Charity Case

How taxpayers subsidize failing philanthropies.

In 2006 the oil tycoon T. Boone Pickens gave $165 million to his alma mater, Oklahoma State University, to build a new football stadium, marking one of the largest charitable gifts on record to an American university and the most gargantuan to an athletics program. Pickens directed that the money be spent on a new west end for the Boone Pickens Stadium, for fields and practice facilities, and for a residential village and dining buffets for OSU athletes.

Mar13-Stern-Books
With Charity for All: Why
Charities Are Failing
and a Better Way to Give

by Ken Stern
Doubleday, 272 pp.

Less than an hour after Pickens’s donation landed in the bank account of Cowboy Golf, one of the athletic department’s fund-raising arms, the money was rerouted to BP Capital Management, Pickens’s hedge fund, where it was soon matched by an additional $37 million in unrelated donations that the university had agreed to invest as a condition of Pickens’s largess. With the funds now illiquid, OSU took on debt to construct the stadium—a strategy, notes author Ken Stern in With Charity for All, that is not unusual for a nonprofit organization, which can “leverage” its tax-exempt status to borrow at lower rates and invest existing assets in matching but higher-yield, taxable securities. The resulting arbitrage, in theory, produces a lower-risk cash flow for the organization, particularly when the matching funds are allocated in a relatively conservative way. OSU’s investment with Pickens, in an oil and gas fund betting on changes in commodity prices, initially spiked in value to $300 million. Then, in the 2008 crash, BP Capital Management lost more than $1 billion—and with it most of the OSU donations, Pickens’s and otherwise.

Stern’s account is not an indictment of college athletics nor of university resource management, though the Pickens affair begs important questions about both—particularly in the wake of this recent recession, which has nearly eviscerated state and private financing for education programs in many institutions of higher learning across the country. Nor does Stern single out Pickens, a man who, as he says, “never did things in a small way,” whether as a ruthless corporate raider, the sponsor of the Swift Boat attack ads that helped derail John Kerry’s presidential bid, or the godfather of OSU sports. After all, Stern concedes, “it was Pickens’s money and he had the right to dispense with it as he pleased,” as did the philanthropists John D. Rockefeller and Andrew Carnegie a century before, who distributed their ruthlessly acquired wealth in the form of libraries, museums, and major research centers. The difference today is that the charitable sector is shaped and supported by a wealth of public subsidies: substantial tax breaks in the form of deductions for donors, and waivers on income and property taxes (among others) for charities themselves, which render acts of private giving anything but. “In the end,” Stern reminds us, “the public does pick up the tab for a significant portion of such gifts, and it is entitled to question whether they are a wise use of public resources.” His insistence on this fundamental question about the purpose of American charity is the great and original strength of this book.

Stern is an engaging storyteller, and his catalog of venality and graft in the charitable sector borders on farce—and would be, were the theft not approximately $40 billion each year that donors and taxpayers had intended for public purpose. We hear about the double lives of priests who minister to the poor by day and spend millions on trips to Las Vegas and escort services in their off hours. Politicians who lard local social service organizations with government funds to employ their family and friends, who, in turn, get out the vote on election day. Executive directors of charities of all sizes who regularly raid the till for personal perks, and scam artists who prey on public sympathy with words like “hurricane relief,” “veterans,” and “cancer” to raise money for nonexistent organizations and services. The remarkably low barriers to entry for new non-profits (inexpensive filing fees, almost certain approval of charitable status), along with minimal government oversight and virtually nonexistent “market” mechanisms to shutter fraudulent or incompetent organizations, has led to unchecked growth in the number of nonprofits in the United States—two million up from 12,000 in 1940.

Part of the problem, Stern contends, is the lack of definitional clarity about just what constitutes a publicly subsidized charity. While we cling to historical, legal, and cultural expectations that nonprofits must be engaged in “purposes beneficial to the community” that serve some kind of “public function,” we regularly encounter organizations that may not fit the bill. For example, Stern cites a roller derby league in Bend, Oregon, the All Colorado Beer Festival, and the Grand Canyon Sisters of Perpetual Indulgence, a drag queen sorority, and surely we can all name tax-exempt nonprofit organizations of questionable “public function” within our own communities. Stern’s critique is hardly one born of cultural elitism, as he questions whether the Metropolitan Opera, priced well beyond the reach of most New York City residents, serves a community benefit sufficient to warrant forgone tax revenues.

Even more complicated are highly profitable charities. Here, too, some seem to fall squarely outside of the “public function” domain, such as the various football bowls that earn hundreds of millions of dollars each year and pay executives in salaries and golf club memberships on par with their corporate peers. Other cases are thornier: what happens, Stern asks, when nonprofit hospitals become “virtually indistinguishable from for-profit institutions” in terms of lavish facilities and compensation, high-end procedures, aggressive bill collection, and, in some cases, very little true charitable service? Should these institutions and their donors still receive significant public subsidy?

Stern argues that, more than malfeasance or subsidized profits that do not return commensurate social benefit, the greatest affliction of the charitable sector is “the absence of market mechanisms that reward good work and punish failure.” This theory of inefficient social capital markets isn’t new; it has been brewing, particularly in the “new” or venture philanthropy corners of the nonprofit world, for more than a decade. The most business-jargoned dialect of the theory tends to be spoken by philanthropists or executives who come to the charitable sector from the commercial realm. Pierre Omidyar, eBay founder turned über philanthropist, has described his journey thus: “Every business person who first engages in the nonprofit sector goes through a lot of growing pains, disappointments. It is a very different kind of sector, a different cultural environment.” Stern, by his own account, seems to have experienced something similar in becoming COO, and then CEO, of National Public Radio, evident by his faith in “market discipline, a new culture of effectiveness, and efficient, results-oriented service.” Although there are many strands of inefficient social capital market theory, at its heart it is about measurement and evaluation (M&E) and demonstrating “social impact”—what works and what doesn’t—in the delivery of social services. Or, as Bill Gates announced on the cover of the Wall Street Journal in January: “My Plan to Fix the World’s Biggest Problems: Measure Them!”

Stern, like Gates and others, describes some of the skewed incentives in the nonprofit sector that discourage rigorous M&E: donors often give out of personal, emotional, or “warm glow” motivations; they do not rely on performance metrics and in fact often chastise grantees that spend too much on “overhead,” the kind of organizational infrastructure necessary to measure (and often achieve) results.

Despite his pessimism, Stern points to bright spots in the charitable sector. The common characteristic of the organizations he extols—New Profit, Inc., a venture philanthropy “rooted in the idea that business innovation could propel the charitable sector forward,” Youth Village, an organization that works with emotionally and behaviorally challenged children and their families, and the Nurse Family Partnership, focused on home visitation for maternal and early child health services—is a devotion to rigorous M&E and proof of social impact. This is not the same, it is worth noting, as a business model or orientation. In fact, the randomized control trial approach to evaluation, a kind of gold standard of evidence for many in the field of social services, and one that Youth Village and the NFP remarkably achieve, draws not from the for-profit sector, but from the fields of science and medicine.

This may seem semantic, but it is an important distinction in parts of the nonprofit world, where, despite Stern’s remonstrations to the contrary, a “business knows best” bias has come to prevail. Jim Collins, author of Good to Great and well known for his insights into high-performing companies, asserts, “We must reject the idea—well-intentioned but dead wrong—that the primary path to greatness in the social sectors is to become more like a business.” Collins instead argues that the “culture of discipline” required for high-performing organizations across sectors “is not a principle of business; it is a principle of greatness.” Or, as Phil Buchanan, the president of the Center for Effective Philanthropy, recently wrote in the Harvard Business Review, “No type of organization—government, business, or nonprofit—has a monopoly on effectiveness. And nonprofits are typically tackling the most complex problems of all. If those problems could have easily been solved by government or business, they wouldn’t exist at all.”

Stern laments that organizations like New Profit, Youth Village, and the NFP are too few and far between. “For all its prominence,” he writes, “the social entrepreneurship movement” that these organizations represent “has hardly put a dent in the American charitable world.” I would posit otherwise. Omidyar distinguishes between “charity” (relief for immediate suffering) and “philanthropy” (from the Latin “love of humanity,” aimed at solving the root cause of problems). Arguably, the philanthropy industry has been profoundly influenced by the social entrepreneurship movement; nearly all professionally run foundations report to be engaged in some kind of formal evaluation of the impact of their grants. The fact that foundation funding only represents approximately 15 percent of total giving, in dollar terms (roughly 75 percent of giving is from individuals) understates the outsized role of philanthropists like Gates and Omidyar, organizations like New Profit, and thoughtful books like With Charity for All, in shaping practices in the field. Perhaps the most interesting and underreported manifestation of the social entrepreneurship movement’s sway is in the public sector, where, as Stern describes, there is a new penchant for evidence-based grant making and use of tools like innovation funds that allow government agencies to work with intermediaries like New Profit to channel public dollars to high-performing nonprofits. These kinds of partnerships indeed offer a better way to give, and a better use of all resources, public and private, to advance the common good.


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Georgia Levenson Keohane

Georgia Levenson Keohane is a fellow at the Roosevelt Institute and most recently the author of Social Entrepreneurship for the 21st Century: Innovation Across the Nonprofit, Private and Public Sectors.