The Built-in Risk of Growth in Government-funded Nonprofits

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March 18, 2017; Detroit Free Press

Government grants and contracts have a pattern of fueling unsustainable organizational growth by rarely funding all of the costs associated with the contracted program and service. Yet, one of nonprofits’ main functions is to provide services the state is otherwise obligated to provide. Responsible nonprofit leaders need to fully articulate program costs and improve evaluation systems, thereby providing long-term dependable services.

Recently, the Greening of Detroit laid off all of its 26 employees and temporarily shut down operations. According to its last published IRS Form 990 return, in 2014, the nonprofit organization had a budget of over $4 million and over 200 employees. Over its 16-year history, it has planted tens of thousands of trees, replacing a large number lost to Dutch elm disease. The organization plans to restart programs in April once funding resumes.

At its peak, the organization had employment training and urban agriculture programs as well as tree-planting activities. Much of its work was fueled by youth and volunteers and the majority of its funding was programmatic government grants. Unfortunately, this structure didn’t provide for the administrative or overhead costs necessary to fuel a healthy organization.

The Nonprofit Quarterly has written many articles chronicling the unsustainable growth of diverse nonprofit organizations. Often, this stems from decisions to accept government grants that barely fund the program, staffing, and equipment and not the space the program is housed in. Lacking the funds for utilities, supervisory, administrative, and overhead costs, organizations have little margin to fund activities to develop other, less restrictive funding and earned income revenue streams. Without other healthier revenue streams, the nonprofit has few options when government funds are late, disrupted, or ended.

Another trap is the belief that using volunteers doesn’t cost money. Volunteer activity may be free, but the identification, training, and supervision of volunteers are not. Without funding to support volunteers, many will become frustrated, and more staffing will be needed to replace the ones that leave.

These decisions create a propensity to continue these untenable government contracts. After all, how can nonprofits argue the contract is insufficient when they have a history of accepting it as full programmatic funding? Additionally, leaders and staff perceive it as a responsibility to provide the services outlined in the organization’s mission and not as creating a dangerous unsustainable precedent. These conditions create an environment where burnout and insufficient staffing become the norm.

Greening’s solution is to develop fee-for-service landscaping opportunities for condominiums and other large landowners. Hopefully, the new earned income revenue stream will be up and running before the federal government guts the Great Lakes Restoration program that’s responsible for funding Greening’s tree planting program.—Gayle Nelson

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The 16 Ways Your 990 Informs on You

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February 19, 2017; Denver Post

Every year, nonprofit organizations must submit their informational returns to the IRS in the form of a 990 or 990-EZ. Although these forms are sent to the IRS, they are also available to the public on a number of websites, including GuideStar. Additionally, nonprofits are required to provide them upon request. Given the competitive funding environment, philanthropic organizations should see the 990 as an opportunity to promote their work to potential donors.

Recently, the Nonprofit Quarterly offered a webinar identifying pitfalls and red flags nonprofit organizations can avoid when filling out their returns. In that webinar, Chuck McLean of GuideStar discussed the areas within the form where the IRS, reporters, and donors tend to look to determine whether or not a nonprofit is on the up-and-up. McLean also explained that the facility all interested parties have in interpreting these reports and red-flagging them in terms of potential problems should be a wakeup call to nonprofits. Quite simply, he said, these are arguably your most public-facing documents and they grow ever more accessible—so why aren’t you paying much attention to them?

The webinar was meant to serve as a guide to improving both the reporting and the actual behavior of the nonprofit. In some cases, problems lie in the substantive issues you are accurately reporting, in which case the form can act as a reminder to the board to make changes. In others, it’s the sloppiness and the disregard of the form itself that are at issue.

Bruce DeBoskey, a philanthropic strategist with the DeBoskey Group, recently described the Form 990 in the Denver Post as a “treasure trove” of information for potential donors. This is particularly true when donors examine it over multiple years. In his excellent article, DeBoskey identified 16 areas of interest:

  • Current tax status
  • Mission statement
  • Revenue received and from what sources
  • Internal expenses, including program, accounting, management and fundraising expenses
  • External fundraising expenses
  • Legal and accounting expenses
  • Net assets and cash reserves
  • Investments
  • Use of program-related investments
  • Identity (and salaries) of board members
  • Salaries of key employees
  • Key programs as well as expenses associated with each program
  • Significant changes in financial condition
  • Conflicts of interest among professional and staff leadership
  • Important governance policies and practices that demonstrate use of best practices in nonprofit management
  • Lobbying activities

Many of these areas are financial in nature, but others, as you will note, describe the management processes and the heart of the organization and its work. Yet, these sections in particular are rarely utilized to their full potential.

One of the first sections of the 990 has a place for the nonprofit to provide its mission. Although the form offers adequate space, many nonprofits provide only a cursory mission statement. Taking the time to provide a more accurate and complete mission educates potential donors on how the organization’s overall services remedy a critical need. Additionally, a strong mission statement sets the tone and encourages donors to continue their examination instead of flipping to the next return.

The 990 also has a section where nonprofits can describe their major programs. The webinar outlined the IRS’s expectations for this section, including numerical outcomes and short- and long-term goals. Using this space to its full potential is particularly important for nonprofits with more complicated programs and services, but few make the effort to provide this type of information.

Another area that rarely receives attention from nonprofit leaders is the board and key staff listing. It is not uncommon for nonprofit leaders to forget to give their tax preparer an updated list of board members. Without an updated list, donors comparing multiple years may be apprehensive over the lack of transition or overly concerned if the board list on the website differs substantially from the one in the last available 990.

In many instances, the picture shown by the financial sections of the 990s is incomplete. For example, consider organizations receiving multiyear grant disbursements, transactions with related or “interested persons,” or the case of embezzlement. The 990 provides specific sections to comprehensively explain these situations to the IRS and potential donors.

Finally, the 990 asks if the nonprofit has policies related to whistleblowers, conflicts of interest, and document retention and destruction. Although they are not required, these are best practices. Not taking the time to develop and execute these policies can be a signal of a looming catastrophe, or at minimum a lack of attention to good governance.

By the way, foundations, too, are required to fill out a Form 990, one which includes a complete list of grants—critical information for nonprofits seeking funding.—Gayle Nelson

Original Cite: https://nonprofitquarterly.org/2017/02/23/sweet-16-990-return-says/

Get SMART: The 4-Step Science of the Viral Fundraising Campaign

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February 13, 2017; Phys.org and Nature: Human Behaviour

Creating an effective social media plan is essential for nonprofits and for profits alike. One question leadership often asks is how an organization can engage supporters on the different platforms and, more importantly, translate this engagement into increased financial support. Recently, we have watched the fire-building and war-chest-building effects of the efforts launched on behalf of the ACLU and Planned Parenthood. Ambassadors and advocates often start these on behalf of a trusted organization.

New research from the University of Cambridge studied successful campaigns like the Ice Bucket Challenge. Back in 2014, millions of people were dumping buckets of ice water over their heads. The campaign, known as the Ice Bucket Challenge, gained media attention and increased awareness of ALS, or Lou Gehrig’s disease. In just eight weeks, it raised $220 million worldwide—13 times the amount raised throughout 2013—thanks to videos of President Obama, Bill Gates, Leonardo DiCaprio, and many more celebrities and ordinary people. All of these efforts raised public familiarity of the disease and led to it becoming the fifth-most-popular Google search for all of 2014.

Clearly, this was a short-term success that produced some great medical advances, but the long-term financial impact was not as significant. The majority of ice bucket donors did not renew their donation the following year, although donations remained around 25 percent higher than the year before the challenge took place. Equally important, the average age of the organization’s donors dropped from 50 to 35—an exciting outcome, since gaining the attention of millennials is challenging but essential for long-term viability.

Efforts to renew and duplicate the campaign have largely failed, leading to research by Dr. Sander van der Linden from the University of Cambridge to explore and attempt to pinpoint a recipe for success. Dr. van der Linden, writing in the journal Nature: Human Behaviour, refers to these campaigns as viral altruism or the “altruistic act of one individual directly inspires another, spreading rapidly like a contagion across a network of interconnected individuals.”

Through his research, Dr. van der Linden identifies four principles, or SMART criteria, of a successful campaign. People engaged in the campaign use social media to reach out to their social networks; that’s the S of SMART. The viral campaign captures people’s attention and makes them feel good. The M represents the moral imperative to act. A successful campaign develops from a story displaying need rather than dry statistics. The person receiving this message is captured by the story or image and compelled to act and share it within their network to receive affective reactions (AR). The clearer, simpler, and more emotional the act, the more likely it will be shared. The more involved the act is, the greater and more lasting the impact, but it lessens the likelihood people will participate.

The T of successful campaigns is the final and most challenging criterion. To realize change, the social media campaign must transform the act from a quick click-and-share to a social movement. Indeed, many campaigns encourage people to compete and win rather than support the cause. These flashy campaigns create interest because of the number of people participating but soon bust since the campaign only lasts as long as the person is acting. Instead, campaigns are often more successful if their growth develops rather than explodes.

Campaigns turn into movements if the act or campaign is connected to the mission. To create lasting engagement, a successful campaign internalizes a new personal deeper action or norm within the people sharing. In the case of The Ice Bucket Challenge, it is estimated that only one out of four videos mentioned ALS, and even fewer (one in five) said they made a donation. But, those that mentioned the organization were five times more likely to give. Additionally, when the organization attempted to restart the challenge in 2015, the donations garnered from it were less than one percent of 2014’s levels.

Deliberately building successful campaigns is rare. Instead, most viral campaigns stem from a single act outside of the organization. Successful nonprofits use their communications plan to connect and build on these campaigns to create lasting change.—Gayle Nelson

Original Cite: https://nonprofitquarterly.org/2017/02/16/get-smart-4-step-science-viral-fundraising-campaign/

In the Philanthropic Weeds: Cannabis Giving Goes Local

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January 12, 2017; Denver Post

Last November, seven more states legalized marijuana, increasing the total number of states where the use of marijuana in some capacity (recreational or medical) is not illegal to twenty-eight. Overall, the legal marijuana industry could gross as much as $20 billion in revenue by 2020. Many of the new businesses making up the legal marijuana industry are looking to give back to their communities, but many nonprofits are hesitant to accept their donations.

Tim Cullen, the CEO of the Colorado Harvest Company, was surprised by the challenges he encountered when he decided to donate some of his business’ earnings. “I have been shocked at how few places will take our money,” he said. Colorado Harvest Company is a chain of shops selling marijuana products. Cullen is also a shareholder of O.penVape, a company producing vaping pens.

Although Colorado legalized recreational marijuana over five years ago, many nonprofits continue to refuse gifts from the industry. Luckily, Cullen felt strongly about the need to give back. “I think philanthropy is what responsible businesses do. It’s not a choice so much as the next logical step,” he said. Eventually, he and his business partners at O.penVape made a donation of $250,000 to Levitt Pavilion Denver to partially fund a new amphitheater in Ruby Hill Park in the southwest part of the city. Once it is finished, the nearly $5 million Levitt Pavilion will host many events, including fifty free concerts each summer.

Accepting this gift was not a simple decision for Chris Zacher, the local executive director. Since the pavilion will be located in a city park, he first reached out to the city of Denver. City officials did not approve or object to the potential partnership but encouraged Levitt to reach its own conclusion, according to city licensing spokesman Dan Rowland. Zacher’s second phone call was to the organization’s national board. “We took it to Levitt, they took it to the board, and as long as it is legal in their state and not promoting the sex trade or tobacco, they were fine with it,” he said.

Although there are 2,966 medical marijuana dispensaries, 3,973 retailers, and 4,200 cultivators across the country, marijuana remains classified as a Schedule 1 drug by the federal government. This is the same classification as heroin, LSD, and ecstasy. At the same time, the public’s views of marijuana continue to evolve. According to a Pew Research Center survey taken in October of 2016, 57 percent of adults in the U.S. believe marijuana should be legal while 37 percent believe it should remain illegal, compared to 32 percent supporting legalization and 60 percent against ten years ago.

This evolving landscape creates risk and uncertainty for the industry, for the thousands of people who legally use it to relieve pain, nausea, muscle spasms, and other conditions, for those who use it for recreational purposes, and for the philanthropic community.

One misconception is why the industry is giving. Although Colorado Harvest Company and O.penVape will be the Pavilion’s headline sponsors, most do not give for marketing or visibility. “I think there is some misunderstanding oftentimes between cannabis (businesses) and nonprofits where nonprofits assume what cannabis wants out of donations is marketing and visibility, and we find the industry does not want that,” said Courtney Mathis, COO of KindColorado. Additionally, since the industry remains illegal in the federal government’s view, businesses can’t write off or deduct their gift on their taxes.

Due to the continued hesitation, the industry as a whole has created a giving campaign through the DoingGood.FOUNDATION. DoingGood.FOUNDATION is a national organization “providing small and local charities with free resources to help them grow and help meet more of our community’s needs!” On April 20th, 2017—yes, 4/20—they are organizing a national campaign to educate the public on the connection between the cannabis industry and local communities. All of the funds raised during the campaign will be given to small nonprofits in the states where the donations originate.

In our opinion, there are far more questionable industries nonprofits take donations from and invest with. As people’s judgment of marijuana and the legal marijuana industry continues to transform, more and more nonprofits will be exploring potential donations and beating back the unease surrounding them.—Gayle Nelson

This article has been altered from its original form. The $250,000 donation to Levitt Pavilion Denver came as two $125,000 donations, one each from Colorado Harvest Company and from O.penVape. NPQ thanks CHC for the clarification.

Original Cite: https://nonprofitquarterly.org/2017/02/08/philanthropic-weeds-cannabis-giving-goes-local/

The Nonprofit #CuteAnimalTweetOff: Does It Need a Reason?

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As an eventful January 2017 ground to a close, the Smithsonian’s National Zoo welcomed a grey seal pup into the world. Its mother, a 33-year-old gray seal named Kara, is the oldest grey seal to give birth in a zoo. The birth was also a celebration of the successful conservation activities leading to the number of gray seals rising to more than 600,000 worldwide and the shifting of the species from “endangered” to “least concern” in 2016 by the International Union for Conservation of Nature.

This pregnancy received social media attention. In December, the Washington Post had a Facebook Live presentation of the seal’s ultrasound. After the seal was born, the Zoo tweeted its photo. Virginia Aquarium and Marine Science Center supporter and Radio Free Radio host Sarah Janet Hill thought, “Our seals are cuter than that,” and posted a Twitter challenge to the Virginia Aquarium. The Aquarium accepted the challenge and posted a picture of a seal and osprey.

The tweets started a Twitter war under the #cuteanimaltweetoff hashtag that lasted for days, with activity from zoos and aquariums across the country and worldwide, including Toronto, Tokyo, and Australia. Even other types of organizations participated, including two police departments, which tweeted pictures of their service dogs. On top of that, it received major newspaper coverage, a home run in visibility and attention.

Mashable, an online newspaper centered on technology and social media, described the tweet-off as “social media done right.” But was it? It certainly received enormous attention and lifted peoples’ spirits. Throughout the Twitter war, few tweets weaved in zoos’ and aquariums’ missions. A small number posted uncommon or less-mainstream animals, like geckos and pufferfish. An even smaller number, such as the Lincoln Park Zoo and the Australian Zoo Wildlife Hospital, merged their missions of conservation and fighting the destruction of these animals’ homes in the wild into their message.

These kinds of spontaneous online events are becoming more common and can rarely be replicated intentionally. Of course, we don’t all deal with adorable baby animals, but in this communications environment, we all should be considering what we want people to understand and remember about our organization for use in such moments and even in less cute times.

Thankfully, there is a second chance. The Smithsonian’s zoo has not named its famous seal pup. They are taking names from the public and inviting potential sponsors to participate. Perhaps the seal pup’s name announcement can set off a second Twitter war focused on preservation and protection of our beautiful land for all species.—Gayle Nelson

Original cite: https://nonprofitquarterly.org/2017/01/31/nonprofit-cuteanimaltweetoff-need-reason/

New Open Road Philanthropic Project Takes On Nonprofit Project Derailments

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January 13, 2017; New York Times

A new philanthropic project called the Open Road Alliance has been established to help grantees that hit snags in promised projects. It is intended both to help the grantees complete projects and educate funders about the need to be supportive when such snags appear.

The Haitian nonprofit organization SOIL provides toilets to the poor residents of Port-au-Prince. These toilets don’t just offer residents a measure of dignity and safety; they also lead to the production of fertilizer, fueling employment opportunities and environmental restoration. Working since 2006, the organization, with a budget of $1.3 million, has empowered some of the poorest communities in the world to restore their environment by transforming hazardous pollutants into precious resources.

Providing services in Haiti is fraught with challenges and risks. SOIL is increasing the probability of success by employing staff who speak the local language; putting local suppliers, including local residents, to use in decision-making; creating projects with an earned income stream; and valuing diverse educational experiences. Even with all of these measures, the project was on the edge of failure less than two years ago when the private company running the local landfill lost their contract. Afterward, the area became full of smoke as trash was burned to maintain access. Employees were only able to reach the site once every two weeks, and there was no contingency landfill in the area.

SOIL’s predicament is not unusual. According to two separate reports by the Clinton Global Initiative and the Open Road Alliance, about one in five projects face challenges that could “slow or derail” successful outcomes. The large number of projects facing adversity is due in part to the failure of nonprofits to discuss likely risks with donors and donors’ inability to identify potential complications. According to the Open Road Alliance’s report, 76 percent of donors don’t ask potential grantees about the risks they face, and 87 percent of nonprofits leaders state that grant applications do not ask about potential hurdles.

The Open Road Alliance is a funding initiative providing one-time grants and loans covering “contingency funding that nonprofits frequently encounter” across sectors worldwide. Its report is based on its survey of four hundred grantors and grantees. The findings were centered on a random sample of two hundred organizations designed to determine the frequency, donor response, current policies and procedures, and consequences of unfunded requests on the relationship between funder and recipient.

Surprisingly, the report found major differences between grantor and grantee perceptions:

  • Grantees believe that asking for additional funds negatively affects the likelihood of being awarded future grants, while the vast majority of Funders claim such requests have no effect on future decision-making.
  • Funders incorrectly believe that if they deny a request for contingency funds, Grantees will find an alternate source of funds.
  • Grantees report that when requests for contingency funds are denied, projects are much more likely to be delayed and somewhat more likely to be reduced in scope than Funders believe; Grantees report 16 percent of such projects are terminated, while Funders estimate 10 percent.
  • Funders believe that Grantees are more comfortable talking about these issues with them than Grantees report.

Due to these findings, Open Road Alliance teamed up with the Rockefeller Foundation and Arabella Advisors to assemble two dozen organizations, including the Bill and Melinda Gates Foundation, Goldman Sachs, and the law firm Patterson Belknap Webb & Tyler, to develop a toolkit to identify and assess project risks. The new resource is available to the community and is constructed to encourage donors to use it in whole or in part to better assess project success.

The kit is part of an increased need to apply business fundamentals to grant making and to encourage grant makers to strategically take on more risky projects. To be more strategic, grantors need more information. The kit includes seven items to help facilitate conversations between donors and potential grantees. Equally important, the developers acknowledge the power differential between grantor and grantee.

“Part of the reason we focused on donors is they have the money,” said Dr. Michaels, a clinical psychologist who is married to David Bonderman, a founder of the private equity firm TPG.

“There’s a power differential,” she added. “It’s hard for a nonprofit to come to a funder and say, ‘How are you going to insure us if something gets screwed up?’”

While funders are fond of touting the need for innovation, taking risks and being open about the inevitable complications that surface is still somewhat foreign to many nonprofit/funder conversations. The answer, according to Open Road Alliance, is less about being a helicopter funder and more about simply being available to face reality with resources. This culture change could not come soon enough for SOIL. As the landfill access challenges continued, the organization went back unsuccessfully to its project donor to ask for additional support. The donor suggested Open Road Alliance, who granted SOIL $100,000 for a new composting site.—Gayle Nelson

Original post: https://nonprofitquarterly.org/2017/01/25/new-open-road-philanthropic-project-takes-nonprofit-project-derailments/

What Does It Take to Grow a Nonprofit? Teamwork and Capital

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November 16, 2016; Stanford Social Innovation Review

Although not always an indicator of impact and sustainability, nonprofit growth is a constant focus of philanthropic leadership. A recent study of over 200 organizations found three common attributes among nonprofits that were able to efficiently make the leap from idea to $2 million budget: strong teamwork, effective outcome evaluation system, and access to capital.

The field-based study began in September of 2016 by Kathleen Kelly Janus, a lecturer at the Stanford Program on Social Entrepreneurship. The study’s team examined more than 200 organizations, distributed among those with budgets under $500,000, between $500,000 and $2 million, and over $2 million. The organizations’ missions were diverse; leaders were asked to describe their work by choosing from multiple categories (and could choose more than one). The top three were education, with 48 percent surveyed; 26 percent with youth-based focus; and 23 percent community development missions. (Thirty-one percent chose “other” as one of their tags.) On average, organizations reached the $500,000 milestone in ten months but needed an average of 16 months to double their budgets to $1 million. On average, organizational growth from $1 to $2 million took a similar trajectory.

Since many articles focus on the personality of an organization’s leader as a key element of organization growth, the study began by examining the CEO/Executive Director. It found a wide range of actual job descriptions, but a key responsibility for organizations of all sizes is fund development. Interestingly, as organizations grow, the amount of time leaders spend in fundraising tasks increased from an average of 26 percent for organizations under $500,000 to 30 percent with budgets over $2 million. Study authors also noted a shift from CEO focus on program development for organizations under $500,000 to people management for organizations over $2 million.

Instead, the first characteristic of organizations achieving substantial growth was having a strong team of leaders to support the CEO/Executive Director. An effective team allowed the CEO to focus on capital instead of program. Connected to creating the team was the talent to avoid “bad hires” and purge them quickly when mistakes are made. Often, a strong team was not only made up of staff but key board members. Overall, the study found that “the lack of a high-functioning team can pose significant risks” to organization growth.

The second essential element was a focus on outcome evaluation. The study found that organizations with robust outcome tracking systems could decrease the time to reach the $2 million mark by as much as five months. The study also made a connection between effective evaluation structure and the ability to obtain a large catalyzing grant quickly.

The final element, access to capital, was often linked to the other two elements. Organizations with board members with connections to foundations or individual wealth were able to use their access to facilitate growth. Additionally, organizations with effective evaluation programs were able to discuss their clear program outcomes with funders, leading to more attention by larger foundations donating significant catalyzing grants.

Antony Bugg-Levine from the Nonprofit Finance Fund described in 2012 a key difference in the distinct types of capital essential for organizational growth:

Pay attention to the difference between “buy” money that pays for services and “build” money that enables an organization to invest in its long-term sustainability. As with any business, organizations need to balance both, and this balance shifts as they scale. Funders need to know whether their grantees need build money or buy money and how to be effective buyers and builders.

Overall, organizations of all sizes struggled to raise essential funds and it remains the number one challenge of growth. This is true even for organizations with “a fair degree of earned income,” as the report claims.

At the end of the study, authors identified three opportunities for funders to help organizations scale: fund leadership coaching, aid in building evaluation programs, and refer grantees to other funders in your network.—Gayle Nelson

 

Original cite:  https://nonprofitquarterly.org/2016/11/29/take-grow-nonprofit-teamwork-capital/