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/

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/

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/

Gates and World Bank Back Tech Aided Access for the Underbanked

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Imagine living without a connection to a bank or financial institution. Your check from your employer must be cashed at a check-cashing store, where they charge 5 percent of the check amount. You cannot shop online, do not have access to credit, and are likely terrified of being robbed. If you need to send money to a child living in another state or family member living in your country of origin, you are charged 5-8 percent to send funds to them, and they then pay another 5-8 percent to cash the money order. Luckily, new technology is on the horizon to help millions gain monetary protections and increase credit opportunities, leading to small business expansion and more hope for those trying to climb out of poverty.

The number of people living in the United States and in the developed world without access to the convenience and safety measures banks provide is staggering. In the U.S., an estimated 9.6 million adults live without a bank account. Internationally, an estimated 2.5 billion adults, including 59 percent of people in the developing countries, live in a cash-only society without access to credit or other opportunities to grow their small businesses. Access is particularly limited for women in these countries: 63 percent, compared to 54 percent of men, do not possess an account. The numbers increases to more than 75 percent for adults living in extreme poverty.

In the United States, the end of the recession and the onset of new technology have created new avenues for the poor to access banks and financial institutions. According to the Federal Reserve, 25 million Americans built a relationship with a bank or other financial institution for the first time in 2013. Of those, more than a third opened an account because their new employer required direct deposit.

Unfortunately, for far too many, this new relationship is limited. The same report identified one in five, or over 67 million, underbanked Americans; this number remained constant from the previous year. The report defines the underbanked as those using a check cashing or other “alternative” service at least once in the last year.

For many, the relationship with their bank is limited due to a growth in bank fees and prior negative bank history due to the recession. A 2013 Bankrate.com survey found bank fees rose for the fifteenth year in a row. This limited relationship constrains the poor’s ability to exit poverty. According to The Cost of Cash in the United States, a Tufts University report, the unbanked and underbanked throw away more of their money on fees and spend more time waiting in line to receive their funds than those with full access to financial services.

Internationally, people remain unbanked because of lack of documentation, arduous regulations, and ineffective and obsolete financial infrastructure. They are unable to prove their assets, identity, or reputation, crippling potential business opportunities and leaving developing countries with little opportunity to grow. Fortunately, digital technology is changing access to money nationally and internationally, but in different ways.

In the U.S. and other developed countries, digital technology is creating a stronger connection between people and their money. New mobile applications allow people to deposit checks without visiting a teller. Text alerts provide notice of potential insufficient funds or low balance penalties before fees are accrued. Although these features are available to all account holders, low-income individuals tend to use them more. In the long run, they can turn the underbanked into full access consumers, but they do little to connect the unbanked.

Internally, technology is developing innovative financial systems that lead to new relationships with banks for millions of people. The epicenter for this growth is in Africa, where a partnership between the World Bank and the Gates Foundation is encouraging the creation of a digital payment system. One of the companies leading the way is M-Pesa. M-Pesa transmits funds via SMS or digital messaging. It was launched in 2007, and currently two-thirds of the Kenya adult population uses it, transferring funds with minimal fees of one to three percent. It is also available in the Democratic Republic of Congo (DRC), Egypt, Fiji, India, Lesotho, Mozambique, Romania, South Africa, and Tanzania.

The system is on the verge of tremendous additional growth, with last week’s partnership between M-Pesa and MoneyGram. The new system will connect funds between people in ninety countries using their mobile devices. Continued expansion of these services will open up $9.6 trillion in assets, according to controversial Peruvian economist Hernando De Soto.

We would love to hear from readers on this and similar projects.

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