Nonprofits, Foundations, And Capital Formation

 On Sean Stannard-Stockton's Tactical Philanthropy blog, he commented that "One of the most bizarre criticisms of the Giving Pledge is the idea that it will hurt the economy." He quotes Forbes columnist John Tamny, who wrote:

“But while it’s exciting to contemplate the giving nature of Gates and Buffett, if their true desire is to help their fellow man, they should hoard every penny of their significant wealth..."

Stannard-Stockton's  response is demonstrate how nonprofits contribute to the economy, saying, in part:

"Nonprofits employ people, nonprofits buy goods and services from for-profits, nonprofits are an important economic engine of the US economy. In fact, nonprofits are a bigger portion of the economy than many other industries."

Certainly, for all the reasons mentioned in his post, nonprofits contribute to and benefit the economy of our nation and our individual communities.

But, in relation to the Gates-Buffett pledge, there's another "dirty little secret" of why the Forbes readers (assumed captains of industry) should support philanthropy of this scale: Endowments.

Of the money pledged by the 40+ billionaires, most of it will not be heading directly to our community service organizations; it will be sitting in foundation endowments, being granted out at a rate of 5% each year.

With that 5% barely being the earnings on the endowment, where's the principal of that endowment going? It's being invested. It's purchasing stocks and shares of mutual funds. It's in long-term bank accounts, giving banks the capital to loan to small businesses.

If John Tamny (and Forbes Magazine) is sincere when he says that "money saved and invested constitutes capital... and... capital formation... naturally stimulates job creation" then he should be encouraging more billionaires to tie up their wealth in foundation endowments.

Yes, nonprofits help build the economy, both through our direct actions assisting in our communities with job training, treating addiction, feeding the hungry, distributing gently used clothing, and offering counseling, support, and affordable housing (not to mention enriching our lives through the arts, cleaning our environment, protecting our children, etc.), but our sector is also responsible for the creation of dedicated capital for investment, something that our nation desperately need right now.

Stand up for the nonprofit sector; the most productive sector of all.

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.

The economic impact of nonprofit organizations

When you work in the nonprofit sector, you will occasionally speak to people who are a) shocked that you get paid to do "charity work" and b) act as if your work, while well-meaning and good, is an economic drain on the community.

At those times, it's good to have an idea of the true, positive impact our sector has on the community. Not just in terms of the people served in fulfilling our missions, but in the size of our sector as a part of the business community.

A new report from the UCSB Economic Forecast Project has completed that task for San Luis Obispo County. Among the findings:

• Nonprofits contribute more than $260 million ($242 million plus an additional $20 million impact on construction spending) annually to the county's economy.
  
• Nonprofits employ more than 2,700 county residents. In total, about 4,000 jobs were supported because of local nonprofit activity.
  
• Taxes totaling at least $23.8 million were generated as a result of nonprofit spending.
  
• As well, the 99 nonprofits surveyed - of the more than 1,000 organizations in the county - for the study reported more than 20,300 volunteers.

This is a great resource that should be duplicated for each county and city in the State. For a list of reports completed by the UCSB Economic Forecast Project (some with downloads) see their web site.

Tags: nonprofit, economic impact, San Luis Obispo