Tuesday, May 27, 2008

Stirred, not shaken

James Bond was known for preferring his martinis "shaken, not stirred." Stephanie Strom's article in Monday's Times on states' pursuits of taxes on presumed tax-exempt organizations raises some important questions about when things blur, rather than blend (or get shaken rather than stirred).

1. Here is the NYT article, "Tax Exemptions of Charities Raise New Challenges." It looks into a few cases of nonprofit organizations where the fee structure raised eyebrows at state regulators offices. Here are the three key issues, according to the piece:

"One issue is the growing confusion over what constitutes a charity at a time when nonprofit groups look more like businesses, charging fees and selling products and services to raise money, and state and local governments are under financial pressure because of lower tax revenues.

And there are others: Does a nonprofit hospital give enough charity care to earn a tax exemption? Is a wealthy university providing enough financial aid?"

The last two issues have been the objects of considerable scrutiny lately - as well as an op-ed in Sunday's edition of the Times. The broad questions raised by the piece are at the very crux of my professional interests - what is public, what is private, and who decides?

2. The second force mentioned in the article, the budget pressures on state and local governments, is a time-honored source of pressure on nonprofit regulators and tax systems. I've written frequently about the relationships between public budget pressures and the regulatory infrastructure for non profits and foundations.

3. The issues raised in the article are critical. Viewed more broadly than the few instances examined in the Times, the questions are:
  • What is a public good?
  • Are public goods and those who provide them deserving of special exemption and recognition? When?
  • Who should provide these goods?
  • How should these providers be structured?
  • How do we support and provide the right incentives for a sustainable mix of "public good" providers?
These issues are not unique to our times - debates and decisions about these very questions are why we have the tax structures and regulatory systems we have. However, they must be understood in today's context which includes the rise in corporate social responsibility, social entrepreneurship, social ventures, and new governance structures for hybrid organizations - B Corporations and L3Cs, in particular.

Why does this context matter? Unrealistic expectations of sustainable revenue sources for nonprofits, or discussions of funders' exit strategies undervalue and push further to the margins organizations that serve essential purposes that will not be paid for by market mechanisms. At the same time, espying a devil in all earned revenue sources leaves critical service providers vulnerable to forces that are not only beyond their control, but that work at fundamentally cross purposes (witness the relationships between falling support for food banks at the same time that the need for their services increases).

As I am involved with the social enterprise movement, philanthropy, and social venture businesses I've come to see these actors as sharing a wide array of interrelated beliefs, which I summarize as 1) communities need a diversity of public goods providers, 2) businesses have many public responsibilities, 3) market forces can be harnessed for public good - though this requires deliberate structure and attention and should not be assumed, 4) public good providers need sustainable sources of funding, 5) governments alone can not be the sole providers of public goods.

There are other premises, and more eloquent articulations of them. However, I don't believe I've ever heard anyone participating in these discussions make a (serious) claim that we don't need independent civil society institutions, nor that social ventures can or will or should provide all public goods. When the discussions devolve into an "either/or" approach, I tend to tune out. Civil society organizations, "pure" nonprofits, hybrid organizations, and socially responsible businesses are here to stay. What the Times article makes clear is that we need public discussions and enforcement actions that consider what mix of actors can best serve broad public goals, knowledge of who does what well, what is known and what is experimental, and the kind of regulatory structure that promotes the best service and protects the most vulnerable.

Disclosure: My company, Blueprint Research & Design, Inc. is a founding B Corporation. We are members of Social Venture Network.


Anonymous said...

Thanks for another great and thought-provoking posting re: Sunday’s Times article re: tax-exempt status of non-profits. As I read the Times article, I thought about what the MN ruling meant for foundations/funders. It seems that we (funders, nay “investors”) push non-profits to be more business-minded. We ask that they have a business plan, develop a revenue stream, think about sustainability. But, it seems that when non-profits employ for-profit “best-practices,” “lessons learned,” and lexicon, the government’s suspicions are aroused. So, if you talk like a business, look like a business, smell like a business, you must be a business! And therefore, why be exempt from paying taxes? Are we doing a disservice to non-profits by demanding them to be more business-minded? Perhaps we should use non-business-y language to ask the same thing? (i.e. Instead of asking an org to “assess the marketplace,” should we ask for the “strengths, weaknesses, opportunities, and threats” of the org?)

Lucy Bernholz said...

The comment above from anonymous also came to me directly in email. The author, who doesn't want to be identified because the opinions expressed may not be shared by the person's employing foundation, is a "NextGen" program officer at a NY based foundation. My response to the questions posed:

"These are EXACTLY the questions I have about the effect of business practice and jargon on nonprofits.

Where do we want the lines to be? What are the potential unintended consequences of pushing for sustainability and earned revenue?"

How can we bring these discussions about nonprofit exemptions, social entrepreneurship, business practice, sustainability, civil society together into place? We don't need more "either/or" debates, but a collective reframing of delivery systems for public goods and the roles and constructs of civil society.

Anonymous said...

This is fascinating, Lucy. Thanks for sharing. I had not thought much about these "unintended" consequences of the shift toward business thinking and increasing earned revenue and sustainability.

The language used in the MN ruling stating that charities must "give away" something seems incomplete and fails to incorporate the concept of providing a public good. This is a crucial debate with serious implications on all nonprofits (and their competitors).

Anonymous said...

This is fascinating. Thanks for sharing, Lucy. I had not thought about these potential unintended consequences of the increased focus on earned revenue and sustainability.

The language of the MN ruling that states charities must "give away" something seems incomplete. It doesn't fully capture the concept of providing a public good. This is a crucial discussion that will have serious implications down the road for nonprofits (and their competitors and clients).