Monday, January 3, 2011
The Georgia Alliance of Community Hospitals recently issued a report attempting to head off any efforts by the Georgia legislature to tamper with or even repeal the property and or sales tax exemption provided to large nonprofits. The report takes the bait, as it were, with regard to PILOTS and property tax exemption. The bait, I think, is the notion that nonprofits should quantify the benefit they provide in exchange for property tax exemption. Its bait because nonprofits can't possibly win in a cost/benefit contest. The Chattanooga Times Free Press reports on a growing trend that is hardly good news for large, commercialized nonprofits:
All Georgia tax credits and exemptions are in the spotlight this year.The Georgia Legislature created the Special Council on Tax Reform last year and charged it with examining the tax credits and exemptions, said Sarah Beth Gehl, with the Georgia Budget and Policy Institute. The state has hundreds of tax exemptions on the books, some decades old, that haven't been evaluated recently for effectiveness, she said. "Often we put these credits and exemptions in place and we never look at them again," she said. "We need to go back and evaluate and examine these and make sure we're getting the return on investment. ... That doesn't mean we're going to cut all of them, but it means we're going to really hold them accountable." Perdue spokesman Bert Brantley said the attention to exemptions represents a new level of budgetary scrutiny.
Right before Christmas, Professor Mayer authored an interesting post concerning Boston's task force on Payments in Lieu of Taxes (PILOTS). The task force had recently issued a 130 page report. I have not read the report yet but I am in the midst of asking myself why and whether states should exempt large land-owning nonprofits (i.e., hospitals and universities) from property taxes at all. The question was slightly different when it first occured to me. Why should large commercialized nonprofits be exempt from any taxes, income, property or otherwise? I am sludging my way through a paper on the topic and have at least determined that the justification for property and income tax exemption are not necessarily the same. The initial question was too broad because justifications for income tax exemption do not necessarily work for other exemptions and yet if the question is accurate one can comfortably stop once the case for income tax exemption is made.
Comfortable but probably wrong. The cost/benefit analysis relating to income and property tax exemption give dissimilar results. And as a result, we might easily and more accurately conclude that income tax exemption is justifiable but property taxation is not. That is where my paper is stuck. So far I have spent a lot of time wondering whether property tax exemption is defensible using the mindset of federal income tax exemption. For one, though, the cost of income tax exemption is so much lower. Hence, the benefit necessary to justify income tax exemption need not be so readily apparent or quantifiable. As costs increase, and perhaps there is a tipping point at which property taxation can no longer be justified, the benefits must increase too. Stereotypically, nonprofit stakeholders disdain cost/benefit analysis not because they can never win but because it is difficult to quantify the intangible benefits provided by nonprofits and therefore nonprofit stakeholders who fall into the trap of cost/benefit, law and economics analysis . . . well, can never win. Unlike me, they should not take the cost/benefit bait, thinking they can win and thereby justify property tax exemption. The battle may be won with respect to income tax exemption and even then the losers are not satisfied that the battle should be over.
If you take a look at the Boston PILOT task force websight you will find presentations such as this one, wherein the task force is provided with cost/benefit data regarding nonprofit hospitals and universities within their midst. Its fair to say, probably, that the train has left the station with regard to PILOTS, a fact which worries me because once PILOTS become normative, it does not take much more to conclude that property tax exemption is no longer justifiable, at least once a nonprofit reaches a certain level of ownership or wealth. Once PILOTS are normative, aren't property tax exemptions "non-normative?" My problem is that I have been resisting this notion by reference to income tax exemption and the rationale usually offered to support that exemption. Doesn't work with regard to property taxation though. My real point, though, is that is probably too late to stop the PILOT train and so now colleges and universities have to deal with the 800 pound gorilla in the room. Why should you be exempt from property taxes at all, especially if you meekly comply when chastised and made to pay back that which you have "stolen" from the cookie jar. The Boston PILOT task force website is essentially a record of the sophisticated ways large cities have been able to chastise large commercialized nonprofits for their apparently unjustified tax exemption. Brief nods are given to efforts to quantify the benefits generated by colleges and universities but one is only fooling oneself to think that nonprofits can ever win in a cost/benefit, law and economics playing field. Make no mistake, though, the cost/benefit analysis will never cut the mustard. Large, commercialized nonprofits have already wasted too much time thinking PILOTS would remain limited to larger northeastern cities and even if they don't, nonprofits can always be show enough benefit to justify the cost of property tax exemption. The Georgia Alliance's report is evidence of how Utopian the former notion (that PILOTS will largely be confined to big cities in the northeast); more importantly, it is an effort that cannot save property tax exemption anywhere. The lesson to be learned from law and economics is we better think again or soon admit that property tax exemption -- once the "tipping point" arrives -- is unjustifiable.
Thursday, December 23, 2010
A Payment In Lieu of Taxes (PILOT) task force created by Boston Mayor Thomas M. Menino just issued a report making numerous recommendations regarding the city's existing PILOT program. According to the related press release, the task force's main recommendations are:
- The PILOT program should remain voluntary.
- The PILOT program should be applied to all nonprofit groups except for smaller nonprofits, suggesting a threshold of $15 million in property value.
- The PILOT contributions should be based on the value of real estate owned by a nonprofit, with a suggested amount of 25% of the tax otherwise owed (approximately equal to the portion of the city's budget that goes to police, fire, snow removal, and other essential services). This formula should be in phased in over a period of not less than 5 years.
- The credit for "Community Benefits" should be limited to 50% of the full PILOT payment. Such benefits include public health initiatives, scholarships for Boston public school students, and summer jobs.
The report now goes to the Mayor for his consideration and possible implementation.
Thursday, November 11, 2010
The National Commission on Fiscal Responsibility and Reform released its draft CoChairs' Proposal in the form a 50-slide PowerPoint presentation and a 24-page illustrative savings list totaling $200 billion in 2015. With tax reform as one of the five basic recommendations made, and no apparent sacred cows, it is not surprising that the current tax benefits enjoyed by charities are among the many targeted tax provisions. Here is how the three proposed tax reform options would affect those benefits:
- Option 1 (The "Zero Plan"): Would eliminate all tax expenditures or, alternatively, preserve only a few such tax benefits in exchange for higher marginal rates. Using the most recent Joint Committee on Taxation Tax Expenditures List (from January of this year), eliminated provisions would include not only the charitable contribution deduction but also tax-exempt bonds, low-income housing credits, and other tax benefits that charities commonly use to advance their mission, such as the exclusion of scholarship and fellowship income, numerous other education-related tax benefits, the credit for rehabilitation of historic structures, the exclusion of certain foster care payments, and similar benefits. With respect to other types of nonprofits, the list also includes tax exemption for credit union income. And this summary does not include those benefits not unique to nonprofits that are nevertheless utilized by them, such as the exclusion from gross income of employer-provided health insurance.
- Option 2 ("Wyden-Gregg Style Reform"): Would modify the charitable contribution deduction by establishing a 2 percent AGI floor.
- Option 3 ("Tax Reform Trigger"): Would create an across-the-board "haircut" for all itemized deductions as well as certain other tax benefits if reform not enacted as of 2013. The size of the haircut would be set at a level sufficient to reduce the deficit by $80 billion in 2015, which roughly translates in about a 15% reduction in such deductions, including the charitable contribution deduction. This proposal would also require the haircut to increase over time in the absence of comprehensive tax reform.
The list of illustrative savings also has some items of interest to nonprofits, including the proposals to have the Smithsonian start charging fees and to eliminate Corporation for Public Broadcasting funding.
These proposals only represent the views of the co-chairs, former Senator Alan Simpson and former Clinton Chief of Staff Erskine Bowles. The final Commission report is due to be released no later than December 1, 2010, but it must receive the approval of at least 14 of the Commission's 18 members.
Wednesday, November 10, 2010
Studies of financial support for nonprofits have become a growing industry, as evidenced by the following slew of reports:
- The Chronicle of Philanthropy reported last month that donations to the nation's 400 largest charities by private funding dropped 11 percent in 2009 from the previous year. As for 2010, of the more than 25 percent of groups that provided a prediction, the median estimate was an increase of only 1.4 percent over 2009 amounts.
- Not all charities have been hit equally, however. The Evangelical Counsel for Financial Accountability issued its 2010 Annual State of Giving Report yesterday, which found that among ECFA members giving declined only by 0.7 percent in 2009 as compared to 2008. At the same time, the report found significant differences depending on activity type, with, for example, members involved in child sponsorship seeing a significant increase in giving while members involved in education seeing a substantial decline.
- Focusing on high net worth individuals, Bank of America Merrill Lynch issued its 2010 Study of High Net Worth Individuals in cooperation with Indiana University's Center on Philanthropy. That study found that while such individuals continued to give at high rates, the amounts given declined from 2007, with overal average gift amounts falling by 35 percent after adjusting for inflation. As a percentage of income, giving declined to 9 percent from 11 percent in 2007. For additional coverage of this study, see the Los Angeles Times.
- College and university endowments have also been the subject of a recent report. The Commonfund Institute reports that based on data from 80 such institutions, the July 1, 2009 to June 30, 2010 fiscal year saw an average return of 12.6 percent. Interestingly and contrary to some past trends, the smaller endowments showed on average higher returns. The Institute relied on preliminary data for the 2010 NACUBO-Commonfund Study of Endowments, which will be released in late January.
Monday, November 8, 2010
The Campaign Finance Institute issued a report last week titled Non-Party Spending Doubled in 2010 But Did Not Dictate the Results. At the same time, Public Citizen issued a report titled Outside Job: Winning Candidates Enjoyed Advantange in Unregulated Third-Party Spending in 58 of 74 Party-Shifting Contests.
What accounts for the difference in these early views of non-party, nonprofit spending in the 2010 election? Both reports relied on independent expenditure and electioneering communications reports filed with the Federal Election Commission, although the Campaign Finance Institute used data through November 4th while Public Citizen used data through October 31st, and Public Citizen excluded expenditures by political committees that did not accept contributions of more than $5,000 from any given donor. The big difference between the reports is that while Public Citizen focused solely on non-party (i.e., nonprofit) spending, the Campaign Finance Institute also considered candidate receipts and party spending. This larger perspective led the Campaign Finance Institute to conclude that in many races differences in non-party spending were relatively small when compared to overall financial resources devoted to each candidate from all sources. Indeed, the Campaign Finance Institute went so far as to conclude:
"It appears as if the one set of candidates most helped by a balance non-party spending favoring their side were the Republican candidates who lost with 45% of the vote or more. Based on their own receipts ($931,000), these could well have been candidates who would have lost by much more in a normal election year. However, the Republican non-party groups had said they were interested in helping to 'expand the playing field,' and these figures (along with the nine undecided races) suggest that they did."
Thursday, November 4, 2010
Last month the Urban Institute's Center on Nonprofits and Philanthropy issued the 2010 National Survey of Nonprofit Government Contracting and Grants, written by Elizabeth T. Boris, Erwin de Leon, Katie L. Roeger, and Milena Nikolova. The survey "aims to provide a comprehensive look at the scope of governments’ contracts and grants with human service organizations in the United States and document the problems that arise." It found that government agencies have approximately 200,000 formal agreements with about 33,000 human service nonprofit organizations, accounting for over 65 percent of the revenue for such organizations. It also discovered widespread instances of late and less-than-full payments, as well problems with administrative complexity and government changes to agreements, but with significant variation between states with respect to the incidence of such issues.
Friday, September 3, 2010
The Chronicle of Philanthropy reports that the Direct Marketing Association's Nonprofit Federation paid for and released two reports that criticized both the evaluation systems used by various charity watchdog organizations and the effect on charities of such evaluations. The criticized organizations were the American Institute of Philanthropy (which operates the Charity Watch website), the Better Business Bureau's Wise Giving Alliance, and Charity Navigator. George Mitchell, a doctoral student affiliated with the Transnational NGO Initiative at Maxwell School of Syracuse University prepared one report, which he based on in-depth interviews with leaders from 152 nonprofit organizations. Jessica Sowa, a professor at the University of Colorado Denver's School of Public Affairs, prepared the other report (for which I could not find a publicly available Internet copy), which compared current charity rating scales against research on nonprofit organizational effectiveness. The Chronicle of Philanthropy article includes responses from leaders of the watchdog groups, some of whom questioned the impartiality of the studies given their funding source.
Thursday, August 26, 2010
The Treasury Inspector General for Tax Administration issued a report titled "Improvements Have Been Made, but Additional Actions Could Ensure That Section 527 Political Organizations More Fully Disclose Financial Information." While the title is relatively mild, the criticisms are not. TIGTA found that :
- "[O]ne out of every four Political Organization Report of Contributions and Expenditures (Form 8872) that we reviewed had incomplete or missing contributor or recipient information."
- "[T]he IRS is not reviewing these filings [Forms 8872] to determine if they are complete or if penalties should be assessed."
- "[T]he IRS is not always issuing notices at the appropriate time that include all information needed by political organizations to become compliant."
- "[T]he IRS is not following up on information it has requested form political organizations to verify compliance."
To be fair to the IRS, it had to design a system to process these highly time-sensitive filings from the ground up, and its Exempt Organizations Division is hindered by its broad mandate - of which reviewing such filings is only a small part - and limited resources (shameless self-promotion: a point I made in a 2007 article). Nevertheless, these failings are troubling as even more and more oversight of political activity appears to be moving to the IRS (see previous blog posting on this point).
Thursday, July 29, 2010
Philanthropy News Digest today reported that the Borchard Foundation Center on Law and Aging is inviting applications for its 2010-2011 Academic Research Grant Program. According to the Digest, the program "is intended to further scholarship about new or improved public policies, laws, and/or programs that will enhance the quality of life for the elderly (including those who are poor or otherwise isolated by lack of education, language, culture, disability, or other barriers)."
The Digest continues:
The center expects grantees to meet the objectives of the grant program through individual or collaborative research projects that analyze and recommend changes in one or more important existing public policies, laws, and/or programs relating to the elderly; or anticipate the need for and recommend new public policies, laws, and/or programs for the elderly necessitated by changes in the number and demographics of the country's and the world's elderly populations, by advances in science and technology, by changes in the healthcare system, or by other developments. Each grant recipient is required to publish an article on the subject of their research in a first-rate journal.
[In the past,] scholars in the fields of health, law, medicine, and sociology have been awarded grants. The program is open to all interested and qualified legal, health sciences, social sciences, and gerontology scholars and professionals. Two or more individuals in the same institution or different institutions may submit a collaborative proposal. Grant recipients must be U.S. citizens or legal residents of the U.S. and must be affiliated with a U.S.-based institution or organization.
The grant program annually awards up to four one-year grants of $20,000 each.
Application materials are available at the Borchard Foundation Web site.
Thursday, July 8, 2010
Taxpayer Advocate: Tax-Exempt Organizations Subject to Onerous Reporting Requirements under the Health Care Act
In her mid-year report to Congress, Taxpayer Advocate Nina E. Olson raises concerns about new reporting requirements imposed on businesses and tax-exempt organizations beginning in 2012 by the Patient Protection and Affordable Care Act of 2010. Specifically, she questions the compliance benefits of the new requirements to the IRS in relation to the potentially onerous burdens imposed on small business and tax-exempts. The relevant portion of her report, as summarized on the IRS website, follows (emphasis added):
2. New Business and Tax-Exempt Organization Reporting Requirements.
The report expresses concern that a new reporting requirement contained in the Patient Protection and Affordable Care Act may impose significant compliance burdens on businesses, charities, and government agencies. Beginning in 2012, all businesses, tax-exempt organizations, and federal, state and local government entities will be required to issue Forms 1099 to vendors from whom they purchase goods totaling $600 or more during a calendar year. To meet this requirement, these businesses and entities will have to keep track of all purchases they make by vendor. For example, if a self-employed individual makes numerous small purchases from an office supply store during a calendar year that total at least $600, the individual must issue a Form 1099 to the vendor and the IRS showing the exact amount of total purchases. The provision will have broad reach. According to a TAS analysis of 2009 IRS data, about 40 million businesses and other entities will be subject to the new requirement, including roughly 26 million non-farm sole proprietorships, four million S corporations, two million C corporations, three million partnerships, two million farming businesses, one million charities and other tax-exempt organizations, and more than 100,000 government entities. All of these nearly 40 million businesses and other entities are subject to the new reporting requirement.
TAS has not yet reached any conclusions regarding the benefits and burdens of the requirement, but the report expresses concern that the burdens “may turn out to be disproportionate as compared with any resulting improvement in tax compliance.” During FY 2011, TAS will study the impact of the new reporting requirement more closely and, depending on what its study finds, may propose administrative or legislative recommendations to modify the provision or suggest that Congress consider less burdensome tax gap proposals, including a TAS proposal to require reporting of non-interest bearing bank accounts, to replace it.
Monday, June 28, 2010
An interesting story in the Boston Globe discusses the potential viability of raising governmental revenues through voluntary taxes. The article, which quotes Yale law professor Ian Ayres and U.S.C. law professor Edward McCaffery, begins with the following fascinating statistics:
In tax year 2008, the Massachusetts Natural Heritage and Endangered Species Fund received $216,544 in taxpayer money to protect threatened species, such as the bald eagle and the marbled salamander. The state's Organ Transplant Fund received $117,654 to help patients who need new kidneys and hearts pay for medical care. And the Massachusetts AIDS Fund got $112,939 for research and education relating to the disease. The functions of these programs differ widely, but they all share one remarkable feature. The taxpayer dollars were not wrenched from the pockets of the Commonwealth's residents.
The gist of the article is that those who object to higher taxes would not necessarily decline to pay more taxes when asked to do so. According to the story, research conducted by economists at the University of Texas at Dallas suggests that many people would in fact voluntarily raise their tax bills if they are given the opportunity to do something that donors to charity have long done – direct the use of their transfers to some degree. When tax revenues are sought to support specific governmental projects, research reportedly shows that people are almost as likely to pay additional taxes to support such projects as they are to donate sums to charity. The research suggests that people do not necessarily object to paying more to government. Rather, they want some assurance that taxes will be spent for purposes that the taxpayers value. The obvious potential benefit of facilitating voluntary tax payments is enhanced funding of worthy public projects. The article also notes the possible negative effects of relying on voluntary taxes, such as enhancing the political influence of the wealthy and shifting responsibility for making allocations of public resources from governmental decision makers to private hands.
These concerns are, of course, familiar to scholars of tax law and charity law, because analogous points figure prominently in debates surrounding the charitable contributions deduction and tax expenditures.
Wednesday, June 23, 2010
The Committee Encouraging Corporate Philanthropy (CECP) has issued a report titled Shaping the Future: Solving Social Problems through Business Strategy. The report seeks to answer two questions:
1. What will the next decade look like, and what are the implications for corporate involvement in solving social issues.
2. How can corporations position themselves now to maximize their profitability and societal impact?
CECP created the report in collaboration with McKinsey & Company, which interviewed CEOs and thought leaders as well as polling CEOs who attended CECP's annual conference. Report highlights include:
- Global Forces. McKinsey has identified five game-changing trends that will affect the future of the global economy: talent shortages, shifting centers of economic activity, a new era of government action, increased scarcity of natural resources, and new levels of technological interconnectivity.
- Key Uncertainties. At the same time, business leaders face two key uncertainties about the future: the level of proactive action on behalf of companies and the expectations that are placed upon the private sector.
- Scenarios for the Future. These certainties and uncertainties combine to create four possible scenarios for 2020: the optimal being “Sustainable Value Creation” and the worst being the “Vicious Circle”. Sustainable Value Creation is a self-reinforcing state of trustworthy, pro-social corporate behavior that simultaneously delivers bottom-line results, provides competitive advantage, and leads to community benefits. The consequences for inaction are severe for both business and society.
- Capturing the Opportunities. Both business and society have responsibility for which scenario ultimately is realized; both have ownership over the future. Sustainable Value Creation requires new forms of collaboration across sectors to achieve results. This report shows how corporations are shifting their view on globalization and economic development – they will work in partnership with nonprofits and government in the future, taking a leadership role on ethical and moral issues for positive business and societal outcomes.
According to CECP's website, Paul Newman and others helped found the now the ten-year old organization, its Board of Directors include numerous CEOs of well-known companies, and its initial funders included a number of major private foundations.
Friday, June 18, 2010
The federal Corporation for National & Community Service issued its annual Volunteering in America reportthis week, finding that 63.4 million Americans volunteered in 2009 by contributing 8.1 billion hours of service. These figures represented an increase of 1.6 million volunteers over 2008, the largest single-year increase since 2003, and repesenting an increase in the volunteer rate from 26.4 to 26.8 percent. For purposes of the report, volunteers are defined as "adults ages 16 or older who performed unpaid volunteer activities for or through an organization." The report provides either directly or through its website a wealth of information regarding volunteer demographics, geographic locations, and organizations served, including the ability to download the available data in multiple formats.
Thursday, June 17, 2010
Two recent reports present sharply divergent views regarding whether and to what extent grantmaking foundations have stepped up to the plate in response to the recent economic downturn.
The Philanthropic Collaborative, a new coalition of charities, foundations, and elected officials, released Responding in Crisis: An Early Analysis of Foundations' Grantmaking During the Economic Crisis. Based on a non-representative sample of approximately 2,700 grants totaling $472 million, this report concludes that foundations have "quietly, expertly, and quickly . . . supported American individuals, families, and communities in need," including by sending more grants to states experiencing relatively more severe mortgage delinquency problems and an increasing proportion of grants and overall grant amounts to states with high unemployment.
In contrast, the Center for Philanthropy released A Time of Need: Nonprofits Report Poor Communication and Little Help from Foundations During the Economic Downturn. This report on 6,000 grantees of 37 foundations from across the country concluded that the grantees both "do not perceive funders to have communicated their responses to the economic downturn clearly, if at all" and "report that funders have offered them little useful help in responding to the challenges of the downturn."
Given the different study methods and subjects, not to mention their limited data, the studies are not necessarily inconsistent but instead may reflect two very different perspectives, that of grantors versus that of existing grantees, on what is broadly the same issue. The key questions are therefore which perspective is the better one, and is their an even better, third perspective from which to look at this issue
The Hudson Institute's Center for Global Prosperity released the 2010 version of its annual Index of Global Philanthropy and Remittances (executive summary (4+ MB); full report (13+ MB)). The report reviews financial support from the United States and other countries to developing countries in 2008, including government aid, private aid, and remittances, as well as investment. Among its findings, the report notes that U.S. private philanthropic support held steady in 2008 at $37.3 billion, as compared to $36.9 billion in 2007, and was $10 billion more than U.S. government official development assistance. Both figures were dwarfed by remittances from people in the U.S. to relatives and friends in the developing countries, which reached its highest level ever in 2008 at $96.8 billion.
Wednesday, June 16, 2010
USA Today reports that the annual report on charitable contributions in the United States shows such giving declined by 3.6 percent in 2009 to $304 billion. The decline is the first reported since 1987 and only the second since the report began in 1956. The report is available for purchase from the GivingUSA Foundation and from the Center on Philanthropy at Indiana University.
UPDATE: A Wall Street Journal blog entry notes that besides showing a decline in giving, the report also shows a number of shifts in giving, most notably away from public-society benefit organizations and toward international aid. Whether these shifts reflect long-term trends, however, is not discussed.
Tuesday, June 15, 2010
1. How can nonprofits more effectively obtain donations from individuals?
2. How can a greater share of donations go to the highest performing nonprofits?
3. What is the market potential for impact investing and how can it be realized?
As noted in a Chronicle of Philanthropy article about the report, one of the more interesting findings is that while these donors say they want to support more effective charities, they are rarely willing to to either research or base their giving decisions on performance. These results suggest that simply requiring more disclosure of information about nonprofits is not enough to better inform donors; instead, it is also important to determine how such information can be delivered to donors such that they receive and use it.
The Johns Hopkins University Center for Civil Society Studies recently issued a report on innovation and performance measurement by nonprofits in four fields: children and family services; elderly housing and services; community and economic development; and the arts. Here are the key findings and recommendations:
I. Innovation Extensive but Facing Impediments
• The vast majority (82 percent) of all Sounding respondents reported implementing at least one innovative program or service over the past five years.
• Although innovation is widespread within the nonprofit sector, it is not as widespread as it could be. Thus:
- More than two-thirds of the organizations reported having at least one innovation in the past two years alone that they wanted to adopt but were unable to.
- The vast majority of all respondents attributed their inability to adopt a proposed innovation to lack of funding.
- Especially problematic was respondents’ inability to move promising innovations to scale due to lack
of “growth capital,” narrow governmental funding streams, and the tendency of foundations to encourage
innovations but then not sustain support for them.
II. Performance Measurement Widespread but Limited
• A striking 85 percent of all Sounding respondents reported measuring the effectiveness of at least a portion of their programs/services on at least an annual basis, and two-thirds do so for at least half of their programs or services.
• Although output measures are the most common measurement technique (used by 95 percent of groups doing any type of performance measurement), nearly 70 percent of organizations that measure program effectiveness reported using outcome measures, the measurement type increasingly promoted by experts in the field.
• Still, only minorities of respondents noted using the kinds of techniques that assessment experts insist are needed to make such measures truly convincing such as random assignment comparisons and social rate of return estimates.
• The major barriers limiting more extensive use of performance measurements are resource constraints—notably, lack of staff time and expertise and the high cost associated with good evaluation.
III. Recommendations for Moving Forward
Respondents offered a range of ideas to help overcome the remaining barriers to nonprofit innovation and adoption of performance measurement:
• The vast majority of respondents called for better tools to measure qualitative impacts, less time-consuming measurement tools, tools with clearer definitions, additional resources to support their measurement and research functions, greater help from intermediary organizations in fashioning common evaluation tools, and training for personnel in how to use them.
• Sizable proportions of respondents also urged the new White House Office of Social Innovation to reduce barriers to funding including burdensome reporting requirements on federal programs, the lack of coordination
among federal agencies and departments, the lack of long-term financial support, and the lack of funds for program evaluation.
Thursday, June 3, 2010
A report by the Tellus Institute argues that risky investment strategies by big nonprofit endowments played a role in making the economic crisis worse.
The report studied the investment strategies at six privately endowed New England colleges and universities: Boston College, Boston University, Brandeis University, Dartmouth College, Harvard University, and MIT. The report finds that the aggressive investment strategies used by the managers of the endowments at these institutions exacerbated the economic crisis. Here are a few of the reports' conclusions:
- By engaging in speculative trading tactics, using exotic derivatives, deploying leverage, and investing in opaque, illiquid, over-crowded asset classes such as commodities, hedge funds and private equity, endowments played a role in magnifying certain systemic risks in the capital markets. Illiquidity in particular forced endowments to sell what few liquid holdings they had into tumbling markets, magnifying volatile price declines even further. The widespread use of borrowed money amplified endowment losses just as it had magnified gains in the past.
- College governing boards have failed to guarantee strong oversight of the Endowment Model by relying heavily upon trustees and committee members drawn from business and financial services, many from the alternative investment industry. . . . To take only one example, Dartmouth’s board has included more than half a dozen trustees whose firms have managed a total of well over $100 million in investments for the endowment, over the last five years. Even when there are not potential conflicts of interest, the oversight abilities of many trustees and investment committee members seem to have diminished because of their professional connections to the shadow banking system or their corporate directorships.
- Although they had little responsibility for endowment management or oversight, students, faculty, staff, alumni, and local communities are bearing the brunt of the Endowment Model’s consequences: from widening pay inequity to demoralizing layoffs, hours and benefits cuts, and hiring and pay freezes; from program cuts to reduced student services; from construction delays and stalled economic development to forgone tax revenues. Because these six schools are among the very largest employers in their communities, the widening pay gap between over-compensated senior administrators and more modestly compensated staff not only distorts pay structures on campus but also deepens social inequality within surrounding communities.
Perhaps more surprising is that the report directly attacks tax-exemption as part of the problem. In essence, the report argues that tax-exemption and its related tax benefits (e.g., the contributions deduction) facilitated the risky investment strategies. Again, a few quotes:
- As major property holders in their communities, the six schools in our study own tax-exempt real estate worth more than $10.6 billion, yet collectively they made negotiated payments in lieu of taxes (PILOTs) totaling less than 5% of the $235 million in taxes they would owe if they did not have the privilege of their tax-exempt status. Some schools make no PILOTs whatsoever.
- Gifts to endowment are tax-deductible to donors, and investment gains and income that endowments generate are tax-exempt. Endowment managers can therefore rapidly trade without considering the potential tax consequences of their investment decisions.
- Tax-exempt bonds have allowed colleges to borrow at low interest rates while keeping their endowment assets fully invested in high-risk, high-return investments. Endowments pocket the difference in yields tax free, while investors in tax-exempt bonds also receive favorable tax treatment on income. Congressional leaders and the Congressional Budget Office are exploring how colleges benefit from this indirect tax arbitrage when they use tax-exempt bond proceeds for operating expenses in order to use other investments to chase higher rates of return. Because of the excessive levels of illiquidity in their investment portfolios, colleges have increasingly turned to the bond markets for cash.
Not surprisingly, the report recommends wholesale changes in endowment investment strategies. "Endowments need to foster greater resilience in times of crisis by investing in assets with greater liquidity and lower volatility, and a portion of excess returns generated during good times needs to be set aside in rainy-day funds for the bad. But more fundamentally, endowments need to pursue “responsible returns” that remain true to their public purpose and nonprofit mission as tax-exempt institutions of higher learning. By integrating sustainability factors into investment decisions and becoming more active owners of their assets, endowments can begin to seize the opportunities of long-term responsible stewardship."
While I don't necessarily agree with all the points made in the report, it does generate a lot of food for thought. For example, the decline in value of endowments has been reported to death, but the press has generally ignored the collateral consequences (layoffs, salary reductions, etc.) that the endowment "crashes" caused in their local communities. On the other hand, the big profits made in the boom years almost certainly helped create a boom in the local economies at the time. So, I wonder: should tax-exempt organizations adopt more conservative ("sustainable" in the words of the report) investment strategies because of their quasi-public role? I frankly don't know about this one; I'll have to cogitate on it some . . .
Tuesday, May 25, 2010
Fenton has released the 2010 Fenton Forecast, the results of a survey of 1,000 charitable donors that looks at public perspectives on the leadership and effectiveness of nonprofits. The survey reveals that most Americans have a positive view of nonprofits but that a majority will give less to nonprofits next year. The survey provides interesting information about technology (nonprofits need to increase use of social media), the ways people judge nonprofits (stewardship of funds, trustworthyness, and the provision of valuable services are the most important factors), and which nonprofits are perceived as being the most effective (the top 3 are the American Diabetes Association, the Special Olympics and the Red Cross). To see the survey, go here.