goals cost-effectively.

“Simple protesting”–another term for that is “political action.” And as committed to the service-providing nonprofit sector as she is, the Nonprofiteer doesn’t imagine–and doesn’t want others to imagine–that it’s a substitute for monitoring, and where necessary changing, government policies toward those in need. Nor is it clear that organizing a nation’s worth of benefit dances to pay for anti-malarial bednets is more “cost-effective” than organizing a nationwide letter-writing campaign urging Congress to spend money on bednets instead of the Iraq war.

So while we’re celebrating charitable young people, let’s not devalue those who choose political involvement instead. There’s nothing “more constructive” they–or any of us–could do than holding our own government to account.

Well, this is refreshing: a philanthropist’s response to the question, “What would you do if you had $100 billion to give away?” that gets beyond the self-referential (”Give every person in the world a computer”) and jargon-infected (”I try not to be top-down”) to the ultimately simple: “Give everyone in the world $100. Some people will waste it but most of them won’t.”

There are all kinds of reasons why this isn’t the right answer, either:

• With the world population at 6.8 billion, in fact $100 billion would provide only about $14 a person–enough to sustain the poorest people in the world at their current level for two weeks. That wouldn’t buy people enough time to change their lives.
• In much of the world, the problem is less lack of money than lack of resources; there’s no point in giving people $100 apiece if there’s only $2 apiece worth of product available for their purchase and consumption, unless we want to inflate the costs of everything 50-fold.

But the notion that what’s wrong with poor people is not that they’re lazy or pathetic or misguided or ill-behaved but simply that they’re poor is one that can’t be reiterated often enough–because the more we reiterate it, the more we’ll be inclined to alleviate poverty not with instruction or programs but with money.

Thus endeth this week’s lesson.

Dear Nonprofiteer,

If I want to have a Benefit event for my mother battling cancer, what are the rules and laws affecting those who want to donate?

Signed, Beginning Charity at Home

Dear Charity,

I’m sorry to hear of your mother’s illness, and of your need to provide for her care through charity. While there’s nothing to prevent donors from giving money directly to individuals, unfortunately the Internal Revenue Service is quite clear that such gifts are not tax-deductible. Only donations to “qualifying charities” provide the tax benefit we’re accustomed to when we give to charity.

IRS Publication 526, which is the deductibility “Bible,” devotes all of page 6 to the subject, and explains,

• There are some contributions you cannot deduct. There are others you can deduct only part of. You cannot deduct as a charitable contribution:

1. A contribution to a specific individual,

and goes on to add:

Contributions to Individuals

You cannot deduct contributions to specific individuals, including the following. . . .

• Payments to a hospital that are for a specific patient’s care or for services for a specific patient. You cannot deduct these payments even if the hospital is operated by a city, state, or other qualified organization.

Nor can you create a “qualified organization” to fund your mother’s care: nonprofits have to be operated for a “public purpose” and specifically can’t benefit or profit a specific individual. While you’ll occasionally run across a lawyer who will suggest that s/he can finesse this so as to create a qualifying charity that actually benefits a single individual, all the hair goes up on the back of the Nonprofiteer’s neck at such a claim.

So you’re NOT a nonprofit, and gifts to you and your mother AREN’T deductible. That doesn’t make gifts to you prohibited–just less beneficial to the donors. Make sure any invitation you create for your benefit event makes this clear. Mere silence on the subject is probably insufficient: there’s no reason for most people to know the relevant law.

Though you’re not going to be issuing tax receipts, you’ll want to keep careful track of the funds you receive and keep them separate from the rest of your finances. Go to your local bank and ask if you can create a checking account specifically for this purpose, and then ask your donors to write checks to the Jane Y. Doe Health Care Fund. This will make clear to them that you’re not mingling their donations for your mother’s care with your own finances, and that therefore their money will go directly to health care costs and not get diverted to your grocery bill. This will help encourage them to give.

My best wishes for her recovery and your success in raising money to support it.