*Challenges within the Vermont Non-profit Sector

To varying degrees, the needs of a society are met by three de facto socio-economic resources: private sector goods and services, government services and not-for-profit organizations.  I say “organized” only to highlight the fact that so much of what makes small-scale communities in Vermont and elsewhere function is a persistent sense of “the common good” and individual empathy and initiative that keeps neighbor looking after neighbor in ways that blessedly defy organization. 

Each of these three sectors is highly nuanced with many extrinsic crossover points.  The current federal administration’s decision to include funding of religious organizations is an example of how these boundaries can intersperse. It is not, however, the purpose of this paper to analyze these nuances, but rather to take stock of the current vulnerabilities affecting non-profits in Vermont and their lifeblood, philanthropy, in order to better understand how Vermont non-profits might strategize to improve Vermont’s social and economic fabric. A discussion of current challenges will better inform us as to how we might plan for a more efficient and effective vision of the non-profit sector’s contribution to the wellbeing of Vermont and the region.

I. Mission and Focus

1. Learning to listen and generate dialogue: An endemic problem with non-profits is their tendency to establish and promote a mission ideology without fully researching and understanding the needs of the community or the philanthropic goals of their funders. This goes to the essential question of whether an organization is ego-driven or community needs-driven. To use extreme examples, one doesn’t insist on funding literacy if people are dying of starvation just as Tiffany doesn’t market diamond watches to aboriginal cultures. Listening to funders is as complex as listening to people who work with and understand community needs. Both require dialogue. A community may well need food to alleviate hunger but it will also need a sustainable enterprise to generate its own food over time. A funder may approach a non-profit with a foregone conclusion about how to alleviate a community problem and they may be right about the need and wrong about the solution, in which case the organization needs to begin a dialogue with the funder, and possibly the community, to help him or her understand and arrive at a long term solution. 

2. Purpose: a community-driven mission or a missionary’s dream?  Some of our most vital non-profits began as the benevolent vision of an individual. Many, however, don’t survive their missionary-founder’s vision or ego.  As in business, the vibrant entrepreneur must ultimately make room for professional management, so must the non-profit visionary subsume his or her own ego in favor of mission and good governance. How many non-profit organizations today fundraise only to sustain themselves?  A development officer hired to fundraise for his or her own salary and that of the Director, though inappropriate, is not uncommon. What is an appropriate ratio of internal cost to direct mission funding? How many organizations run aground on the shoals of their founder’s persistent leadership? Web-based services like Charity Navigator www.charitynavigator.org are beginning to step in where regulation has not and offer donors answers to these questions, although their analysis does not extend beyond the 5000 largest national charities.

3. Naming philanthropic Sectors:  The non-profit community might be better served if there were greater public understanding of areas of mission focus as well as a common descriptor of each sector:  community needs  (social safety net), research, education, environment, international, arts & cultural heritage etc.  This would allow donors to better navigate towards their own particular interests. A common language will become increasingly important as donors rely on the Web to navigate, access, judge and transact with their favorite charitable organizations.

4. Address or alleviate?:  The Vermont Community Foundation has wisely opened a discussion on the critical distinction between addressing the root cause or the symptoms of a social need.  To use a well worn example, how much resource is applied to providing food or how much to creating a sustainable agricultural enterprise? The VCF makes a distinction between charity and philanthropy, implying in somewhat confusing redefinitions that charity alleviates and philanthropy addresses root cause.  There are organizations that do either or both, but often don’t differentiate within their mission statement between tactical and strategic initiatives.  The VCF has been wise to introduce the discussion as it will bring better focus and measurement to outcomes.

5. The difference between for-profit and not-for-profit:  Vermonters are not alone in conflating the for-profit and not-for-profit sectors. The non-profit sector includes trade organizations that might be more accurately called lobbying organizations representing for-profit businesses, contributing to the confusion. Is, for example, the Vermont Education Association, the teachers’ union, the same as the Visiting Nurse Association?  Furthermore, Vermonters are inundated with charitable fund drives conducted by professional fundraisers asking them to donate to the Vermont Professional Firefighters Organization or the Vermont Police Association, while locally they are also asked to donate to their local volunteer fire or police department. Which is trade and which is non-profit community support?  The non-profit 501C4 trade association may lobby for its business members aggregate goals including those contributing to their profitability, but the non-profit 501C3 is limited largely to lobbying on behalf of its mission or being an informational resource. The introduction of social networking websites with their lack of legal and economic definition, surrounded by an ocean of deceptive spam messaging only adds to the confusion. On the national level about a third of non-profits are in fact trade organizations. Foundations established by businesses such as the Gannett Foundation are required by statute to be driven by mission rather than the interests of the funding business. After the recent “research funding” debacles involving respected research universities wherein pharma and tobacco foundations funded questionable research results, one might fairly ask if safeguards are in place to assure integrity and compliance.

An ancillary point of confusion for many is the widespread and erroneous assumption that non-profits must actually lose money and that any positive annual budget contributions to “fund balance” will ultimately negate their non-profit status. In fact, the opposite is true. Non-profits ought, if possible, to budget for such contributions annually to enable them to grow and invest further in mission.

II. Leadership, Management and Governance

1. Dysfunctional Governance:  This may well be the non-profit sector’s greatest liability. The widespread lack of understanding of non-profit governance and the poor performance of board chairs in leading their non-profit boards is a frequent, if rarely acknowledged point of failure. The demise of a non-profit is usually found in a specific event that might never have been allowed to develop into a crisis if the board was exercising its premonitory fiduciary and mission oversight correctly. Organizational forensics often brings to light the dissociative behavior of both board and executive director as if responsibility for the event was never quite clear.  Too often boards are populated by the executive director, often the founder, rather than being chosen and vetted by the search and governance committee of a self-perpetuating board. This faulty practice produces a board whose members cannot be objective or critical and, in its worst cases, amounts to social patronage. Such board composition may also lead to faulty conflict of interest management and opaque and improper grant funding. What’s more presidents or executive directors of organizations are rarely held to account and rarely do they receive thorough, objective annual performance reviews, often simply because it is uncomfortable. These are all threats to good governance.  

2. Professional Management:  An often expressed concern among philanthropists is their perception that the depth of management skills within organizations they fund is inadequate to assure the most efficient use of their donations. Management positions with non-profits are often filled by people whose dedication to mission is rewarded and harnessed by offering them a position in the organization for which they have little or no actual training or experience.  This is often the case because an individual’s passion for the mission can offset to some degree their real market compensation for a specific skill. An intern dedicated to the work of the organization becomes a grant manager, part time bookkeeper or Webmaster even though they may have little or no training for the role. Apart from the ethical considerations, is this the proper way to staff an organization?

3. Dearth of Development Professionals:  Vermont and the region lack a robust pool of available development professionals. Many development officers have neither the training nor the experience to grow a healthy endowment and annual revenues. They’ve simply evolved into their current positions, learning as they go. Development is a marriage of art and science and both must be present to be successful. The “art” is the diplomatic ability of a development officer or his or her team to understand and relate to the community of donors, to be socially comfortable with access challenges, donor research, donor affinities and asking for money. The “science” involves understanding the tools that make for successful development, including the management of databases (potential donors, perpetual donors, large gifts, bequests et alia), campaign calendars, privacy, security, and email and direct mail solicitation copywriting. It is rare that a nonprofit organization attains the scale or can afford to encompass both art and science in its development staffing and infrastructure. If an organization can afford only one of the two, “art” is by far the more important, leaving open the opportunity for an organization like The Vermont Community Foundation or The Windham Foundation to explore and possibly fund a fire-walled, cooperative development management software system.

4. Donor Mismanagement:  From some reports, donor confusion is rife in Vermont and elsewhere. Perpetual donors are frustrated by the endless mail stream they receive from organizations to which they donate, the sale of their names to other organizations and the effusion of solicitations they receive from like organizations to which they choose not to donate. Donors know that direct mail is expensive. For many, it is inconsistent with their individual efforts to minimize the waste stream coming into their homes. “Calendar insensitivity” is also a great source of frustration. The receipt of a solicitation letter two weeks after one has made his or her annual donation at best annoys or at worst enrages donors. “Donate-‘til-forbid” programs that periodically debit a donors credit card for the donor-selected amount are making inroads in this area, but the bulk of expensive non-profit mail entering the mail-stream is beginning to rival that produced by for-profit direct marketers.

Inexperienced development and capital campaign managers may lack experience with the tools available to them to raise money. They may not have done capacity studies or donor-focus groups. Their campaigns may be poorly coordinated with other community fund raising efforts, badly designed and untested and only serve to induce confusion or    anger in potential donors. The net of all this is a calcification of donor enthusiasm for the organization or giving in general that can become an excuse for saying no.

III. Organizational Efficiency

1. Replicated infrastructure and overhead:  If larger scale non-profits are fundraising for common needs such as office space, utilities, office equipment, software and accounting, technical and grant management staff or real estate, how much philanthropic money and energy is diverted from mission as this expense gets replicated over ever more organizations? 

At the very least there is a strategic opportunity to share accounting, non-mission-based personnel, common space, class rooms, exhibition space, technology, and contracted services among similarly positioned non-profits while maintaining unique missions, directors, governing  boards and program development staff.  The Vermont Historical Society, the Vermont Arts Council, the Vermont Humanities Council, The Vermont Folklife Center, all struggling to fund mission and overhead, might consider combining those overheads, using their amplified scale to achieve cost reductions that would accrue to the benefit of their unique missions. As these cultural non-profits extend their reach and mission onto the Web, they will be called on to acquire very expensive technology to archive, parse and serve their broadband assets like recordings, documents, photographs and films to an audience well beyond Vermont’s borders. Will each try and raise the money to acquire this technology when one properly designed system could serve the needs and assets of all? Does each organization need a unique financial manager when the combined revenues of all four are less than a small business?

Donors are drawn to mission and program results, not overhead, making it critical that non-profits conserve energy and resources in the service of mission. Boards and directors of Vermont non-profits need to look inward and assess how hard they are working at mission and how hard they are working at survival. An honest accounting of revenues allocated to mission versus overhead will be a key to an organization’s intrinsic strength.

2. Too many non-profits?:  Vermont has about 2700 non-profits, one non-profit for every 225 Vermonters. This amounts to more non-profits per capita than any other state in the Union. This may well reflect Vermont’s deep-rooted sense of commitment to community wellbeing. The sector employs over 40,000 people and generates over 10% of the State’s economic activity amounting to almost $2B. Three out of four of the State’s largest employers are in fact non-profits. The State itself employs about 10,000. Fletcher Allen is second, at over 6000, followed by IBM and then UVM. The number of non-profits may be inflated by the fact that many are little more than legal and organizational frameworks for largely volunteer workforces that do not depend heavily on private or public philanthropy. 

IRS and State registration hurdles for non-profit start-ups offer minimal on-going accountability for linking mission and beneficient output. Non-profit status, once awarded, is usually put at risk only by excessive unrelated business income (UBIT) or by an external legal challenge, often from the for-profit sector.

Furthermore, it takes more than a dream to fulfill a mission in the non-profit world. It takes leadership, donor money and governance. A large number of organizations compete for the donations of Vermont’s 630,000 people. In the recent past, Chittenden County alone has had over forty capital fund drives. If non-profits were to be consolidated by design, should the organizational driver be mission focus or geographic community? Alternatively, should we rely on “natural selection” as the commercial sector does, or is there a better strategy that might ensure more efficient use of our limited charitable revenues and the wealth of volunteerism for which Vermonters are famous?

IV. Legal Challenges and Opportunities:

1. Non-profit status challenges:  Across the country there is a small, but significant pattern of legal challenges against certain non-profits: day care centers, large hospitals, large colleges and universities, mega-churches, public broadcasters and museums seeking to challenge their non-profit status.  They come from four sources:

• Private sector entities that feel market specific competition and believe that non-profit status is unfairly awarded, amounting to unfair competition
• The IRS questioning non-profit status based on what an organization has become
• Cash-strapped -communities seeking additional tax revenues in their tax base
• Individuals or organizations who have an ideological antipathy to non-profits
• Congressional initiatives seeking to emend non-profit status.

Few, if any, of these threats have seriously manifested themselves in Vermont. The City of Burlington some years back questioned the taxable status of both the University and the Academic Medical Center it hosts.

A national perspective on the non-profit sector adds little clarity to the situation here in Vermont. Although there is IRS oversight, there seems little principle-based agreement on the social and economic role of non-profits in the country at large. The political pendulum’s arc between conservative and liberal leadership further confuses the issue of how political ideologies perceive or even value the sector. Conservatives seem to want the public sector to stick to its charitable knitting and present no competition to the private sector, while liberals are disposed to create non-profit entities out of certain social services that conservatives have previously tried to privatize like public utilities and educational and correctional institutions.

The general message to the public sector is “do more with less.” There is, of course, an end game to this path. Many social safety net non-profits are heavily dependent on state and federal funding as well as donations and limited fees. As the two former resources decrease and the two latter near capacity, what becomes of organizational stability?

A national dialogue with an eye to a better common understanding of what constitutes the non-profit designation, how it meshes with a for-profit economy and its ultimate purpose in a society would be helpful in clarifying these ambiguities.  This will become increasingly important as the Internet 2 social networking technology matures and enables more mission-driven businesses.  

2.  L3C Legislation: Much is made of the role of business in helping non-profits with infrastructure grants, lent executives, and giving, but this manna has proven to be inconsistent. Business acts as it should, in the best interests of its bottom line, and, to the extent that its support of a non-profit serves it, the relationship works, but it can be short-lived as business cycles reverse, leaving the non-profit with a gaping hole. Federal investigators are now probing retail stores and e-commerce sites claiming to support non-profits with undisclosed percentages of their sales. The demographic association with the non-profit works for the business; but does it actually work for the non-profit organization? Furthermore the appearance of for-profit and not-for-profit social networking sites must come under scrutiny as well. The volatility of user traffic, sales and donations on the Web, while evident, is still not fully understood, nor are there adequate regulatory guidelines for the existence of Web -only non-profits.  

For some time, the definitional clarity has been blurring between what constitutes for-profit and non-profit enterprises. Non-profits are being rated by organizations like Charity Navigator on their fiscal efficiency, while for-profit corporations are being rated by other organizations on their “social responsibility.”  The possible emergence of the L3C designation seeks to address this hybridization between for-profit companies with a social mission and non-profit organizations being run like efficient businesses.

The Council on Foundations supports federal legislation that would allow foundations to make program-related investments to L3Cs.  In its 2007 (Legislative) Agenda for Philanthropic Partnership, the Council describes its position as follows:

“Rationale:  The L3C is designed to facilitate the flow of philanthropic capital to economic development activities such as creating jobs in economically depressed areas. It does this by simplifying the complex analysis required before private foundations can undertake program-related investments. The proposed legislation would benefit community foundations and other public charities engaged in economic development by allowing them to contribute to a business that is structured primarily to accomplish a charitable purpose.

The L3C would be limited to business activities that significantly further a charitable or educational purpose and that do not have a significant goal of producing income or capital appreciation. Therefore, foundations should be able to invest in or make grants and loans to L3C’s and have the payment count towards the foundation’s payout. Further, they should be able to do so without the need for the analysis that currently supports program-related investment decisions.”

In the latter half of 2006, the non-profit sector’s own organization VANPO (VT Association of Non-Profits) failed financially, thereafter selling its intellectual assets to The Vermont Community Foundation (VCF). VCF then began to review how they might help fill the void created by VANPO’s demise and bring additional organization to the sector’s statewide presence.  VCF’s is studying the question now. There appears to be clear agreement, however, about the need to have an umbrella organization overseeing and advocating for the non-profit sector in Vermont.

An examination of these thirteen points might well form the basis of a strategic plan for strengthening the non-profit community in Vermont. Some are more important than others, but all have an impact on the ability of the sector to efficiently employ the generosity of Vermont to strengthen community.

Bill Schubart

May 25, 2008