Economics of the Nonprofit Sector - Introduction - PowerPoint PPT Presentation

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Title: Economics of the Nonprofit Sector - Introduction

Economics of the Nonprofit Sector - Introduction
  • Syllabus
  • Class format
  • Key topics
  • Funding mechanisms employed by nonprofits/charitab
    le organizations
  • The relationship that exists between the
    government sector and the Nonprofit Sector
  • Details of the organizational characteristics of
    effective and ineffective charitable
  • New forms of philanthropic organizations
  • The implications of agency problems and possible
  • Comprehensive analysis of how charitable
    organizations are assessed

Funding of Nonprofits
  • Four major sources of funds and funding
  • Individual
  • Corporate
  • Foundations
  • Bequests
  • Altruism(?)
  • Donor control do donors get what they want?

What Motivates Giving
  • Individuals
  • Altruism
  • Social Stature
  • Warm-glow
  • Businesses
  • Altruism of Managers
  • Profit Motive
  • Foundations
  • Altruism
  • Social Goals

  • Should donations be tax-deductible?

Looking Towards Meeting 2
  • Familiarize yourself with Blackbaud Index, the
    Chronicle of Philanthropy, Giving in Numbers
  • These are major sources of data on charitable
    giving and philanthropy
  • Read Ott Dicke, Chapters 10, 13 and 22.
  • Read Van Slyke and Brooks piece and McClelland
    and Brooks
  • Student Presenters

Meeting 2
  • Ott Dicke Chapter 10, The Fundraising Process
  • Planning for fundraising
  • SWOT analysis
  • Strengths, Weaknesses, Opportunities, Threats
  • Analysis of a well-known local charity
  • Based on SWOT outcome, setting of goals
  • Operating, endowment, capital (facilities)
  • Establishing an Action Plan
  • Including cultivation and solicitations
  • Cultivation of long-term donors

Evaluation of Fundraising
  • Steps
  • Achievement of goals within certain constraints
  • Achieved within a reasonable time
  • Frugality were goals achieved without spending
    large proportion of raised funds to conduct
  • Dont want to end up on this list

Worst Charities
Rank Charity name Total raised by solicitors Paid to solicitors spent on direct cash aid
1 Kids Wish Network 137.9 million 115.9 million 2.5
2 Cancer Fund of America 86.8 million 75.4 million 1.0
3 Children's Wish Foundation International 92.7 million 61.2 million 10.6
4 Firefighters Charitable Foundation 62.8 million 53.8 million 7.4
5 International Union of Police Associations, AFL-CIO 66.6 million 50.4 million 0.5
6 Breast Cancer Relief Foundation 63.9 million 44.8 million 2.2
7 American Association of State Troopers 48.1 million 38.6 million 8.9
8 National Veterans Service Fund 70.2 million 36.9 million 7.8
9 Children's Cancer Fund of America 43.7 million 34.4 million 4.6
10 Children's Cancer Recovery Foundation 38.5 million 28.9 million 0.7
  • Ott Dicke, Chapter 13 Foundations (Boris)
  • Types of Foundations
  • Private foundations
  • A private foundation is a legal entity set up by
    an individual, a family or a group of
    individuals, for a purpose such as philanthropy
    or an object legal in the economic operation. The
    Bill Melinda Gates Foundation is the largest
    private foundation in the U.S. with over 38
    billion in assets.1 However, most private
    foundations are much smaller. Approximately
    two-thirds of the more than 84,000 foundations
    which file with the IRS, in 2008, have less than
    1 million in assets, and 93 have less than 10
    million in assets.1 In aggregate, private
    foundations in the U.S. control over 628 billion
    in assets1 and made more than 44 billion in
    charitable contributions in 2007
  • -Tax Laws more stringent Deduction limited to
    30 of income

Public foundations A public foundation is also
called a grantmaking public charity. They raise
money from the public (individuals, corporations,
and other foundations) to provide grants. The IRS
does not consider these as private foundations
since their base of support is typically broad.
Community foundations are recognized as public.
Tax Laws less stringent Donations up to 50 of
Government Foundations
  • Funded through tax dollars
  • Fund through grant-making process

Foundation Governance
  • Corporate Governance
  • Donor
  • Small Foundations managed by family and small
    set of donors
  • Administrator
  • Board makes decisions on funds Administered by
    small professional staff
  • Director
  • Executive Director manages funding process
  • Presidential Model
  • Managed primarily by Nonprofits CEO
  • ? Impact on the administrative costs of nonprofit?

Ott Dicke (Drapkin and Hayden), Chapter 22
  • Managing Volunteers
  • Nonprofit sector typically highly dependent on
  • Lowers cost of operation makes nonprofit
    expenditures a lower proportion of donations
  • Authors note the complexity of the volunteering
  • ex. Coerced versus free-will
  • Politically motivated volunteerism
  • Volunteers are not free, as supervision
    consumes staff time
  • Ott Dickey note that increased lifespan
    produces a larger pool of potential volunteers
  • Government programs such as AmeriCorps are
    providing more outlets for volunteering

What Does philanthropy mean?
  • https//

  • 3 of 5 assigned readings are primary data sources
    for information on nonprofits and charitable
  • (Reading 2) Blackbaud Index (charitable giving
  • Provides statistics on charitable giving by
    source, purpose and by method by which it was
  • Major findings are the rapidly rising importance
    of online giving, along with a trend towards
    giving towards international affairs causes
  • Blackbaud targeted more towards nonprofits
    managers, less towards researchers

Reading 3
  • Chronicle of Philanthropy
  • Comprehensive data on giving, including corporate
    giving (key corporate donors)
  • Includes the Philanthropy 400 interactive
    database of organizations
  • Filtered by cause, location
  • information on Americas top donors
  • Considered the premier source of data

Reading 4
  • Conference Board, Giving in Numbers
  • Best source of data on corporate giving
  • Gives numbers by industry cross-referenced with
  • E.g. what firms in the petroleum industry give to
    artistic causes
  • Figures help illuminate corporate goals
  • Firms with P.R. problems (tobacco firms) might
    give to causes that are highly visible and
    enlightened (the arts)
  • Firms that need highly trained labor might give
    to educational causes
  • Further Reading LeClair, M. and Gordon, K.
    (2000), Corporate Support for Artistic and
    Cultural Activities What Determines the
    Composition of Corporate Giving? Journal of
    Cultural Economics, 24(3), 2000.

Article presentation
  • Van Slyke and Brooks
  • Why do People Give?
  • Point of article is to understand what motivates
    giving, and how nonprofit managers can use that
  • Authors note that philanthropy is no longer a
    private concern part of civil society
  • Competition among nonprofits for donors dollars
    is increasing
  • And, through the tax code, the public IS paying
    for part of each nonprofits budget
  • Article focuses on which strategies work for
    which donors
  • Page 201 notes that the increasing availability
    of data means that nonprofit managers have much
    more information to utilize in setting strategies
    (e.g. Giving USA)
  • Page 202 Factors that correlate with giving
  • Age, gender, religiosity, income, wealth
    (difference?), taxes and volunteerism

  • Tax Implications note that if you do not
    itemize, the tax deduction is of no value
  • Up to 50 of AGI anything near this will get
    you audited!
  • Authors then apply empirical test to determine
    what variables best determine giving (Page 308)
  • gtgtgtbrief explanation of regression
  • Results on page 309 indicate that the following
    are significant
  • Income, age, Christian (5), college-educated,
    married, nonwhite (5), civically active,
  • Rest are at 1 level
  • These can become the basis for targeted
  • Authors note that in some cases, the results may
    simply indicate that potential donors had never
    been approached.

Looking towards next meeting
  • Class Discussion on Effective Charitable
  • Visit Charity Navigator and Charity Watch
  • Pick one charity that is highly ranked and
    another that is poorly ranked
  • Find out why!
  • Literature assignments
  • Bradshaw, P., Hayday, B. and Armstrong, R.
    (2007), Nonprofit Governance Models Problems
    and Prospects,  Christopher Bernard
  • Bekkers, R. and Wiepking, P. (2011). A
    Literature Review of Empirical Studies of
    Philanthropy Eight Mechanisms that Drive
    Charitable Giving, Chris Cahill
  • How to Determine if a Charity is Effective,
    online at http//
    0001424127887323977304579000433238565634, Jack

Effective and ineffective nonprofits Meeting 3
  • Fundraising methods and effectiveness
  • Fundraising costs as a percentage of donations
    (or budget)
  • Effectiveness of programs
  • Who benefits in short- and long-run
  • Management accountability and reporting
  • Dedication to charter do nonprofits follow the
    intentions of their donors (financers)?

Case Studies The Best Charities (source CS
1 YMCA of the USA Social services 5986.1 823.4 87.4 441,438 A MEETS STANDARDS ????
2 Goodwill Industries International Social services 4,437.0 778.0 89.0 508,571 A MEETS STANDARDS NO RATING
3 Catholic Charities USA Social services 4,422.8 679.2 79.6 265,356 NO RATING MEETS STANDARDS ????
4 United Way Social services 4,139.9 3,903.2 90.6 763,394 NO RATING NO RATING ????
5 American Red Cross Social services 3,453.0 945.9 92.2 568,594 A MEETS STANDARDS ???
6 The Salvation Army Social services 3,203.8 1,697.6 84.0 216,182 A / A MEETS STANDARDS NO RATING
Examination of American Red Cross
  • Website includes state goals and pricinples
  • Governance Documents
  • Committees
  • Audit and Risk Management Committee
  • Quality and Regulatory Compliance Subcommittee
  • Board of Trustees of the Endowment Fund
  • Compensation and Management Development Committee
  • Executive Committee
  • Governance and Board Development Committee

  • Posted Ethical Rules by which the organization is
  • Strict guidelines and oversight have protected
    the organization from scandal
  • 92.2 of raised funds go to programs
  • Volunteers used extensively to keep costs down
  • Auditing process includes external oversight

The Bad Angel Food Ministries
  • Georgia-based nonprofit that used donations to
    buy food at wholesale and sell it to the needy at
    bargain prices
  • Operated out of numerous churches
  • At pinnacle, Angel Food was providing discounted
    food to 500,000 families
  • Problem Cash-based business with poor
  • Also Run entirely by close circle of family
    members with no external auditing process
  • Cash was siphoned off to purchase cars, real
    estate and even a private jet.
  • Raided by FBI in 2011 had received substantial
    federal funding (7 million), so federal
    government got involved.

  • Ultimately led to jail time for those involved
  • Most unfortunate part was loss of service to ½
    million beneficiaries
  • Other very bad nonprofits
  • Foundation for New Philanthropy (Ponzi scheme)
  • United States Navy Veterans Association
    Collected 100 million dollars over 10 years no
    charitable activity of any kind

Readings for the week
  • Ott Dickey (Eadie) Chapter 2 Governance
  • Boards may be high impact or at arms length
  • Meddlesome or arms length
  • Authors note (page 20) that boards of small
    organizations may find it difficult to separate
    themselves from day-to-day operations of the
    entity, instead of providing oversight.
  • Ideally, boards should provide oversight on
  • Strategic questions
  • Operational questions
  • Accountability questions is the organizational
    accountable to its stakeholders and the broader

Four Streams of governance identified by eadie
  • Board self-management (who serves and what is
    expected of them)
  • Planning stream strategic goals, annual budgets
  • Performance oversight and monitoring stream
  • External stakeholder stream How to communicate
    with donors and the community

high impact board
  • High-stakes issues are addressed fully and in a
    timely fashion
  • Board members (not bored members) are fully
    invested in the success of the enterprise
  • Board members work effectively with CEO of

The old model The passive-reactive board
  • Board stays out of decision-making process
    (allows wide leeway to CEO) until crisis
  • Then reacts to problem rather than providing
  • CEO now views board action as interference
    defensive posture inevitable
  • If CEO and Board are in partnership, this is

The high-impact board
  • Requires
  • Strong mission statement to provide guidance
  • Standing committees so the boards work does not
    take place 4 days out of the year.

Class exercise
  • Samaritans Purse v. Wishing Well Foundation
  • Address four issues in group
  • Overall and categorical rating of each
  • Effectiveness
  • Governance model
  • Malfeasance is nonprofit doing anything
    under-handed? clue answer for one of these is

Ott Dickey, Chapter 3 (American Bar Association)
  • Author provides look at impact of Sarbanes-Oxley
    on nonprofits
  • 10 General principles off corporate governance
  • Role of the Board should provide oversight that
    ensures effective and ethical management
  • Importance of Independent Directors Directors
    should not be subservient to management, as is
    frequently the case when nominated and appointed
    by management
  • Need for an Audit Committee lack of independent
    auditing and cross-checking of finances a major
    source of problems
  • Existence of a nominating committee for the Board
  • Compensation Committee Independent directors
    that examine pay and compensation issues
  • Should have intervened in United Way scandal

  • Complete and accurate disclosure of the
    financials of the nonprofit
  • Appropriate business conduct and ethics codes in
  • Executive compensation should reflect
    responsibilities and backgrounds of executive -
    problems arise when Board members are appointed
    by executives and OK excess compensation
  • Procedures should be in place to receive and
    respond to complaints (ethical, financial)
  • Document retention rules should be in place
    rules should lay out when documents may be

Looking towards Next week
  • Begin look at effective fundraising, including
    new forms of securing donations
  • e.g. Crowd-funding
  • First cover chapters 10-12 as background (OD)
  • Then, each group will design an on-line
    fundraising for a designated charity
  • I will be handing out assignments
  • Work will be presented next week

Meeting 4 Designing an effective fundraising
  • OD, Chapter 10 (Lindahl)
  • The Fundraising Process
  • Chapter emphasizes research on process,
    prospects, etc.
  • Also, fully understanding ones own organization,
    so its goals, etc. can be explained to potential
  • Lindahl, Page 119 goal-setting
  • Facilities, Endowment and Operating
  • Some donors may be much more responsive to one
    type of donation (e.g. some may only give to
    facilities improvement)
  • Steps
  • Cultivation
  • Fairfield example
  • Solicitation

  • Types of solicitations
  • Planned giving
  • Major gift solicitations
  • Role of Stewardship
  • Possible alternative goals of managers
  • Self-interest, social status
  • Good stewardship requires goals of nonprofit are
  • Lindahl (page 124) note that a ex post evaluation
    of how well the fundraising worked is critical

  • OD, Chapter 11 (Pratt) Analyzing the Dynamics
    of Funding
  • Key focus of chapter is on the reliability of
    fund-raising and the degree to which the funding
    binds the hand of the nonprofit
  • Reliability
  • High Individual donors, endowments,
    memberships, rental income, advertising
  • Medium fees for services, continuing government
    contracts, corporate charitable contributions
  • Low Government grants that are project-driven,
    foundation grants, corporate sponsorships

  • Autonomy
  • High small- to medium-sized individual
    contributions, foundations, fees for service,
    endowments, memberships
  • Medium large individual contributions,
    corporate contributions
  • Low project grants, government contracts,
    United Way support
  • Pages 130-31 Eight forms of funding and
    resulting reliability and autonomy
  • Discussion particularly the issue of
    government-funded nonprofits

Giving Circles and crowdfunding
  • What happens when charity becomes a social act?
  • Chapter12 focuses on giving circles
  • Groups that pool resources to leverage donations
  • Eikenberry notes that these groups are
    educational in nature, and that giving becomes
    part a members social life
  • Giving can be more informed and members can find
    new ways to engage with issues they are
    interested in
  • Forms
  • Page 136 Organizational form
  • Most operate on a fee basis (which funds
  • Large donation groups typically have a more
    formalized grant-making procedure
  • Some are formal groups that meet, some are loose

Eikenberry Provide 2 case studies
  • Shared Giving Small (16 members) group that
    focuses on leveraging individual donations
  • Started by couple that realized they were giving
    away a lot of money, but randomly and in small
  • Decided to increase the impact of giving by
    organizing and targeting contributions
  • Womenade 38 giving circles under this name.
    Join for a small fee (35) Money used to
    provide small donations to women (families)
    experiencing financial stress
  • Such as paying an over-due utility bill
  • http//

Benefits of giving circles
  • Charity as a way of life
  • Giving is consistent and targeted
  • More informed!
  • Social aspect encourages participation
  • List of Giving Circles can be found at
  • http//

  • Means by which to draw in many donors at a very
    small price per donor.
  • Cause and monetary goal posted on the web
  • Rely upon social contacts to encourage
  • Top ten sites can be found at
  • http//
  • Example Kickstarter seeks individual
    donations to fund creative work that otherwise
    would not be funded (e.g. cinema)

  • Crowdfunding also used to fund medical treatment
    for those with serious long-term illnesses who
    are in financial stress
  • Avoids costs of approaching donors, but
    visibility is an issue

Literature for Next Time
  • 9. Heutel, Garth (2014). Crowding Out and
    Crowding In of Private Donations and Government
    Grants, Public Finance Review 42, 143-75.
    (Christina Howell)
  • 10. Brokaw, L. (2012, November 28). The
    Benefit Corporation Movement, MIT Sloan
    Management Review. Retrieved from
  • (Julie Labbadia)

Class Exercise
  • Donation effectiveness
  • Design a website that
  • Promotes Cause
  • Will be easily found by those searching
  • Details finances of nonprofit
  • Provides searchable statistics (why?)
  • Stories of assistance
  • Mission statement
  • History
  • Media resources
  • Major Donors (why might you want to omit this?)

Web design session
  • Handout
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