Archive for the ‘Investment’ Category
November 29, 2011
Look, there are numerous “good cases” where one can see that infusion of capital that doesn’t really have to be repaid at market rates makes good sense. (Actually, government loan guarantees of, say, solar power start-ups falls into this category.) The problem with allowing 501(c)(3)’s to make these sorts of investments is that the process is subject to abuse.
Say that I want to create “Stuart Levine’s Good Works Foundation.” The Foundation attracts $10M in tax deductible contributions. The Foundation uses the cash to “invest” in projects operated either by me or my Aunt Minnie. While Minnie and I invest our own funds in these businesses, our capital position is ahead of the Foundation’s and gets a higher return, so that the first profit out goes to pay us and, if the deal craters, the biggest part of the hit will fall on the foundation. (Did I mention the $250K a year consulting fee paid to me by the investment entity?)
I don’t for a minute believe that the Bill and Melinda Gates Foundation is engaged in double-dealing of the sort that I described. I have less faith in the “Stuart Levine’s Good Works Foundation.” Has everyone forgotten the Pallottine Fathers? See here:
http://tvnews.vanderbilt.edu/program.pl?ID=254962
Or, as one might say, everything old is new again.
The burden of proof rests on those who believe L3Cs are essential. They must demonstrate that the entities’ potential for abuse is outweighed by their capacity to meet needs that are otherwise unmet. But all that’s unmet so far is that burden of proof.
Tags:501c3, charity, Conflict of Interest, donors, foundations, nonprofit, not for profit, philanthrocapitalism, philanthropy, Relations with funders, social entrepreneurship
Posted in Conflict of Interest, Finances, Foundation Hall of Shame/Stupid Foundation Tricks, Investment, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Relations with funders, Social enterprise | 3 Comments »
November 2, 2011
Ellen Alberding’s interview with the Chicago Tribune in advance of the Independent Sector‘s meeting in Chicago earlier this week pressed nearly every one of the Nonprofiteer’s buttons. Ms. Alberding, head of the Joyce Foundation, described the Foundation’s approach to what even she characterizes as a perfect storm of increased need and reduced resources in the nonprofit sector:
We do what any good business person would do when faced with reduced resources. We have become very focused on first maintaining support of our core grantees. Foundations are required to spend a minimum amount — 5 percent of our assets. On occasion, we will overspend that in order to keep our grantees whole.
In other words, business as usual. Most likely the Joyce Foundation’s governing documents prevent its Board from spending its assets down to zero, but there’s no reason why the Foundation shouldn’t use more than the statutory minimum 5% of its $800 million in assets to sustain the work it exists to support. Foundations are NOT businesses; they exist to give their money away, and only in some vague theoretical sense is an institution with $800 million facing constraints preventing it from giving away more than $40 million.
If Joyce gave only 6% instead, that would be another $8 million available to nonprofits in its areas of concern—a not-insubstantial 20% increase. What is stopping the Foundation from doing this, other than a misguided sense that preserving its capital is more important than doing its job?
And then the cherry on the sundae:
It’s the position of the Independent Sector that a cap [on charitable deductions] will reduce charitable contributions across the board and diminish support for nonprofit organizations. I believe it’s the administration’s view that the 28 percent cap might have some impact, but it wouldn’t have a dire impact. (But) I think we have to listen to the organizations themselves, who feel otherwise.
In other words, notwithstanding reality, the prejudices of self-interested parties will dictate the organization’s behavior. Their minds are made up—don’t confuse them with the facts. But as President of the organization, doesn’t it behoove Ms. Alberding to make sure her members don’t make their decisions based on fantasy?
Grrrr.
Tags:501c3, Board of Directors, charity, Conflict of Interest, donors, Endowment, foundations, Fundraising, grantmaking, grants, IRS, nonprofit, not for profit, philanthropy, politics, recession, Relations with funders
Posted in Boards of Directors, Conflict of Interest, Coverage of nonprofits, Finances, Foundation Hall of Shame/Stupid Foundation Tricks, Fundraising, Investment, Mission, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Private Philanthropy, Relations with funders | Leave a Comment »
March 17, 2011
Here’s something strange: a concept thrown around routinely and casually in conversations among nonprofits and philanthropies is simultaneously the subject of fierce debate and sometime disapproval by the Internal Revenue Service, a committee of the American Bar Association, and other experts. What is going on?
The notion of Low Profit Limited Liability Corporations (L3Cs, for short) is that they’re a vehicle for doing well by doing good and therefore an improvement over the typical nonprofit structure. L3Cs are permitted to earn profits but proponents claim that their praiseworthy intentions—to end hunger or provide clean water or whatever—make those who lend to them eligible for the special tax benefits attached to program-related investments. In other words, this is a legal structure presented as a technique for gaining access to capital (always a struggle for nonprofits) by providing a tax benefit to lenders.
Of course, foundations already get a tax benefit for program-related investments in regular nonprofits, so what, exactly, is the appeal? In theory, foundations might be more interested in program-related investments that generate a reliable flow of capital (in the form of profit) than in program-related investments that generate nothing but additional nonprofit programs and services. Likewise in theory, regular venture capitalists outside of foundations will be more interested in making investments in profit-making entities than in pure nonprofits. This—the notion goes—will increase the amount of capital available to support general good-guy behavior.
However, a number of scholars and lawyers (Daniel Kleinberger of William Mitchell College of Law prominent among them) see the L3C as, at best, redundant and, at worst, an invitation to fraud. They point out that regular limited liability corporations can be organized for any purpose, including public-spirited and low-profit ones. They point out that the IRS has not yet issued (and does not seemed inclined to create) a rule awarding automatic program-related investment status to any investment in an L3C. So anyone who invests in an L3C on the basis that it provides a higher return than a regular nonprofit with the same tax benefits will find out to his/her sorrow that this is not the case.
What strikes the Nonprofiteer as peculiar, though, is that in the many discussions she’s heard and read about L3Cs, only one mention (specifically, Professor Kleinberger’s Nonprofit Quarterly article) has ever surfaced of this opposition from the bar and Federal regulators. Not until her tax lawyer Stuart Levine asked about the [successful] efforts in Illinois to create L3Cs did she realize there was anything controversial about the phenomenon. After bringing her up to speed Levine wisely said,
L3C’s don’t work unless there is a change in federal tax law. In other words, L3C’s are a little like Oreo-Tycin-Myacin—the wonder drug for which there is no known disease.
L3C’s raise difficult issues of fiduciary duty and the inherent conflict between “charitable” purposes and “business” purposes. At the least, these conflicts cannot be dealt with via a quick-fix state statute.
Doubtless the Nonprofiteer spaces out on frequent occasions and misses aspects of what’s said or done in the sector. But she suspects there’s also a disconnect between what nonprofit executives and L3C promoters expect and describe and what lawyers and regulators understand.
So if you’re considering investment in an L3C, be the aware buyer of whom you’ve heard.
Tags:501c3, charity, Executive Director, foundations, Fundraising, IRS, L3C, low profit limited liability corporation, nonprofit, nonprofits, not for profit, philanthrocapitalism, philanthropy, program related investments, Relations with funders, social capital, social entrepreneurship
Posted in Coverage of nonprofits, Current Affairs, Earned income, Executive Directors, Finances, Foundation Hall of Shame/Stupid Foundation Tricks, Fundraising, Investment, Nonprofit management, Nonprofits--General, Philanthropy and Taxation, Private Philanthropy, Relations with funders, Social enterprise | 8 Comments »
January 26, 2011
The indispensable Nonprofit Finance Fund has just begun its annual survey of the sector for 2011. The Fund’s slicing and dicing of the data will produce a thoughtful report on the state of the sector, of the kind it has already provided for 2009 and 2010. Please help the Fund’s researchers help us: take 15 or 20 minutes and respond to their questions.
Speaking of indispensable, the Fund’s founding Executive Director Clara Miller has just announced that she’s moving on to a job with the FB Heron Foundation. No doubt she’ll continue to be a leader in her new position, but her tenacity and vision in creating financial systems for nonprofits (including the Community Development Finance Institution, of which the Fund itself became a leading example) and her no-nonsense discussions of what the sector needs and what it lacks will be sorely missed.
We all owe Clara Miller a debt of gratitude. Maybe the Nonprofit Finance Fund’s expertise can help us figure out how to repay it!
Tags:501c3, CDFI, charity, Community Development Finance Institution, nonprofit, nonprofit financing, nonprofits, not for profit, philanthropy, social capital
Posted in Current Affairs, Finances, Investment, Nonprofits--General, Private Philanthropy | Leave a Comment »
November 19, 2010
More about the troubles of the do-well-by-doing-good gang, this time in the financial services sector.
Which raises the question: when does “profiting” turn into “profiteering”?
Tags:charity, corporate giving, Fundraising, International, nonprofit, nonprofits, not for profit, philanthrocapitalism, Poverty, social entrepreneurship
Posted in Charity scandals, Conflict of Interest, Coverage of nonprofits, Current Affairs, Earned income, Finances, Fundraising, International, Investment, Mission, Nonprofit management, Nonprofits--General, Poverty, Relations with funders, Social enterprise | Leave a Comment »
November 17, 2010
A new study—poignantly titled “Social Enterprise: Innovation or Mission Distraction?”—reports that nonprofit agencies which choose to support themselves with for-profit businesses end up serving their clients less and worse. Moreover, when the businesses thrive the profits go back into the business, while when the businesses falter the losses are taken out of the hide of the agencies. (So glad to see nonprofits acting like businesses! This “heads I win, tails you lose” approach is just what the investment bankers did—en route to destroying the economy.)
Gloating is unattractive, and unwarranted. After all, any friend of the nonprofit sector would be delighted to learn there was a way to strengthen it without having to stretch every penny into a copper wire, or grovel to wealthy people who understand the situation less well than the people they may or may not deign to help. But a bit of schadenfreude directed at the prophets of social enterprise really can’t be avoided.
It’s always seemed obvious to the Nonprofiteer that if there were money to be made in ending poverty, poverty would long since have been ended. The challenge is to provide services and alleviate suffering when it isn’t profitable. It seems equally obvious that any system which must allow for a private person to make money before the clients get served is one that reduces the resources available for those clients.
Now, lots of things that are obvious also happen to be false. And certainly there’s a reasonable discussion to be had about whether, once you factor in all the costs of raising donations, it would be cheaper or more efficient—even with a profit margin—to organize charities as business enterprises. But a decade’s worth of experimentation suggests that the answer is “No.”
Are services provided by social entrepreneurs better than no services at all? Sure, but it demonstrates the poverty of our current mindless anti-tax political discourse that those seem like the only two choices. The real alternative to entrusting the provision of public services to for-profit groups is having them supplied by the public. Anyone familiar with the history of the private subway franchises and private lending libraries and private schools of the 19th Century will be grateful that our predecessors decided to eliminate the middleman markup and run subways and libraries and schools as the public goods they are.
Have social enterprises ever succeeded? Certainly, and more power to them. But anyone who claims they will supplant philanthropy, charity or social change movements is selling snake-oil.
The most thoroughgoing enthusiasts of the market seem to forget that Adam Smith himself recognized areas in which it would, and did, fail. Those of us caring for people who can’t make profits for other people are dealing with the consequences of those failures. So let’s face it: we’re outside the market economy. Let’s stop contorting ourselves to fit into it, and concentrate on figuring out how to make our own systems function more fairly, transparently and effectively.
Tags:501c3, Fundraising, nonprofit, nonprofits, not for profit, philanthrocapitalism, philanthropy, Poverty, recession, social capital, social enterprise, social entrepreneurs, social entrepreneurship, social services
Posted in Coverage of nonprofits, Current Affairs, Earned income, Fundraising, Investment, Mission, Nonprofit management, Nonprofits--General, Poverty, Private Philanthropy, Social enterprise | 10 Comments »
May 28, 2010
Everyone in the sector–no kidding, everyone!–should read this Nonprofit Quarterly piece by Clara Miller of the Nonprofit Finance Fund about the practices most likely to make nonprofits vulnerable to financial disaster. Pay particular attention to Ms. Miller’s skepticism about the value of owning one’s own building.
The Nonprofiteer has argued for years that the likelihood of a building’s being a good investment is significantly smaller than the likelihood of its being a money pit, particularly for arts organizations who make over-optimistic estimates of their likely rental revenue. But now someone who actually knows what she’s talking about is saying the same thing.
So listen up! Please.
Tags:arts groups, Board of Directors, Executive Director, nonprofit, nonprofits, not for profit, Real Estate, recession
Posted in Arts Organizations, Coverage of nonprofits, Current Affairs, Endowment, Finances, Investment, Nonprofit management, Nonprofits--General, Real Estate | 2 Comments »
October 23, 2009
This is the most innovative idea I’ve heard to date for modifying the nonprofit model to better suit organizations which aren’t properly “charities” but still serve the public interest. The conversation has been about theater companies–and I salute Stolen Chair‘s leadership for introducing it–but it would work equally well for the newspaper business, where very little else seems to work. The Nonprofiteer promptly and shamelessly cribbed the idea for a “Whither journalism?” discussion, and intends to do so again.
H/t to Thomas Cott of “You’ve Cott Mail” for passing along the Artful Manager‘s coverage of this intriguing concept–the first notion in many a day to tempt the Nonprofiteer out of her lair.
Tags:arts management, charity, community supported agriculture, newspapers, nonprofit, not for profit, theater management
Posted in Arts Organizations, Current Affairs, Executive Directors, Fundraising, Investment, Nonprofit management, Nonprofits--General, Private Philanthropy, Relations with funders | 4 Comments »
April 3, 2009
. . . which right now isn’t foundation coffers but the vaults at Fort Knox, as this excellent summary of how to get yours under the Federal economic stimulus package makes clear.
Tags:charity, Federal stimulus, grants, nonprofits, not for profit
Posted in Current Affairs, Earned income, Finances, Foundation Hall of Shame/Stupid Foundation Tricks, Fundraising, Investment, Nonprofit management, Nonprofits--General, Public private partnerships, Social Service Agencies | Leave a Comment »
March 13, 2009
Here’s a story about endowments that can’t be touched because they’re “underwater,” that is, now worth less than the contribution(s) that established them, and state law prohibits endowed nonprofits from touching the principal. Though the Nonprofiteer is ordinarily a big fan of regulation, she notes that this statutory scheme harms the very agencies it intends to protect.
But more troubling still is the organization described in the article whose concern for the size of its endowment causes it to fire staff rather than dip into principal to pay their salaries. Why is the perpetual existence of an organization more important than its ability to perform its mission now?
Nonprofits–whether operating charities or foundations–are not for perpetual existence; they’re for accomplishing their mission. When perpetuity gets in the way of mission, it’s perpetuity that ought to give way. And the Nonprofiteer would be willing to risk any unintended consequences of a regulatory scheme embodying that idea.
Tags:Endowment, perpetuity, underwater
Posted in Arts Organizations, Current Affairs, Education, Endowment, Finances, Foundation Hall of Shame/Stupid Foundation Tricks, Higher education, Investment, Mission, Nonprofit management, Nonprofits--General, Personnel Issues | Leave a Comment »
