Advancing Urban Policy:
Nonprofit Management September 16, 2013
This edition of Advancing Urban Policy, the monthly e-newsletter of the Maxine Goodman Levin College of Urban Affairs at Cleveland State University, features research and thought leadership from across the country related to Nonprofit ManagementIt highlights articles on L3Cs, social enterprise, "public value," transparency, impact investing, taxing institutions of higher education, and more... It also introduces the Nonprofit Academic Centers Council, an international organization to strengthen the field of nonprofit education, which is housed in the Levin College. Future editions of Advancing Urban Policy will feature topics related to City Management (October), Environmental Policy (November), and Public Finance & Budgeting (December). We welcome your ideas and submissions. They may be sent to:


Edward (Ned) W. Hill, Ph.D., Dean


Private/Nonprofit: Hybrids and Partnerships


L3Cs: Best of Both Worlds? Maybe Not.

Over the last five years, nearly half of the states have created a new corporate form: Low-Profit Limited Liability Companies, or L3Cs. These hybrid entities incorporate elements of both nonprofit organizations (existing to further a social purpose) and for-profit corporations (the ability to distribute profits to shareholders). A forthcoming work, Profits v. Purpose: Hybrid Companies and the Charitable Dollar, questions the need for L3Cs, raising several legal and empirical doubts about the effectiveness of hybrid entities. For example, although proponents of hybrid legislation claim that foundations will be able to more readily satisfy complex federal tax rules regarding Program-Related Investments (PRIs) by investing in L3Cs than in pure for-profit corporations, the authors argue that federal tax law does not give L3Cs any special treatment. And, the authors note, L3Cs can take advantage of the "halo effect" of marketing themselves as pseudo-charitable organizations, without the safeguards and oversight that apply to traditional nonprofit organizations. The authors also identify a number of legal and empirical questions regarding L3Cs that merit further study.


Nonprofit Work Integration Social Enterprises: A Comparative Study

Work integration social enterprises (WISEs) are nonprofit human-service organizations that provide work opportunities and job training to people with employment barriers. Although the work experiences are the primary component of their social services, WISEs also produce and sell products or services. Thus, the social enterprise functions as both social service and commercial business. Because it pursues a "double bottom line" of social impact and financial return, the WISE has been heralded as a potentially self-sustaining economic model that cleverly harnesses the market in service of a social mission. Commercial earnings in excess of operating costs can cross subsidize other social programs and render additional social value.


However, the model is subject to institutional conflict between the mission and market. When the market logic prevails within the WISE, clients are commoditized; their value as production instruments supersedes the service-recipient role. Alternatively, when a social service logic prevails within the WISE (which is, at its core, a human-service organization), clients are de-commoditized -- that is, they are valued primarily as social service recipients rather than as production instruments. This hybrid identity creates tensions between its mission and its market that appear in the dual role its clients assume.


Business Value Boosted When Tied To Nonprofit

A study last year by two management professors at the University of California at Davis found that companies experienced big increases in their stock prices within days of distributing corporate social responsibility news releases. For-profits also have become more strategic about their philanthropy, developing relationships with nonprofits designed to make a greater impact on social and global problems. Companies are looking for sources of competitiveness for the business, and realizing one way business can grow is by solving social problems.


Corporate social responsibility is hot. Corporations are facing rising expectations from their customers, employees, investors and vendors to improve their efficiency and bottom line in a marketplace that has grown fiercely competitive since the capital markets collapsed four-and-a-half years ago. Corporations have moved beyond traditional philanthropy, trumpeting what they are doing to be good corporate citizens and promoting their social investments.


The Home Depot formed a partnership with Good360 as an alternative to dumping unsold inventory in landfills or paying to have returns sent to a distribution center. The American Red Cross, wanting to improve its delivery of supplies to regions hit by disasters, teamed up with FedEx for its expertise and assistance with shipping, logistics, supply-chain strategy and warehousing. And, seeking an innovative way to invest $1 million it had won through a contest sponsored by online retailer Amazon, developed and funded a charity gift card that Crate and Barrel agreed to distribute to its top customers.

Creating Public Value


How Nonprofit Organizations Create Public Value

Nonprofit organizations create public value in important ways that have been largely overlooked by scholars and policy makers. Public value is weighted less toward financial performance, efficiency, and the "good that government can do through policy and public management innovation and entrepreneurialism" and more toward the facilitating, intermediary and partnership contributions nonprofits make in their interactions with government, the private sector and individuals.


Nonprofit organizations contribute to the creation of public value in at least three ways: mission fulfillment, involvement in public-private partnerships, and assumption of a stewardship role. The work of nonprofits contributes to public value by inducing a more engaged citizenry and the strengthening connections between social capital and a stronger civil society. By bridging the gap between public policy formulation and practical implementation, nonprofits generate public value and honor the public values that underpin a vibrant American civil society.


In the context of the nonprofit sector, "public value" arises as an outcome of the intermediary and facilitating processes nonprofit organizations employ as they strive to achieve their organizational mission. Public value also results as nonprofits perform their work and serve constituents, form and strengthen social networks, sustain social capital, build community and nurture the bonds of trust that comprise civil society. In many respects, creating public value is a primary reason for existence for the American nonprofit sector.

What Nonprofits Want/Need


Foundation Transparency

The discussion of foundation transparency has frequently focused on the required disclosure of financial information to the public and the federal government and the voluntary sharing of grants data through the Foundation Center. Initiatives such as the Foundation Center's Glasspockets have also encouraged foundations to share more information on their websites about how their organizations and grant-making programs are structured, governed, and assessed.


Transparency has become an increasingly debated topic among foundation leaders and foundation-watchers. Some, such as the National Committee for Responsive Philanthropy, argue that foundations have an ethical obligation to be transparent. There are a range of views both why transparency matters and what specific information foundations should share in their efforts to be transparent. Often missing in discussions of foundation transparency is the question of audience. There is little evidence to suggest that the public at large is interested in examining information about how foundations are operating. But one audience surely does care about what foundations choose to reveal about themselves -the nonprofits that are seeking and receiving foundation funding.


To nonprofits, foundation transparency means being clear, open, and honest about the processes and decisions that are relevant to nonprofits' work. Discussions about foundation transparency have typically focused on items such as financial data, the names of foundation board members, or contact information for foundation staff. But that's not what nonprofit leaders care about. Instead, more than two-thirds of nonprofit leaders say that foundation transparency is about what information does - or does not - get communicated regarding foundation processes and decisions that have implications for nonprofits' work.


What Nonprofits Need: Three Things That Funders Can Learn from Nonprofit Finance Fund's 2013 State of the Sector Survey

For the first time in the five years of Nonprofit Finance Fund 's annual State of the Sector survey, more than half of nonprofits-52 percent of the 6,000 organizations around the country who responded-report being unable to meet demand. And the picture is even worse for nonprofits serving poor communities-almost two-thirds of these organizations report being unable to keep up. Nonprofits are failing to maintain the social safety net for those who need it most.


Expecting donors to pay for the rising costs of service delivery and to make up for government cuts is not going to work. Instead, foundations are thinking about how to give more smartly to maximize the impact of their support in the current environment of scarcity and adaptation.

Diversification, Revenue Mixes, and Sustainability


Geographic and Product Diversification in Charitable Organizations

While multinational corporations may struggle to identify new geographic and product market needs in seeking out profitable growth opportunities, charitable organizations have no such shortage of unmet social needs in regions throughout the world. Rather, the engagement of charities in diversified activities to pare the already prodigious pile of global social needs, such as those created by poverty, illiteracy, and environmental degradation, is constrained primarily by their ability to garner donor and volunteer resources. However, heightened competition for funding has caused such resources to become increasingly scarce and costly to acquire.


Historically, donors have focused almost exclusively on measures of social effectiveness when evaluating the performance of charitable organizations. However, increased donor skepticism surrounding the percentage of their funds being spent directly on charitable activities, as opposed to administrative overhead and fund-raising, has led to an increased focus on financial efficiency as an important indicator of performance. Recent studies have indicated that charities perceived as inefficient tend to experience lower future funding from stakeholders who are no longer willing to support such organizations. Thus, the strategic focus of charities is being forced to shift away from unchecked growth and more toward maintaining a level of geographic and product scope that reflects an efficient allocation of resources as judged by the stakeholders upon whom the organization relies.

Oil and Water Rarely Mix: Exploring the Relative Stability of Nonprofit Revenue Mixes Over Time

The empirical study of organizations' changing revenue mixes is a comparatively underdeveloped area of nonprofit research. Donative and commercial nonprofits are distinguished based on their primary sources of income (grants and donations or earned income), though some attention has been paid to the emergence of mixed revenue forms of nonprofit which combine donative and commercial revenue in part as a response to arguments about resource dependency or the benefits of diversification and appeal to multiple stakeholder groups. By diversifying revenue streams, nonprofits can achieve an optimal balance between financial risk and reward. However, mixed revenue strategies may be difficult to sustain over time as organizations are pulled in different directions by competing goals and operational priorities associated with diverse sources of funds. This raises questions as to whether nonprofits actually are adopting mixed revenue strategies, and if so, whether these strategies are sustainable over time. 



Evaluating Nonprofits: Mapping the Knowledge Base of Nonprofit Management in Human Services



To survive and thrive in a changing political and economic environment, nonprofits have had to develop and sustain a diversified financial base. At the same time, the demands from funding sources and constituents for accountability have required nonprofits to develop systems to evaluate their service delivery and financial performance. The major themes include financial management, foundations and funders, fundraising, social enterprise, accountability, program evaluation and management information systems. The dual challenges and the rapid development of technology have pressured nonprofits to adopt mechanisms to integrate and evaluate service and financial data. The review concludes with the beginnings of a research agenda related to revenue generation, resource allocation, and performance improvement.


Changes in the political, social and economic environment have led nonprofits to seek alternative sources of funding in order to sustain themselves in a changing financial landscape. Financial planning strategies have contributed to a rise in nonprofit attention to institutional and individual philanthropy, fundraising, and social enterprise to diversity their funding base. Fundraising also receives considerable attention, especially the development of fundraising plans and effective fundraising strategies. Of all of the diversification strategies considered, social enterprise attracts the least attention, possibly due to its controversial nature or the limited amount of research on the outcomes of these ventures.



 In addition to developing and managing a diverse funding base, nonprofit managers have also addressed the growing emphasis on grant and contract accountability and the measurement of outcomes. The diversification of funding often leads to increased attention to the diversity of accountability requirements generated by multiple funders. Growing accountability requirements have led nonprofits to develop program evaluation systems to assess service outcomes through the use of management information systems. The financial management of nonprofit organizations and associated accountability requirements continue to challenge nonprofit human service organizations.


Impact and Investment


It's Time to Cut through the Hype of Impact Investing

In a time of skyrocketing deficits, uncertain financial markets, and staggering need, many government, business, and nonprofit leaders are eagerly looking for help from impact investments-deals that achieve a measurable social and environmental impact alongside a financial return. But impact investment is not well understood outside of a relatively small group of early adopters, and even this band of innovators harbors multiple, sometimes-incompatible interpretations of the concept. The result of this fragmentation is that government is struggling to build an environment that encourages impact investing while investors and foundations try to figure out what kinds of returns are reasonable to expect. In the meantime, hype is outpacing reality, and all the excitement could fizzle into very little unless methods are implemented to move forward.


For nonprofits, the path to getting involved in impact investing is complicated. Nonprofit organizations are encouraged to experiment with ideas like creating benefit corporations-businesses that are designed specifically to achieve social returns, not just profits-or pay-for-success programs (also known as "social-impact bonds"), where private donors put up money and government pays them back if a project achieves intended results that not only benefit society but save taxpayers money.


Yet even if not all nonprofits can get a direct financial benefit from impact investing, many of them would gain indirectly if the idea spreads. The growth of such investments could reduce competition if some groups could take advantage of impact investments and limit their reliance on grants from foundations, corporations, and wealthy donors as well as from government sources. What's more, the experimentation with new ways to finance social causes will eventually lead to new ideas that benefit a far wider range of organizations than we can imagine today.


Thus the opportunity for traditional nonprofit organizations is less about reconfiguring the fundamentals of their financing as it is about rethinking how they fit into the impact-investment market. Nonprofits can work with businesses to consider a twist on impact investing that helps them not only aid society-but actually to "prime the pump" for the impact-investment market. To do this, they can look for help in an unexpected corner. Corporations increasingly "impact venturing." They now also finance start-ups and spin-offs with combined social and financial objectives. In addition to investment capital, social businesses also need access to expertise, and some corporations are reorienting their corporate philanthropy in this direction. 



Just "Getting By" Is No Longer an Option for Nonprofits

It's no secret that nonprofits are always looking for new funding sources. Most social programs find that resources just don't keep up with demand for services. Fifty percent of nonprofits surveyed by the Nonprofit Finance Fund said they can't meet the current demand-and demand is soaring. Social sector leaders know they must look for ways to change their approach to raising capital if they're going to thrive or even survive. Just "getting by" is not an option for them-"tried and true" fundraising doesn't work in the new reality.


Even the federal government recognizes the need for new ways of funding nonprofits. Government officials are the first to acknowledge a strong nonprofit sector is essential for producing vibrant communities. Yet, the more the government cuts funding, the more nonprofits must pick up the slack. As this reaches a tipping point, President Obama is calling for development of cross-sector teams comprised of nonprofits, government, business, and investors. He points out that nonprofits are a driver of job creation and an incubator of social innovation. With diminished charitable giving, reduced government budgets, and increased demand for services, the President says it's time to optimize public dollars by attracting new sources of funds.


As a result, new capital sources are emerging called impact investing. The latest model for this new method of funding is called Pay for Success. The first project started in New York City in 2012 as a Social Impact Bond. The current federal budget calls for quadrupling the funds for this project to $500 million.Pay for Success leverages philanthropic and private dollars to fund preventive services provided by nonprofits and other non-governmental entities up front, with the government paying back investors only after the interventions generate results that save taxpayer money. At a time when public dollars are scarce, this model provides funding for service providers to test new and proven innovations at low risk to the taxpayer.


Proponents of the model are hoping to adapt it to produce positive outcomes in healthcare, the environment, prison recidivism, workforce development, elderly support, subsidized housing, and disability services. Emphasis will be on measuring outcomes rather than outputs. Organizations participating in Pay for Success must prove they are making a measurable difference in their target population, resulting in savings for taxpayers and return for social impact investors, thus connecting performance outcomes to financial return.


Fundraising and Incentives


Do Storytelling and Data Have Chemistry in Your Fundraising World?


Nonprofit storytelling is a very hot topic lately, although it is hardly a new practice for the nonprofit sector. Nonprofits must blend stories that appeal to the heart and the imagination with stringent measurement requirements to be successful in fundraising. This mixture works to engage both donors and supporters for the long haul.


For decades, nonprofits have used compelling, and at times heartbreaking, stories to raise funds for their cause. Using stories to raise support or awareness is a tried-and-true approach, but the forum in which it occurs has changed, as has the need for truly compelling stories. For better or worse, social media provides us with uninterrupted access to an expansive array of stories and organizational information. Given the proliferation of nonprofit organizations, as well as the significant number of humanitarian and environmental crises on an increasingly local level, competition for nonprofit followers and donors has increased dramatically. Broadening an organization's circle of supporters depends on its capacity to make a compelling case not just to individual donors, but also to the funders on which it depends.


Storytelling itself is an art. It's the act of highlighting a simple occurrence, statement, or activity and using it to represent something with greater significance. The goal for nonprofit storytelling is to capture a transformative incident that represents the organization's impact on an individual or issue, and then use that specific case to highlight the group's broader impact. In so doing, the organization seeks to either expand its base of supporters for a specific campaign, raise funds to foster more financial support and thus the continuation of said efforts, or demonstrate to funders that the money provided has achieved the desired impact. In this case, while the individual story is noteworthy, it's more meaningful and significant as a display of what can be achieved with sufficient resources, whether human or financial.


By offering supporting data, organizations demonstrate their capacity to replicate an individual story on a broader level with others in their target audience, whatever it may be. In essence, the data represent the pool of achievability through the specific activity or event that took place. Pairing measurable data with good storytelling can help build support and raise awareness.


The Charitable Giving Incentive

Federal tax law currently encourages individuals to give to charitable organizations whose missions they support by providing an itemized deduction. Policymakers in Washington are focusing on how to reduce the federal budget deficit through spending cuts, entitlement reforms, and changes to the tax code. The President, Senators, Representatives, bi-partisan commissions, and think tanks have all put forward plans to address these issues, and many propose changing the charitable giving incentive in one way or another. No one knows the true impact that any of these proposals will have on the ability of charitable nonprofits to raise the resources needed to provide the programs and services that fulfill their missions. It is imperative that Congress make no changes to the charitable deduction that threatens the ability of nonprofit organizations to serve those most in need and to continue to strengthen communities.


Capping all itemized deductions, including charitable giving, would effectively take away incentives for donations to churches and synagogues, domestic violence shelters, early childhood programs, food banks, school alumni groups, and all other charitable nonprofits, and would further reduce the ability of charitable organizations to meet the increasing need for services in their communities.


Nonprofit organizations throughout the United States are dedicated to the public good; their work improves lives, strengthens communities and the economy, and lightens the burdens of government, taxpayers, and society as a whole. Maintaining the value of the charitable deduction is essential to the ongoing work of nonprofit organizations in delivering essential services, enhancing quality of life, and uplifting the spirit of faith, innovation, and inspiration in local communities across America.


Higher Education


Why is Princeton Tax Exempt?

An opinion piece in the Wall Street Journal asks the question: Why do we give tax exempt status to higher education institutions that are increasingly run like corporations? The authors note that some private higher educational institutions receive enormous amounts of revenue from sports, merchandise, alumni vacation tours, corporate-funded research, and, of course, tuition. And many sit on huge endowment funds, like Princeton's banked $16 Billion. Yet these organizations are generally exempt from property tax collection, depriving local governments of revenue from what is often the largest and wealthiest landowner in the area. The authors suggest that if higher education institutions behave like businesses by focusing on "expansion and profit" instead of "teaching and learning," they should lose their tax exempt status.


Introducing: Nonprofit Academic Centers Council

The mission of the Nonprofit Academic Centers Council (NACC) is to support academic centers devoted to the study of the nonprofit/nongovernmental sector, philanthropy and voluntary action to advance education, research and practice that increases the nonprofit sector's ability to enhance civic engagement, democracy and human welfare. In July, NACC held its biennial conference in Chicago, IL, on the theme, Leading the Field: Innovation in Curriculum, Programming and Institution Building, at which several papers related to nonprofit education were presented and discussed. Some of those papers may be found on the NACC Website:


 The following is one example:


Paper on the Promise and Potential of the Nonprofit Academic Centers Council Present and Future Strategic Mission Fulfillment

In recent years, non-business and non-governmental sector studies programs have become increasingly important to colleges and universities. One indicator of this trend is the rise in the number of academic, applied research, and service-to-the-community programs on campuses around the world, dedicated to furthering knowledge about civil society, nonprofit independent voluntary charitable third sector organizations and processes.


Nonprofit higher education degrees and the nonprofit sector job market are one set of drivers that have advanced nonprofit studies and research on college and university campuses. Field placements and internships for nonprofit students also drive the popularity of advance nonprofit degrees by serving the dual purpose of providing students with practical experience and supplying nonprofits with desperately needed man-power. The projection of students and their (potential) good works into the community also offer the promise of enhanced project revenues, future funding opportunity from philanthropic institutions, sponsor contributions and fee income for continuing education.


Upcoming Events


"Future Perils and Possibilities for the Nonprofit Sector: Views from the Top" University of Notre Dame Nonprofit Executives Education Certificate Program, November 10-15, South Bend, IN


Recession, Renewal, Revolution? Nonprofit and Voluntary Action in an Age of Turbulence

ARNOVA, November 21-23, Connecticut Convention Center, Hartford CT


National Philanthropy Day will be celebrated at events around the country in November. Visit your local Association of Fundraising Professionals website to find an event in your community.

Advancing Urban Policy: Community Development was created with counsel from Stuart C. Mendel, Ph.D., and Joseph Mead, Esq.; compiled by Jessica Murphy, graduate assistant; edited by Roslyn Miller, consultant.

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