Balancing the Mission Checkbook

How can you appeal to donors at a time when costs and demands for services are increasing? How about a letter or email detailing your line by line budget increases? Probably not – because what it costs to provide services isn’t compelling. It’s what results from the services that makes the case. By results, though, I don’t just mean a nice story or picture. I mean results. I’ve been reading and hearing more and more frequently about measuring, quantifying, and communicating the results of nonprofit programs, but somehow we (as a nonprofit community) still seem to be coming up short in public perception.

Once again, a study reports that public confidence in charities is declining. Less than 20% of respondents expressed the highest level of confidence in charities’ practices in using financial resources or in managing programs and services. This annual survey, conducted by Professor Paul Light from NYU’s Wagner School of Public Service, was recently summarized in The Chronicle of Philanthropy. Professor Light was the speaker at Charities Review Council’s Annual Forum in Saint Paul last week. After summarizing the survey results and trends, he focused on two key factors related to confidence. The essential question about confidence, he said, is whether or not the public (and your donors) believe that charities spend their money wisely. Not about what line items are in your budget, or how much is spent on program vs. management – the concern is whether money is spent wisely to accomplish something of value. The second, parallel question is how a nonprofit conveys and demonstrates their value. What benefits occur because of your program? Harlem Children’s Zone’s annual report, for example, is full of data about results, progress, and success. The data demonstrates that money is spent wisely because the results are so real. Professor Light repeated his mantra several times - measure something!

A headline last week in Philanthropy Today read “Mass. Charities Urged to Merge and Pool Resources”. The story comments on a report just released by The Boston Foundation on the financial status and condition of nonprofits in the state. The online story offers a few nuggets from the report and summarizes that “Its findings follow what officials at the foundation have been saying less formally in the past several years: that some of the state’s nonprofit groups should merge or pool resources to reduce overhead and offset cuts in state money and waning private donations.” This summary of the report’s recommendations is accurate, but it’s incomplete. The report itself, Passion & Purpose: Raising the Fiscal Fitness Bar for Massachusetts Nonprofits, offers so much more in information, analysis, and recommendations that are important for nonprofits everywhere.

In their analysis, the authors group nonprofits in three organizational/financial categories: small Grassroots Organizations, mid-sized Safety Net Organizations, and large Economic Engines. While it is a budgetary distinction, the authors dig into the financial profiles of these three groups and point out some systemic issues. They raise alarms, for example, about the vulnerable financial condition of the essential Safety Net Organizations caused by reliance on public funding that does not cover the cost of delivering services or building infrastructure and reserves. The report also acknowledges that the growth in the number of young Grassroots organizations can be seen as evidence that there are too many nonprofits, but that this group is often the source of new ideas and direct responsiveness to niche community needs.

The report concludes with three recommendations billed as “A Call to Action” on page 15 of the Executive Summary. The first recommendation, which earned the headline, is for Restructuring and Consolidation including mergers and/or alliances to efficiently provide some administrative and operational foundations. A great Minnesota example of this is MACC CommonWealth. The other recommendations that weren’t headlined are also important. The second is Repositioning nonprofits as an influential group in the state and region through collective action, policy work, and organizing for common goals such as cost savings, efficient regulations, and access to capital. In my view, the third Call to Action is most important – Reinvention and Reinvestment. This broad recommendation encompasses three themes: appropriate program funding structures that cover the cost of services, adequate funding for organizational capacity and stability, and healthy financial management practices. These structural questions are urgent. Nonprofits can’t merge their way out of recurring deficits if the formulas and expectations continue to demand more services for less money. The three recommendations have the most impact as a set – not an either/or choice. The challenges to stable services in the community and healthy nonprofits spring from various practices, systems, and perceptions and require multiple approaches. I hope you read this report and join the call to action.

When economic times get stressed, as they are now, nonprofit organizations are often urged to consider mergers or other collaborative structures as a strategy to navigate reductions and shifts in funding. The topic came up again at a meeting last week titled “The State We’re In: Fulfilling Human Service Needs in a Time of Economic Uncertainty.” Scott Russell at MinnPost.com wrote a good summary of the tone and comments of the meeting, Nonprofits hear a gloomy forecast about future funding. With financial pressures from all sides, coupled with increased demand for services stemming from employment and housing problems, many nonprofits will be hard pressed to keep up the juggling.

No one would say that mergers are the right answer for every nonprofit, but if you do think that joining forces would make sense and help your organization maintain stable services, where do you find your mate? All of the articles and books I’ve read discuss the importance of finding the right fit with leadership that can work together, board buy-in, and mission alignment. But where do you find them? What happens when the board chair or director of a small nonprofit calls the CEO of a large, established agency to inquire about a potential merger? Do they invite you over for coffee? Do they even return the call?

I think I’ve found the answer – speed dating for nonprofits! Speed dating is an organized event to help singles meet a number of people in one evening with the intent of finding one or two for an actual date. Speed dating for nonprofits would follow the formula. Nonprofit leaders, from large, medium, and small organizations, would be scheduled for a series of 5 to 8 minute conversations about mission, programs, and goals. A bell would indicate time to move on to the next “date.” No commitments or promises are made. At the end of the event everyone indicates on the list which of the nonprofits they would like to talk with further. It’s efficient and direct.

On the other hand, if you’d rather proceed with more control and confidentiality, there are a number of resources available. A short study published in 2004 by a collaborative of Milwaukee funders, Nonprofit Collaborations and Mergers: Finding the Right Fit, lists these key characteristics of successful partnerships: committed leadership, unambiguous goals, clearly defined roles, commitment at multiple levels of the organization, dedicated staff time, and sustainability in the midst of change. Fieldstone Alliance has two workbooks by David La Piana on nonprofit mergers. For hands on assistance, Project ReDesign is a new service from MAP for Nonprofits to assist with any part of considering, planning, and carrying out a merger.

Right now, about 25% of the nonprofits that we are working with pretty closely are in the midst of a capital campaign, are just finishing their campaign, or have plans to launch one in the next year or so. The meaning of “capital” campaign is evolving, and about one-third of these campaigns include a substantial amount of flexible working capital and infrastructure investment in addition to traditional bricks and mortar. (This is an important trend that I’ve written about before.) Looking at the campaigns and organizations as a whole, it’s clear that the campaigns that are going well were thoughtfully planned out, based on feasibility studies, and focused on donors with whom the nonprofit already had a relationship. The campaigns that have floundered or dragged on were based on some broad assumptions about who “should” support them, plugged numbers to fill out the budget, and the planning happened along the way. These observations lead right to the basics of capital campaigns – lots of planning, being realistic, committing the time and people, and monitoring everything as you progress.

Capital campaigns also demand consideration of external factors, including the competitive impact of other capital campaigns and of economic trends. We in Minnesota can thank the Minnesota Council on Foundations for conducting a survey last month on Capital and Endowment Campaigns in Minnesota, 2007-2008. The survey reports on 62 current and 72 planned campaigns for buildings, endowments, and infrastructure investments. The largest campaigns are for colleges and universities, with human services and health care a distant second and third. Interestingly, the higher ed, health care, and arts organizations expect most of their funds to come from individuals donors, while human service nonprofits expect about half to come from grants. This week’s Chronicle of Philanthropy reports in “Feeling the Squeeze” that some large capital campaigns are running into some resistance from large donors concerned about the economy. The examples in the article, which is only available in its online format to subscribers, indicated that gifts were delayed or stretched out, but that the campaigns continued to be successful in a different environment.

If you are beginning to plan a new fundraising push – whether you call it capital campaign or not – you need to understand the trends, the local landscape, and how many other “asks” will be in the mail.

The State of Vermont recently adopted legislation creating a new type of entity, a Low-profit Limited Liability Corporation. The L3C, as it is called, is sort of a hybrid of for-profit and nonprofit created as a way to attract both private and philanthropic capital to build businesses with a social benefit. The leading advocate for this new structure has been Americans for Community Development and the Mannweiler Foundation.

The idea behind this hybrid, from an excellent overview of the L3C written by Americans for Community Development, is to “access the vast pools of market driven wealth to make socially responsible investments in so called nonprofit areas.”

From what I understand, the L3C is formed as a Limited Liability Corporation, a well established and flexible business form. The members, or shareholders, of an LLC are entitled to receive a profit or return on their investment. The nonprofit-like aspect comes in the “low-profit” name. The Vermont legislation requires that the L3C must also meet these requirements:

• “Significantly furthers the accomplishment of one or more charitable or educational purposes”
• “No significant purpose of the company is the production of income or the appreciation of property”
• “No purpose of the company is to accomplish one or more political or legislative purposes”
• The name of the company “shall contain the abbreviation L3C or l3c”

This language was carefully developed to qualify these new entities to receive investments from foundations through Program Related Investments. I’ve written before about PRIs as an interesting and unique source of capital funds for nonprofits.

“The key insight of the L3C is that it is not a two-part world but a three part world and that many worthy causes are capable of being self sufficient; they simply do not offer enough of a return in order to attract for profit investors - particularly at their inception,” (Americans for Community Development). So the idea is to create businesses that can attract some private capital, bolster that with more patient philanthropic or socially motivated investment, and result in value to the community (jobs, housing, local revitalization) and a below-market return to investors. This structure is not a fit for every nonprofit, or even for every social enterprise. The L3C is all about raising capital, and when the need for capital is significant, this is worth considering. While the legal form currently exists only in Vermont, several other states are considering adopting the enabling legislation. Meanwhile, an L3C formed in Vermont can operate in any state.

For more information about the forces that are driving the demand for an alternative structure, and some arguments that a new form are unnecessary, The Aspen Institute published a report last year by Thomas Billitteri, Mixing Mission and Business: Does Social Enterprise Need a New Legal Approach?

Many nonprofits think about the Internal Revenue Service only once a year - when they are filing their 990 return. Since the IRS is the regulator and enforcer of exempt status and activities, you might want to pay closer and more frequent attention. Of increasing importance are questions about the role and scope of the IRS’s watchdog and oversight activity. The IRS website has a section devoted to Exempt Organizations that contains some valuable resources. The article on Governance and Related Topics opens, “The Internal Revenue Service believes that a well-governed charity is more likely to obey the tax laws, safeguard charitable assets, and serve charitable interests than one with poor or lax governance.” Who could disagree? But where does the IRS fit in assessing the quality and effectiveness of your governance practices?

In speeches delivered at a conference on April 23rd and 24th, Commissioner Steven Miller makes clear that the IRS believes that there is no question about whether they have a role, but rather what that role is. In his April 23rd speech as part of a panel on nonprofit governance he addresses the questions by saying, “despite the absence of explicit federal statutory provisions setting forth clear governance standards, what I am calling jurisdictional gaps, we are not interlopers trying to regulate an area that is beyond our sphere.” In other words – the IRS intends to exercise its muscles, real and perceived, in the movement to push nonprofits to more specific standards in governance practices. If you doubt that they can, read the 20 questions contained in the Governance, Management, and Disclosure section in the new Form 990.

The new IRS 990 form is effective in 2009, with a two year transition period for some nonprofits. Most nonprofits I’ve talked with have only a general awareness of it out there in the future. It’s time to pay close attention now. It’s a significant change to the current 990, with several new schedules that may require different record keeping for 2008 activities. The IRS recently released the draft instructions that offer the most detailed view. (Read through Part VI of the new form: Governance, Management, and Disclosure.) You’ll also be seeing more e-newsletters from accounting firms and nonprofit associations with updates and training events.

Regarding the question of whether the IRS should have an enforcement/watchdog role in governance, I think we should take a step back. Let’s consider why the service, and Congress, think that they need to. When there are bad actors and the public feels victimized, regulations often follow.