Must Read: For-Profit Arm No Panacea For Non-Profit Funding Woes

by:

Joe Patti

If you have ever thought that starting a for-profit arm for your non-profit to help support the latter’s mission, you must read The Nonprofiteer’s post on the subject. I have been hearing it suggested that non-profits embrace these types of arrangements as grants and donations have become increasingly difficult to secure. A study linked to by The Nonprofiteer requires one to pause in such considerations.

Writes the Nonprofiteer of the study:

“nonprofit agencies which choose to support themselves with for-profit businesses end up serving their clients less and worse. Moreover, when the businesses thrive the profits go back into the business, while when the businesses falter the losses are taken out of the hide of the agencies. “

I took a look at the study, “Social Enterprise: Innovation or Mission Distraction,” in which author Rebecca Tekula analyzes the 990 filings of Human Service organizations in New York County from 2000 to 2005. The number of organizations this encompasses is not cited though Tekula writes that the data “represents 700 organizational years” which averages to 116.67 organizations for each of those six years.

What Tekula says she found is that enterprises that yield non-business related income undermine the value provided through the non-profit program-

“As hypothesized, the internal capital markets of nonprofit firms seem to follow that of for-profit firms in that diversification leads to value loss as proxied by programmatic expenditure. What can be inferred from my findings is that this particular type of external enterprising behavior is associated with less value in the programmatic output of human service nonprofits.”

And, no surprise, ineffective programs can be a drain on the resources that should be directed to the effective ones-

“My findings are in accordance with cross-subsidy theories of diversification in which internal budgeting allocates funds to divisions with few investment opportunities (ailing enterprises of nonprofits) while failing to channel funds to those with ample investment opportunities (effective, efficient programs). While this research is a first step toward identifying the factors associated with earned income behavior in nonprofit organizations, there is much work to be done in this area.”

Tekula is careful not to say this will be true for all sectors of the non-profit world and encourages similar study of the arts, healthcare and education. But does caution, (my emphasis)

“Clearly more thought and research must be invested in this area and caution must be given in popularizing and glorifying the unproven benefits of unrelated or external enterprising activities on the very organizations that have become important service providers for society’s neediest individuals.”

Little More About Politics and Art

by:

Joe Patti

I finally got around to reading an interview I bookmarked where Barry Hessenius conducted with Adam Huttler, Executive Director of Fractured Atlas. There was a lot of interesting things said, but I thought I would focus in on some sections related to some recent posts I made.

At one point Huttler touches on the topic I discussed yesterday. The NEA doesn’t get much funding and what it does get is subject to contentious scrutiny. Huttler points out however there are other areas in which people can advocate which can greatly impact the arts.

“Meanwhile, policymakers – on both a local and national level – have countless other levers for impacting cultural vitality. Zoning laws can determine whether urban cultural enclaves remain dynamic hubs of creativity or gentrify into sterile swaths of Starbucks and bank branches. Immigration rules can facilitate or inhibit international cultural exchange…We need to take a more holistic view in which the arts play a role in projects funded by the Department of Housing and Urban Development, the Department of Transportation, or the Department of Homeland Security.”

Hessenius points out that the NEA is not the only source of funding for the arts and in addition to those departments Huttler mentioned, there is also the National Endowment for the Humanities and the Smithsonian. The conversation moves toward the idea that the arts need to exercise their political clout a lot more if they expect better results. There is a discussion of 501 (c) (4)s and political action committees as a tool and some of the complications relative to those structures.

As conversation in this area continues, Hessnius talks about an option I had mentioned as a possible consequence of people turning their back on NEA funding and perhaps 501 c 3 status–performance to benefit political ends. I actually didn’t know that it was permitted under current status as apparently many don’t.

“Some have argued (me included) that the nonprofit arts sector (by taking advantage of its ability to do performance benefits to fund its political activities) ought to be one of the most powerful special interest groups on the playing field – with real political clout that might not only help us to obtain more funding, but pass diverse legislation on all the levels as you suggest – from tax laws to zoning regulations. Yet we do not.”

Huttler notes that laws governing political lobbying and activity make things a little more involved than that, but still an under utilized option that Fractured Atlas will be exploring.

Where Your Duty As A Non-Profit Lies

by:

Joe Patti

I had to wonder if people were intentionally misreading the post I made about the Arts Council of England requiring applications for funding. My declaration that “Once again, Europe proves their arts policy is superior to that of the U.S.!” was meant to be read a little tongue in cheek lampooning the constant refrain that the arts policy and audiences in Europe are better than in the U.S. And even if that tone didn’t come across, I would have thought that when I wrote sentence or two later that the reality was that the policy is exclusionary and then spend 500 or so words talking about how it will be improved, it would be clear that I wasn’t seriously supporting the old way of doing things.

But I wasn’t really put off by the comments on the entry or by Leonard Jacobs post criticizing this view on The Clyde Fitch Report. In my mind, I was guilty of the age old failing – If you have to explain the joke, you didn’t deliver it correctly. Besides, I figured my blog would get some traffic from the Clyde Fitch Report post.

But then I got to thinking about it. No arts organization ever forms for the purpose of filling out grant applications. Yes, you know when you form your non-profit, it is something of a necessity for doing business. It isn’t a surprise that filling them out does indeed divert energy from the core purpose of the organization. So yes, on second thought, I do think it is pretty much the duty of every non-profit organization to gain funding with the least effort possible so they can get on with their core purpose. It isn’t just me saying this. The biggest measure of non-profit effectiveness is the ratio of how much raised goes toward programs vs how much goes toward overhead and expenses. This is the measure Charity Navigator used to rate my local United Way dead last among local non-profits.

Charity Navigator admits their evaluation doesn’t look at the quality of programs non-profits offer, a fact those at the bottom of the list are quick to cite when they decry the legitimacy of the rankings. But this is a measure that is gaining more and more traction, especially among politicians who are questioning the salaries of those few non-profit executives who actually make enough worth noting.

No surprise politics plays a big part in who gets government funding and who doesn’t. In that context it is get tougher to say that the old policy for funding by the Arts Council of England is really worse than that of the NEA. There are categories of people who were once eligible for funding by the NEA who no longer are due to changes in laws and policies made in reaction to political pressure. We have had mayors of New York City who have unilaterally declared that arts organizations will not receive funding because of program content. Are situations where individuals have the power to rescind funding awarded by a small group of people based on an application any more egalitarian than a situation where a small group of people are empowered to decide who will receive funding based on their own judgments (as well informed as they may be by the vastly superior arts environment which exists in Europe)?

Actually, on the face of it, I would say yes since the criteria being used by the NEA to award grants are clear from the outset, regardless of the pressures exerted to shape those criteria. As I mentioned in my original post, the process and criteria by which the Arts Council decided which organizations to fund and how an organization might even enter the council’s consideration was murky at best. Politics are going to tinge any decision making process where judgments are present. Lets not pretend though that the lengthy application process, be it an electronic or paper submission process, is the best and only way for governments to disburse funds.

When my consortium met last week, one of the aspirations we had for our fledgling merger was right in line with the regional partner initiatives the Arts Council of England hopes to implement. We are looking to become organized enough to propose becoming a partner organization to the state arts foundation and receive annual funding for our activities outside of the normal granting process. To my mind 10-15 performing arts entities coming together to work in partnership is an approach worth funding in an alternative manner. I believe it would be counterproductive to require each of us to submit a separate applications because it would perpetuate the idea that we needed to compete as individuals for funding rather than to collaborate.

Let’s be honest, there is a lot of self-interest when non-profits are seeking funding. As Leonard Jacobs notes, many funders have restrictive criteria about what they will fund based on interests, geography and shifting priorities. Our interests in the criteria for government funding is based immediately on whether we and perhaps our close partners qualify. A desire for an egalitarian arts policy that benefits everyone else is more philosophically abstract, based generally on creating an environment in which our potential audience base comes to appreciate the arts. If our perceived rivals gain significantly more largesse, our attitudes can become less charitable.

I am all for any system that encourages a shift toward group interest and responsibility–especially if the group shares in the paperwork rather than just me. But more importantly if you haven’t guessed, I would welcome a shift away from the damn paperwork. Leonard Jacobs says to stop whining about the paperwork and do some work for it. Well, it is the art that is the work you are doing for the grant, not the paperwork. Nobody is interested in funding paperwork. Though reviewing written applications may be efficient in terms of cost, the paperwork is really about the least effective way to measure the worth of a project. It is just a measure of good writing ability, which granted is an art itself and deserving of support. But that is just the genteel way of saying that someone knows how to bullshit well and use all the correct phrases and keywords. Many of the online application forms don’t let you submit them if your costs exceed your income and therefore require that you lie to complete them even if the truth is that you spent $50 more than you made. The whole process is dishonest before anyone even looks at the application.

The arts by their very nature are meant to be seen and experienced. Yes, sending people out to visit grantees is expensive, but perhaps it would be done if there was better funding. Yes, the visiting team might make subjective judgments about the worthiness of your organization, but they are doing that already when they read your grant application.

Colleges and universities are accredited by regional bodies who send people to evaluate them on a regular basis to bring them into compliance with current standards. Now I will readily admit that compliance translates into paperwork. I will also concede that the schools probably pay quite a lot to be part of this process. And even though they aren’t part of the government, members of Congress have been criticizing the accrediting bodies. So I won’t even pretend this idea would satisfy the NEA’s biggest critics.

But if arts groups were organized under regional bodies, then the cost could be borne by many just as it is with the schools. The experience of those participating as visiting evaluators would be much more valuable than sitting on a grant review committee. Instead of learning what committees were looking for in a grant application, the committee member could actually learn about the best practices by groups in their region and share that information with their home organization. Not to mention they would be sharing information and developing deeper relationships with other arts professionals beyond what can be accomplished at conferences.

Granted so much of this is pie in the sky idealism currently, but that doesn’t mean we have to complacently accept the current way of doing things. Really, it may not be that the written application is a bad format, but rather the criteria it looks to evaluate is flawed. The visitation process I am suggesting would change the evaluation criteria out of necessity. But as an alternative, as our ability to record and share our accomplishments on media improves, it can be just as valid a tool in shifting what criteria is emphasized too.

Though I really think that that an extensive program of visits by well trained teams would go an incredibly long way in improving arts leadership and management. While I think the sites that hosts the visits might receive some excellent guidance, were I designing the program, my focus would be on cultivating the abilities of the visiting team over telling the host what they are doing wrong.

Consortium Merger Update

by:

Joe Patti

This week the state booking consortium of which I am a member met to start planning our upcoming seasons and also move forward toward our plan to merge with our sister organization. The governance committee upon which I sit had met about three weeks ago to discuss the steps we would have to take to accomplish the merger and work on rewriting our bylaws to come into compliance with practice. The committee spent about an hour discussing the relevant rules and laws the state attorney general’s office has for dissolutions and asset transfers of non-profit organizations and physically rewriting the bylaws.

Another three hours were devoted to discussing the implications of the changes we were proposing. Our consortium had already agreed we should shift from a membership to a board organization. What we ended up proposing this week was to shift from having organizations as board members to having individuals as board members. This was a rather significant move so discussing how it might manifest and what the impacts might be required some serious conversation. We felt this would provide much more flexibility and open up possibilities. For example, instead of focusing on writing grants to support the tours member organizations had arranged, the consortium would seek funding for touring or educational outreach and then decide how to apply it. The difference may be hard to discern, but it is possibly a significant change in the way the consortium operates and has the potential to position us as a partner to some granting organizations and foundations.

The biggest advantage is that the board would be free to choose its members rather than depend on specific organizations to send a representative. This would provide opportunities to bring people on based on their knowledge rather than affiliation. It could also allow the consortium to decide as an entity that it wanted to initiate a statewide arts in healthcare program where artists could barter their services working with hospitals, hospices, retirement homes, etc in return for low to no cost health coverage. The consortium’s direct involvement might be arranging outreach activities to these institutions by touring artists, but the benefit would be to all artists across the state, some of which may not be members of the consortium. Yet some of the board members may represent arts organizations that frequently employ these artists and find it in their best interest that the artists not have to worry about health care as they practice their craft. In this case, the board might seek to add a member from the healthcare field to advise and perhaps rally industry support for grants.

As the governance committee meeting was drawing to a close a few weeks ago, I mentioned that what we were proposing might cause a lot of debate at the full meeting because it was such a departure from the way business had been conducted. I noted that a shift in thinking away from the way we currently did business would be required. In fact, there was a lot of discussion about the proposal. There were a lot of “what ifs” asked based on the way we engaged in our activities. Some of the questions we had already considered and had responses to, but others illuminated the need for the creation of policy and procedures. Ultimately, I was happy to hear a board member who had not been part of the governance committee pointed out that we couldn’t think about the changes in bylaws completely in the context of how we currently operated and that it would require shifting our thinking.

There is still a lot of work to be done on the bylaws and one of the members of my committee uncovered more regulations governing dissolution and mergers with which we need to comply. I feel very optimistic about the work being done and the potential of the reorganization. Of course, it helps that the local community foundation received a large amount of money from the founder of eBay and they are directing some of it toward encouraging innovation in non-profits. It makes what we are doing seem relevant and timely.