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At Philanthropy Action we are generally skeptical that there is anything really different about the “new” philanthropy focus of applying business methods to nonprofit programs. Having said that, there is no question that the trend in nonprofits toward “earned income” (e.g. charities charging for some of their services) and self-sustainability is a new development over the last decade. While a few critics have vociferously opposed the trend from an ideological perspective, there has been little real pushback. This is not surprising given that this move toward self-sustainability has largely been pushed by donors; non-profits generally have no choice but to go along with donor advocated trends because to resist means putting financial resources at risk.

This week Stephanie Strom from the New York Times reports on some of the unforeseen consequences of these trends, consequences unforeseen by both advocates and critics. In December, the Minnesota Supreme Court stripped a small non-profit daycare of its tax-exempt status because, in the court’s words, it doesn’t “give away anything.“ While the facts of the case limit its real applicability to most other non-profits (the fees the daycare charges, for instance, are not less than for-profit daycares), the underlying issues could have significant implications for those organizations that define themselves as ‘non-profit’. If, according to the rules of “new” philanthropy, a non-profit needs to be largely self-sustaining or generate “earned income”, why is it a non-profit? What’s the real difference between an elite, non-profit university with a huge endowment that still charges most of its students more than a hundred thousand dollars in tuition for an undergraduate degree, and a for-profit eco-tourism lodge that generates jobs for the local poor and preserves vital ecosystems? Why should the former be tax-exempt and the latter not? And what about an organization that provides, for instance, job training for the mentally handicapped which no one else will provide but is paid by the government to do so? The logic of earned income is powerful. It can help make a non-profit more accountable to the people it serves and create more stable programs and services. Charging for services can be an excellent way of allocating scarce resources to those most likely to benefit from them.

The essential challenge is that we are learning that the most effective way of delivering services to those in need may be a hybrid approach, a gray zone between for-profit and non-profit models. But while the lines that distinguish between for-profit and non-profit are blurring, the lines of tax law and public policy can’t follow. Laws that govern contracts, taxes and the like cannot be gray—they must be black and white. This is the clash, the unforeseen consequence, that “new” philanthropy has yet to figure out. It will be a shame if the promise of blended approaches gets extinguished by our inability to creatively solve the public policy challenges they create.

Another key issue that the article draws out is how many non-profits today receive revenue most of their revenue from government contracts. At both the state and the federal level, governments have scaled back the direct delivery of social services and have outsourced services to non-profit (and sometimes for-profit) groups. Given the truly abysmal record of government service delivery, it’s hard to make a rational argument against this move (though there are of course cases of bad contracts and services gone wrong). But the larger issue in the Minnesota court’s ruling is that, to quote the article, “government payments were not evidence of charity — those payments were not a gift.“

The court’s ruling draws an artificial distinction between government payments and donor payments. Someone or something is paying for the services that non-profits deliver.  Why does it matter if the payer is the government or a private donor? If the payer is receiving direct benefit from the services then obviously there is no gift, and tax-exempt status should be denied. But if the payer is not receiving a benefit, then we are talking, in the strictest sense, about a gift. Stripping non-profits of their tax-exempt status at the state level because the majority of their revenue comes from government payments simply creates a Kafka-esque irrationality. The government social service programs will have to pay the organizations higher fees so that the organizations can give the money back to the government in property taxes.

While some serious questions were being raised about the public policy implications of “new” philanthropy, “old” philanthropy made headlines this week. The Howard Hughes Medical Institute announced $600 million in grants that break most all of the “new” philanthropy rules. The grants are to fund specific scientists to pursue basic biomedical research. The Institute sums up its approach in the phrase, “people, not projects.“ Additionally, the grants essentially endow the research of these scientists for years—the Institute says that it values risk-taking and “impact over publication volume” while “recogniz[ing] that some areas of research will proceed more slowly than others.“ This is in stark contrast to “new” philanthropy, which tends to focus on measurable, short-term results from research focused on specific diseases. As a consequence, it has become increasingly hard for scientists to find funding for basic research. The Hughes program is by no means unique—see the MacArthur “genius” grants for instance—but it is definitely against the flow. And it makes sense as a logical approach to funding basic scientific research. Time will tell, but such an “old” approach is probably equally likely to ultimately be effective as any “new” philanthropy approach.

The point is not that “old” philanthropy is better than “new” philanthropy or vice versa. But the headlines should make us remember that “new” doesn’t necessarily mean “better”, and “old” wouldn’t have survived long enough to be old if there wasn’t some value in it.

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