Thursday, November 25, 2004
When Michael O’Neill talks about the nonprofit sector, as he frequently does, being a professor of nonprofit management at the University of San Francisco, he likes to throw around the numbers. They’re impressive numbers, back-breaking numbers. Numbers countries like Mexico and Canada would be happy just to be able to roll across the room.
“We’re talking about a trillion-dollar-a-year economy,” he says. “It accounts for 10 percent of the total GDP [gross domestic product] of the US. There are only six countries in the world outside the United States that have a larger GDP than the US nonprofit sector.”
He goes on. Nonprofits employ 11 million people, more than the civilian employees of the federal government and the 50 states combined. Another 100 million volunteer their time. Collective assets are figured at $2 trillion.
“And that’s conservative,” O’Neill says. “It’s probably higher.”
Nonprofits, largely fueled by individual philanthropy, have become such big players in the local and national economy that O’Neill and other economists refer to them as “the third sector.” There is the public sector, what most of us call government; there is the private sector, commonly referred to as business; and then there is the third sector—the aggregate of all the nonprofits, political groups, churches, charities, and foundations that are neither money-making ventures nor official government institutions. In this country, as O’Neill’s data shows, the third sector is huge, the lovechild of an unlikely union between privilege and necessity. It is nourished on the rich milk of American wealth, but it gets that milk because it has to be strong—the job of private philanthropy is to help uphold the social safety net.
That’s the deal we make by rejecting the tax structure necessary to fund universal health care, social security and other basic needs. If you don’t want to pay income taxes on par with Sweden’s, at 45 to 60 percent, you or someone like you has to donate to Meals on Wheels.
A Powerful Gift
The 19th-century concept of noblesse oblige (literally “nobility obligates”) figures prominently in this arrangement. It dictates that wealthy individuals, and by extension affluent societies, give to those who are less fortunate. If it sounds a touch condescending in the French, it’s not much better in English. Steel magnate Andrew Carnegie advised his fellow tycoons to embrace personal austerity and an assertive form of philanthropy driven by the benefactor’s vision. His essay The Gospel of Wealth (1889) summarized his high-minded philosophy and still forms a mossy cornerstone of modern philanthropy.
“[T]he man of wealth thus [becomes] the mere agent and trustee for his poorer brethren,” Carnegie wrote, “bringing to their service his superior wisdom, experience, and ability to administer, doing for them better than they would or could do for themselves…”
As a society, then, we agree to give. Americans donated $240 billion to philanthropic causes in 2002, $183 billion of which came from living individuals, most of whom did their giving at church. Some $27 billion was from foundations, $18 billion in the form of bequests and $12 billion from corporations.
There’s more to come. Todd Lueders, executive director of the Community Foundation of Monterey County, is optimistic about philanthropy’s future.
Although charities nationwide took a double hit in 2001 from the stock market plunge and 9/11, he believes the third sector is regaining its legs. He refers to a 1999 study by Boston College researchers Paul Schervish and John Havens showing that $41 trillion in assets will change hands between generations in the next 50 years.
“It’s a huge intergenerational transfer,” Lueders says. “Obviously not all that money’s going to go to children or grandchildren, and hopefully not all of it is going to go to the government. So charities are hoping to be a significant player in that transfer of wealth.”
One way they will benefit is through bequests. “Testamentary giving”—money left to charities in a person’s will—has been inching up for the last few years, and local charities are beginning to see anecdotal evidence of that. It happened in May 2002 when Engracia Irene Murray, who had lived for many years in downtown Monterey, passed away, leaving her entire estate to a Community Foundation fund for historic preservation and senior services. It took the foundation by surprise.
“This woman had never been a donor during her lifetime,” Lueders says. “She had been kind of a volunteer, but nothing more. Close to $800,000—but we never sent her a newsletter, never met her.”
While bequests are always welcome, it’s impossible to budget for them. Most of the Community Foundation’s donors don’t wait that long anyway. They come to Lueders and his staff during their 70s or 80s to start figuring out their legacy—how much to give and to whom and under what conditions.
“The question really is an existential one: How do I want to leave the world a better place?” Lueders says. “It’s a fascinating conversation. It involves family: How much should I leave my kids? How am I gonna deal with this disgruntled cousin who’s gonna get nothing because I can’t stand the guy? And once I’ve settled that, how do I feel about the money I’ve made and what good it might do in the world?”
People give for all kinds of reasons: to memorialize a family member, to fight a disease that took a loved one’s life, to champion a favorite cause. One thing is certain, Lueders says: People don’t give for the tax benefit.
“I can count the number of times in the last 24 years that someone has said ‘What’s my tax deduction here?’ on one hand without even using all the fingers. And that’s nice to know.”
Mostly, people give because it is part of their value structure—John D. Rockefeller’s Baptist roots compelled him toward philanthropy. Or they give because they are afraid. Michael O’Neill has a story about this.
“There was a Jesuit priest who was a fundraiser for the high school I went to,” he recalls. “He was old school. People made allowances for that. There was a very wealthy guy—this is in Spokane—he said Father Hurley came to talk to him and said, ‘Larry, you know that parable in the Bible where it’s harder for a rich man to enter Heaven than for a camel to pass through the eye of a needle?’ And he said, ‘Larry, I’m here to help.’”
The Hard Good Work
The Community Foundation is one-stop shopping for people with a substantial amount of money to donate but not enough to start a foundation of their own. Pooling their money with that of hundreds of other donors gives them the chance to make a bigger impact than they otherwise could.
When they sit down with Lueders and his staff, they face an array of options. Give all their money to the Community Foundation, to be doled out at the staff’s discretion depending on each year’s needs? Pour it into one of the foundation’s Field of Interest funds, like the Fund for the Arts, benefiting arts organizations across the county? Divide it between designated groups like the Food Bank and the SPCA? Open a donor-advised fund and decide each year how to allocate the money?
The choices are similar to those faced by all foundations. Is it better to spread wealth around or target it? Turn over the money and walk away or stay involved? Is it giving if there are strings attached? Is it irresponsible if there aren’t?
Lueders says about half of all testamentary gifts are now unrestricted, a fact the Community Foundation welcomes.
“We like that because it gives our board discretion to respond to needs right now,” he says. “Things are changing faster and faster because of reductions in state and local funding. There’s a lot more discussion about how do you deliver meals, how do you run a clinic.
“I really think the pressure is huge on the third sector to step forward.”
The Community Foundation gives almost half its discretionary funding to community, social and health services. Yet the unmet needs are so great that the foundation, which has an endowment of $77 million and paid out $5 million in grants last year, risks wasting its effort.
“We could pump $100 million into Natividad [Medical Center] and that would only help them for this year,” Lueders says. “Or you could put it in the community clinics, which are grossly underfunded, and yet a key safety net for a lot of low-income workers. It’s a real sinkhole if you try to get at the whole system.”
Chris DeCardy, executive director of the Los Altos-based Packard Foundation, agrees.
“All of the foundation giving last year was around $30 million,” he says. “If you think about the projected budget gap in the state of California, which is about $6 billion, you quickly begin to understand there’s no way foundations or philanthropy could ever begin to fill the needs that are in play because of the downturn and state and federal budget cuts. You could wipe out all the foundations and not address the budget gap.”
Better, he says, to use foundation money for cutting-edge research like vaccines that will in time harvest a bumper crop of benefits.
“The innovation of foundations can catalyze and spark and help create all these amazing new things,” DeCardy says. “Foundations have been a really rich augmentation of what you get from the private sector and the social safety net you get from government, and that should be celebrated.”
One thing not to be celebrated is the spiral of the Packard Foundation’s endowment, which consisted of stocks from Hewlett-Packard and its spin-off Agilent Technologies. The endowment, valued at $13 billion in 1999, plunged to $6.2 billion in 2001 and now hovers at $5 billion, leaving the foundation scrambling to diversify its assets and curtail its funding. Overall grant payouts, which exceeded $600 million in 2000 and 2001, are now in the $200 million range—a feat the foundation is managing by digging deep, spending 7 to 8 percent of its endowment each year instead of the legally required 5 percent. In Monterey County, Packard funding fell from $9 million in 2001 (not including MBARI, which gets about $32 million annually) to $2 million in 2002. It has crept back up to $4 million so far this year, but there is no mistaking it: the giddy late ‘90s are gone for good.
Giving It All Away
All foundations exercise care when deciding what organizations to fund, but there are distinct styles of philanthropy. One is the Old Faithful model. Like a dependable draft horse, the Old Faithful foundation is there year after year, steadying the organizations it funds with little fanfare and doing the unglamorous work of pulling slowly toward a better future. Another is the Moving Mountains model. It aims, Kung Fu-like (or venture capital-like, in its most extreme form) to effect great change by cleverly applying pressure to just the right spot. At their worst, the former is ineffective, the latter quixotic. At their best, they complement each other naturally, providing the dynamic range of stability and risk necessary to fund a healthy community of nonprofits.
These were the options facing Michael McMahan, wife Nicky and sister Marsha McMahan Zelus a year ago as they considered where to take the McMahan Foundation, created by Michael and Marsha’s father in 1954 with money made from the family furniture stores.
“We had been meeting twice a year and making donations that ranged anywhere from $500 to $10,000, with a few larger than that,” Michael says. “And we had followed that practice for 16, 17 years, since my father died in 1988. And while we became aware that we were doing good for a lot of organizations, we became aware that we weren’t making transitional change for any of them.
“We thought about it over a number of months. It was a pretty radical decision, but we decided if we made these large gifts we could make substantial changes.”
The large gifts in question were of $4 million each—the foundation’s total assets—to the Big Sur Land Trust and Chartwell School. The gifts would spell the end of the foundation, so the stakes were high, and the McMahans wanted to be sure their contribution would do the maximum good.
The gifts were carefully tailored in collaboration with Chartwell and the Land Trust. The $4 million to Chartwell, which serves dyslexic children, was tagged as a matching fund for a new $8 million campus on Fort Ord. Not a dime will be released until the school raises the first $4 million.
The $4 million to the Big Sur Land Trust is divided between a land stewardship fund and a revolving acquisition fund. The acquisition fund is designed to help with the speedy purchase of land as it becomes available, before slow-moving government agencies can respond. After they do, the money is backed out and parked once more in the acquisition fund, ready for redeployment.
When we spoke, McMahan had just returned from the National Philanthropy Day luncheon at the Inn at Spanish Bay, where he had seen a number of organizations the McMahan Foundation used to fund.
“And of course we got to know these organizations, and it was a wonderful opportunity,” he said, a little nostalgically. “It was a difficult choice, but we’re glad we did it.”
A Steady Push
The Salinas-based Harden Foundation, the largest private foundation in the county, subscribes to the Old Faithful model, with the occasional major capital outlay. For 40 years, it has been funding Monterey County youth and other organizations on behalf of Eugene and Ercia Harden, a childless couple whose legacy sprang from the same green gold that has driven much of the Salinas Valley’s prosperity: the growing, packing and marketing of lettuce.
Like everyone else heavily invested in the stock market, the Harden Foundation suffered in the last few years. Its net assets slid from $49 million to $41 million and chugged back up to $51 million. But during that time it spent fairly consistently, about $2.3 million a year, and expects to reach $2.8 million this fiscal year.
The wealth is spread around the county. In 2003, 101 local organizations in seven categories received Harden Foundation grants ranging from $6,000 to $50,000. Youth and family organizations received the lion’s share at $872,000. In the last few years, the foundation also built the $3.2 million Harden Youth Development Center in Salinas.
As Joe Grainger, the foundation’s director, explains its philosophy, it has the ring of an older generation’s values to it, emphasizing prudence and the encouragement of sturdy self-reliance.
“Obviously you could bombard one thing, but there are some challenges to that too sometimes,” Grainger says. “You don’t want any organization to be too dependent on one entity. Sometimes the bigger foundations will give an initiative for five years, and it’ll be a big chunk of the funding with the understanding that the organization needs to get their feet under them. But they may not be on financial footing when the time is up, and the program goes away.
“You can come in and give them a big boost. If you give them too much you can accomplish things in the short term, but in the long term it may not be as healthy for the organization.”
Laurel Alexander, grants program manager for the Monterey Peninsula Foundation, is of a similar mind. She says she’s seeing more requests from nonprofits for salaries and other operating costs, which can be cause for alarm. The MPF, which gives away about $4 million in proceeds from the AT&T Pro-Am golf tournament each year, has always done some funding of operating costs, Alexander says, but would rather not focus on them.
“Operating support is seen as something very important, but we want them to show they have the ability to support themselves, because what if the AT&T went away? Would they be able to sustain themselves?” she asks.
Grainger sees local nonprofits in survival mode, which is part of the reason the foundation gave a grant to the Monterey-based Action Council, a new umbrella organization, to study the impact of nonprofits on the county’s economy. The study is due out early next year.
“What is the size and scope of their budgets, and what does that mean for Monterey County?” Grainger asks. “I think it’s huge. It’s really the third industry here.”
Clearly, Grainger believes the local nonprofits are making a difference, but the Harden Foundation’s conservative manner of funding them does not lend itself to quick returns.
“It’s like a teacher,” says Grainger. “Sometimes you don’t know you’re making a difference, but you have to have faith that it’s working.”
As of this weekend, the season of giving is officially upon us. The donation bins will appear inside the grocery stores, the tinkling bell and red kettle outside them, and hurrying between, throngs of people preoccupied with what CD to buy for this person, if it’s a waste to give books, and whether there’s a way to avoid buying anyone socks with little Christmas trees on them.
Like the stores that start replacing bags of Tootsie Pops with plug-in Santas the day after Halloween, charitable organizations at all levels have already gotten a jump on things. The Salvation Army of Monterey held its Red Kettle Kickoff luncheon two weeks ago and raised $130,000 in half an hour as Dina Ruiz Eastwood and KSBW news anchor Dan Green entertained the crowd. The New York Times launched its Neediest Cases Fund this month. Even U.N. Secretary General Kofi Annan got in on the action: on Nov. 11 he launched the organization’s consolidated humanitarian appeal, a plea for $1.7 billion from all the countries of the world to feed 26 million of the world’s poorest people. (Last year nations met only half of the U.N.’s $3 billion appeal so, bowing to reality, Annan scaled back the request.)
And Bob Geldof, the man behind 1984’s hit single “Feed the World,” gathered Coldplay’s Chris Martin, Dido, the Sugababes, Joss Stone, Band Aid veteran Bono and other stars two weekends ago to record a remake of the Christmas classic by Band Aid 20. The single is due in stores this weekend.
Maybe giving’s back in style. Maybe it never went out. Michael O’Neill says the research shows that “people give because they’re asked, and they’re asked at the right time by the right person.”
If you listen, a lot of people are asking. Surely someone,
somewhere, is hitting the right note.