RECESSION SUICIDE

The Aesop fable about the doe that sought refuge from hunters in the cave of a lion points out that avoiding one evil can lead to another. These difficult times are a wake up call to charitable organizations to step up fundraising.

Practical and tactical decisions will have more influence on resources than the economic downturn. Organizations that don’t make the right decisions now will suffer the fate of a group that was close to my heart – the National Welfare Rights Organization, instrumental in fighting for the interests of people reliant on government assistance, went bankrupt in 1975 and their voice in the national debate is sorely missed.

As Sean Triner, co-founder of Pareto Fundraising in Sydney, Australia notes, “We fundraisers need to prevent our boards and management making the possibly fatal mistake of cutting fundraising expenditure…. Don’t commit recession suicide.”

Sean points out that if the economy gets worse, your organization may have to spend more to generate the same net income, which is crucial to continue delivering services. Information in your existing donor database holds the answer to the success of various fundraising efforts…for some organizations it’s a “secret” source of information that has yet to be exploited.

Don’t jump to conclusions. Find out what is working and what isn’t. Take the time to calculate your sustainable income streams. For some of you it may be online and direct mail, but for most I can safely advise focusing on major giving, annual fund and planned gift programs.

Do it better, quit wasting your time. Segment your donors and develop and coordinate organization-wide messaging accordingly. Regular, effective and active communication with donors about your work, impact and achievements fosters confidence and loyalty. Set up a working group to evaluate funded activities or projects and to find ways to contain or reduce costs.

People vote not only at the polls but with their dollars. Donors will be more selective in their choices so transparency and accountability are crucial.

Drop marginal or unprofitable activities. This may be very hard to do when a certain dinner or marathon is a cherished part of the organization’s image. One group I have advised spent an inordinate amount of staff time acquiring port-o-johns, mapping courses and signing up sponsors for a small pay off – develop a volunteer corps to make such activities happen.

Discourage pessimism in your Development Department and the organization as a whole. Realize you have more control than you think. Don’t panic; focus on the fundamentals; focus on the long haul. Don’t be the deer in the headlights.

DONOR-ADVISED FUNDS ANYONE?

Having worked at the Evanston Community Foundation, an exemplary organization in my hometown, I’m a little concerned about IRS focus on community foundation donor-advised funds. (DAF for short.) I’m also curious about how a non-profit organization could involve donors in an advisory role for an endowment fund emulating DAFs – smell my wheels burning?

You and I are in luck because I’m going to share with you an exchange I had with Attorney Gene Takagi, an attorney for nonprofits in San Francisco.

As background, the IRS description of these funds follows (if you know this, skip this paragraph). “A donor advised fund is a separately identified account maintained and operated by a section 501(c)(3) organization. These accounts have become very popular in recent years. Each account is funded with contributions made by a donor or a group of donors. For the payment to qualify as a completed gift, the charity must have legal control over the donated funds. While the donor, or individuals selected by the donor, may advise on the distribution of funds from the account and the investment of assets in the account, the charity must be free to accept or reject the donor’s recommendations. For example, a donor may contribute $1,000,000 to a donor advised fund and claim the whole amount as a charitable deduction for the year in which the contribution is made. In future years the donor may advise the fund as to desired distributions to qualified beneficiaries (e.g., other charities). In operation these funds allow considerable input from the donor but are not classified as private foundations. Again, in a legitimate donor advised fund, the charity must have legal control over the donated funds and must have the right to disregard the donor’s advice.”

It is always chilling when the IRS says something like this: “We have seen abuses in this area…. we are aware that some promoters encourage clients to donate funds and then use those funds to pay personal expenses, which might include school expenses for the donor’s children, payments for the donor’s own ‘volunteer work’, and loans back to the donor. We have over 100 individuals under audit in connection with such cases.”

Abuses aside, my question is: If people can receive a tax deduction for donations to community foundations, are there any drawbacks to or less incentive for those same people making earmarked donations to non-profit organization endowment funds, in essence donor advised funds (DAF)? Non-profits don't have the 5% payout rule community foundations face.

Gene responded:

“There are of course many advantages to contributing to a DAF as opposed to an endowment fund of a nonprofit, including:
· The ability to advise on distributions to a different charity or charitable area from one year to the next;
· The opportunity to have a discussion with community foundation staff regarding the effectiveness of their contributions and the reputations and progress of the charitable beneficiaries.

“On the other hand, where the donor’s intent is to give to one particular charity with which the donor has a strong connection, a gift to the endowment may better fulfill the donor’s desires. It may also result in greater recognition. Note that endowments have their own payout requirements.

“The endowment payout requirements are generally established by the organizations, consistent with the applicable state laws (e.g., UMIFA or UPMIFA). While state laws do not set a minimum payout, I don’t believe many organizations will allow you to set up an endowment that is subject to restrictions against annual distributions. [My emphasis added.] Note as well discussion on the Hill about a 5% payout requirement for university endowments.”

We’ll have more on lawmakers' backlash over Harvard/Princeton/Yale endowments at a later date. I’m curious as to how you involve your donors once they have made gifts to your endowment. If so, are you marketing that? Care to share?

In appreciation for Gene Takagi’s insight, I extend my thanks to him and I will leave you with the following from him:

Circular 230: This communication was not written or intended to be used, and may not be used, by any taxpayer for the purpose of (i) avoiding any tax-related penalty under the Internal Revenue Code, or (ii) promoting, marketing or recommending a tax-related transaction described herein.

The Law Office of Gene Takagi 703 Market St., Suite 1412 San Francisco, CA 94103415.977.0558 (office) 415.977.0559 (fax) gene@attorneyfornonprofits.com www.attorneyfornonprofits.com www.nonprofitlawblog.com

THOSE BABY BLUES

Paul Newman played a big role in some of my first dates. There he was up on the big screen in the peak of his drop dead gorgeous years while I sat in a darkened theater with wonderful young men watching him portray Luke, the feisty prisoner on a Southern chain gang who refuses to buckle under to authority in Cool Hand Luke or the handsome scoundrel Butch in Butch Cassidy and the Sundance Kid. How often have you heard someone recite, "What we've got here is failure to communicate?"

He passed away at his tree shrouded home on a rolling back road of Wesport, CT after a long battle with cancer. He was 83. There are attractive younger movie stars on film these days, but few of them are conscientious charitable role models for the rest of us to emulate. As Roger Ebert said of Newman’s passing, “He seemed above all a deeply good man, who freed himself to live life fully and joyfully, and used his success as a way to follow his own path, and to help others.”

Paul Newman met Joanne Woodward in his 1953 debut Broadway production of Picnic. They shared an apparently love-filled 50-year marriage. They were artists, sweethearts, parents and dedicated philanthropists together.

I lived in Westport for three years in the 90’s and regretted that I had not one Newman/Woodward sighting. Off-stage, their tireless devotion to philanthropic work enhanced many lives and worthwhile causes locally. Their family's support of the renowned Westport Country Playhouse, for which Joanne Woodward is artistic director, is famous.

Newman is celebrated for founding The Hole in the Wall Gang Camp, named for the outlaws in Butch Cassidy, where seriously ill youngsters enjoy summer camp in the great outdoors for free. Newman’s Own Foundation, the philanthropic arm of his food empire founded along with author A. E. Hochner, donates all profits and royalties after taxes to educational and charitable purposes. He has donated more than $250 million to charities, including The Scott Newman Center for drug abuse prevention, Parkinson's research and the Canary Foundation on the early detection of cancer (for which he drove in the San Jose Grand Prix - where he came in second - to raise money), as well as Help USA to empower the homeless and many, many other worthy causes. In 2007, he donated $10 million to Kenyon College, where he had enrolled after being discharged from the Navy.

He took my breath away in the 60's and his passing takes my words away now. In the spirit of Paul Newman, we should all leave such a lasting legacy.

COMFORT ZONE

A girlfriend of mine, a gemologist, has been asked by a major university's geology professor to give a presentation to his class, something she has never done before. While she will be fantastic, this will take her out of her comfort zone, something we humans are so loathe to do. Right now the economic situation is taking nearly everyone out of their comfort zone. Like countless investors, many non-profit executives are hunkering down, leaving fundraising positions unfilled, cutting back on publications and mailings. One local group is considering a merger.

McKinsey & Company, advisor and counselor to many of the most influential businesses and institutions in the world, suggests that rough economic periods can create opportunity as well as danger. An archived copy of The McKinsey Quarterly has an article that is pertinent today: Learning to Love Recessions.

To see how economically troubled times can be used to advantage, McKinsey studied the performance of 1,000 mainly industrial companies in the United States during an 18-year period (1982–99) that included the recession of 1990 to 1991.

Companies that retained or gained market leadership during the 1990–91 recession, their study found, were not afraid to spend their cash reserves on strategic acquisitions. Also, those companies refocused their spending in line with competitive opportunities instead of tightening their belts on operating expenses. McKinsey reports a counterintuitive strategy—investing for future growth—often makes more sense than pulling in your horns to cut losses.

In the non-profit arena John Glier, President and Chief Executive Officer of Chicago fundraising consultants Grenzebach, Glier & Associates, examined the past fundraising performance of 20 to 50 large colleges and universities during each of four previous recessions.

Institutions whose contributions dropped during one or more recessions were those that failed to hire a sufficient number of fundraisers, lagged in their efforts to recruit donors, or failed to promptly fill a key fundraising or other leadership job, Mr. Glier said.

Colleges and universities where fundraising continued to flourish during hard times, he says, tended to be those that expected the economic downturn as well as those that were sensitive to the need to take special action and took a long view of their fundraising operations.

He points to one university he is working with now that exemplifies the type of institution likely to keep contributions growing throughout the current turbulent economy and beyond. Mr. Glier says the institution, which he declines to name, but which I believe is the University of Chicago for reasons below, “has one of the highest compound annual growth rates in higher education” and is already spending $40 million annually on fund raising. Just recently, he says, it decided to put another $21 million into its development operations, $9 million in the 2008-2009 academic year alone. The decision, Mr. Glier says, has nothing to do with an impending campaign; the university has just completed its biggest fund-raising drive yet.

To survive a recession, says Mr. Glier, “Take the long view. High performance makes the difference.”

Consider this: Since the Foundation Center began collecting data on private and community foundations in 1975, the United States has experienced several recessions. “During most of these recessionary periods -- 1980, 1981-82, and 1990-91 -- U.S. foundation giving in inflation-adjusted dollars did not decline -- and, in fact, increased slightly.”

According to data from the Center on Philanthropy at Indiana University, as of June 2008, 13 gifts of $100 million or more and 214 gifts of between $10 million and $100 million have been reported, suggesting that market oscillations of the first half of 2008 have not stopped the pipeline of significant charitable contributions.

To remain financially strong in this rocky economy, non-profit organizations need fundraising and fundraising professionals even more than ever. Heed Mr. Glier’s advice … it’s prescient AND it’s free.

NOT SO DIRE PREDICTION

It’s not news that economic cumulonimbus clouds have been casting shadows over the fundraising landscape. However, not everyone is so glum.

Quoting liberally from the Oct. 8, 2008 issue of The Chronicle of Philanthropy below (because there is a lot we can learn from universities, pun intended), a noted wealth researcher at Boston College says charitable giving may not face circumstances as dreadful as predicted in this rocky economy.

“Extrapolating from data on charitable giving in the last recession, John J. Havens, a researcher at Boston College’s Center on Wealth and Philanthropy, told a conference of fund raisers that it may be a year before the troubled economy begins to take a toll on the sums charities collect.

"More important, he said, unless national incomes drop sharply, the decline in giving may not last long or be significant.

"The current crisis is similar to the conditions nearly a decade ago, said Mr. Havens, at a conference on “The Supply and Demand of Philanthropy in the 21st Century,” sponsored Boston College’s Center on Wealth and Philanthropy, the Association of Fundraising Professionals, and the Eaton Vance Investment Council.

"In the last recession, said Mr. Havens, the United States began to see a decline in net wealth in 1999, even before the burst of the dot-com bubble precipitated the 2000 stock-market crash. The downward growth in wealth continued for three years, with aggregate household wealth declining by 15 to 20 percent from 1999 to 2002 — the largest and deepest downturn in wealth since the 1930s.

"Those variations in net worth, however, did not directly correlate with changes in philanthropic giving, Mr. Havens said.

"Average household contributions did not begin to fall until 2000, and they did not drop as much as households’ net worth did. From 1999 to 2002, household donations decreased by 10 percent, while their net worths dropped by as much as 20 percent. Moreover, said Mr. Havens, once net wealth began to grow again in 2002, donations also rebounded.

"The net wealth of households began to decline in the fourth quarter of 2007, said Mr. Havens. Based on the previous recession, Mr. Havens predicted a lag of up to a year before donations decline – -in part because most high-net worth donors plan their charitable contributions a year in advance — and the decline in aggregate donations may not be significant.

"But Mr. Havens’ prediction, he warned, assumed there would be no big drops in income. If household incomes decline sharply, the impact on giving would probably be more severe and prolonged, said Mr. Havens. However, he added, household income levels have historically tended to remain more stable than net wealth."

Next: What you can and should do.

CONFLICT OF INTEREST

The talk here in Atlanta is all about the New York Times' front page article on the failure of Emory University psychiatry professor Dr. Charles Nemeroff to report $1.2 million in income he received from drug makers.

Dr. Nemeroff, one of our country’s most influential psychiatrists who earned more than $2.8 million consulting with drug makers from 2000 to 2007, failed to report his income to his university and violated federal research rules, according to documents provided to congressional investigators. Sen. Charles Grassley (R-IA), ranking member of the Senate Finance Committee, is leading investigations of academic research with the intention of curbing inappropriate relationships and conflicts of interest. He, along with Sen. Herb Kohl (D-WI), Chairman of the Special Committee on Aging, has introduced the Physician Payment Sunshine Act, S. 2029, for transparency in drug industry payments to physicians, requiring pharmaceutical drug, medical device and biotechnology companies to publicly list payments over $500 they make to doctors in return for time and expertise with product development, research and training.

There is a serious question of whether payments alter medical judgment in ways that benefit companies at the expense of patients. Can Dr. Nemeroff put the welfare of the public before personal benefit?

Dr. Nemeroff was head of his department (before he voluntarily resigned), has written over 850 research reports, is editor in chief of the journal Neuropsychopharmacology, and is a successful fundraiser. He was instrumental in securing generous gifts for Emory from Smith-Kline Beecham Pharmaceuticals and Wyeth-Ayerst Pharmaceuticals beyond funds that financed him. He has sought funding from many other companies for the university.

Let me digress here a moment for those who might not appreciate the need for conflict of interest rules for nonprofits. A conflict of interest surfaces when a board member or staff member has a personal interest that clashes with the interests of the organization or where a board or staff member has divided loyalties (also known as a “duality of interest”). Situations arising out of a conflict of interest can result in either inappropriate financial gain or the appearance of a lack of integrity by the organization, both damaging to the organization -- in this case Emory and, by extension, people who may rely on unbiased appraisals of pharmaceutical materials or devices by Emory doctors.

Avoid the possibility that those in positions of authority with your organization may receive an inappropriate benefit by adopting a conflict of interest policy. While not fail safe or required by the Internal Revenue Service to obtain tax-exempt status, the IRS (and I) strongly urge nonprofits to develop conflict of interest policies which all board members, staff, consultants and volunteers must sign. The IRS has published a suggested conflict of interest policy, included in the instructions for completing Form 1023 (the Application for Recognition of Exemption under Section 501(c)(3) the IRS Code). This detailed and comprehensive policy is published as Appendix A starting on page 25 of http://www.irs.gov/pub/irs-pdf/i1023.pdf

How hard is it for any organization to rein in a successful fundraiser? What elements of transparency need to be in place to determine conflicts?

As Emory has found out, policing conflicts of interest is no easy matter. Perhaps we in non-profit organizations can learn a lot from this reassessment of academic/industry relationships.

FOURTH QUARTER

I’m not talking football here. The last quarter of each year is crucial for nonprofit fundraising. Forty percent of charities raise on average between one-third and one-half of their entire annual donations from October - December. Like the American Lung Association, for example, almost three in 10 charities raise more than half of their revenue in the fourth quarter. Nearly two in 10 respondents receive more than 40 percent of their annual contributions in the month of December alone!

How much the Wall Street crisis will affect people's charitable giving has yet to be seen. Some non-profit executives believe the prolonged primary election season and presidential campaigns will also adversely affect fourth quarter donations. Presidential campaigns raised $580.4 million in 2007 according to the Federal Election Commission, which is less than one-quarter of one percent of the $306 billion raised for charitable purposes, according to Giving USA 2008.

"If you look at the history of philanthropy since the '50s, it has dropped about 1 percent on average in a recession," said Reynold Levy, the president of Lincoln Center. Quoted in the Washington Post, he added, "Whenever there's a recession, or the closure of a given firm, the natural tendency is to extrapolate and predict a very strong downturn. But that has not been the case."

This is no time to cut back on marketing and communications. Do not give up on your long-range strategies and long-term cultivation plans, but be creative with your fundraising. Identify new sources of revenue.

When times are tough, we need to communicate that honestly and loudly! Be sure you are making a really compelling case. If you commiserate with your donors and allow them to sympathize with you and the people or cause you serve, they can come through for your organization.

Specifically, scrutinize each of your major donors; some have suffered a setback in this economy, some are still fine. Matthew Haag, senior director of major gifts and regional programs at the University of Rochester says, “Now is an opportunity to show that you are interested in them beyond the financial, because you know some just don’t have it to give right now.” This is a great opportunity to forge enduring, long-term donor relationships.

These last months of 2008 could support you through a thorny economy. Remember, in the face of our nation’s slow economy, Jerry Lewis’ annual Labor Day Muscular Dystrophy telethon raised a record $65 million, $1.2 million more this year than last.

You can win the game in the Fourth Quarter!