Ken Goldstein, MPPA

Ken Goldstein has been working in nonprofits and local government agencies from Santa Cruz, to Sacramento, and back to Silicon Valley, since 1989. He's been staff, volunteer, board member, executive director, and, since 2003, a consultant to local nonprofit organizations. For more on Ken's background, click here. If you are interested in retaining Ken's services, you may contact him at ken at goldstein.net.

Wednesday, March 05, 2008

Market failure and collusion in the philanthropic marketplace

That's a bit of a heady title, but stick with it and humor me for a minute or two longer. I'm going to use a lesson from basic economics 101 to explain why nonprofits are unnecessarily forced spend too much time and energy chasing dollars instead of achieving their missions.

Cast your mind back to college days. and remember that intro to economics class. Remember how the supply and demand curves are supposed to work? In a functioning market, each are at least somewhat elastic. When demand outpaces supply, shortages occur and prices rise till supply can catch up. When supply outpaces demand, prices begin to drop. In each case, the correction (either dropping prices or increased supply) brings the market back into equilibrium. Ta daa! The invisible hand at work.

When these forces fail to bring the market back to a working situation, for whatever reason, the resulting state is called a market failure. One possible cause of a market failure is collusion; where a number of players one side of the equation agree to withhold either supply or demand in order to manipulate the market for their own ends.

Okay, so now let's look at the market for foundation grants to nonprofits. It is an accepted fact of life that the demand far outpaces the number of grants awarded. We know that the rule of thumb is that only one in twelve proposals will be funded (some of us do somewhat better than that, but it's balanced by those who do worse), and that none of us who have been at it long can boast of a perfect record of every proposal funded.

Because of a low supply of grants from foundations, nonprofits pay a higher than market price for searching out, applying for, and managing what few grants are available to them. Economics 101. That higher price nonprofits pay to receive grants has to come from somewhere, so it comes from programs; from mission.

This would suggest that there's a shortage in the supply chain of charitable dollars. But that's simply not true. Foundations are sitting on massive endowments that could satisfy most any nonprofit's needs. These dollars have already been earmarked for charitable purposes and the donors have already received their tax benefits at the expense of the public treasury. So why are they not being distributed?

And that's where the collusion comes in. While the IRS requires that foundations spend out a minimum of five percent of their endowments each year, the majority of U.S. foundations have taken that five percent to be the industry standard (a few notable exception spend at higher rates, and they are to be commended).

In the face of a contracting economy, with rising demand for the social services provided by the nonprofit community matched with fewer dollars to pay for it, this collusion of foundations has become the single largest impediment to nonprofits succeeding at their missions and a danger to the public safety, health, and societal well-being.

Alright. Maybe I'm going a bit too far here. I like to exaggerate to make a point. But the fact stands: In tough times the community of foundations have the ability - and I would argue social responsibility - to step up to the plate and increase the flow of grants.

And, while we're at it, maybe they can cut some of the administrative burden associated with the process. Oops. I know. This time I've really gone too far.

3 comments:

  1. I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


    Kaylee

    http://grillsblog.com

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  2. So Comrade Ken, your solution is to have the government force the Foundation free market to redistribute its wealth that it has earned and give it to another free market that has not earned it? What will then happen to the supply of Foundations and demand from grant seekers?

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  3. David: Despite your use of "Comrade" to try to dismiss me as some socialist crackpot, I'll still try to answer your question.

    First: I didn't say that the government should force foundations to increase their payout. I suggested that foundations should step up to the plate and increase donations in time of great need. That's a voluntary act.

    Second: The donors to foundations have certainly earned their wealth, but they have then voluntarily (there's that nasty word again) given it to a foundation for the express purpose of having it used for charitable purposes (and, in exchange, to receive a tax write-off). The Foundation acquired that wealth from the original donor by offering that tax write-off and making the promise that the money be used to improve some aspect of society. If they fail to use the money for that purpose, then they have broken their promise, and have, you might say, not earned it after all. The Foundation earns their wealth when they distribute it.

    Third: Nonprofits haven't earned it? Surely a matter of opinion. When Foundations feel a nonprofit hasn't provided some valuable public service they have a very easy solution: they don't give to that nonprofit. Foundations typically only give to those charities that can show that they meet a public need, and one that fits within that foundation's scope of interest.

    That you don't like any of the above facts doesn't change any of them. Clearly you don't care for charity or any "unearned" acts of giving. That's fine, you have every right to be a misanthrope. But the Foundation system was set up to facilitate such charitable acts to improve communities. It is my opinion - and on my blog I'm entitled to express my opinion - that in hard times, they can do a little better.

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