DUE 4/18

8

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PolIty revenues and governanCe deCIsIons

In May 2007, libraries in Josephine County [southern Oregon] were closed due to lack of funding. In September 2007, community members formed Josephine County Libraries Inc. (JCLI), a nongovernmental, nonprofit organization dedicated to reopening and operating the libraries in the county.

(Dawn Marie Gaid 2009, 56)

Oregon Statute: 307.130 Sunset Date: None Year Enacted: 1854

Property owned or being purchased by literary, benevolent, charitable organizations or scientific institutions is exempt from property taxation. To qualify, the organization or in- stitution must:

• Be a nonprofit corporation, • Provide a charitable gift to the public without expectation of payment, and • Occupy and use the property in a manner that furthers the organization’s charitable purpose.

2009–10 Assessed Value of Property Exempted: $4.3 billion 2009–11 (biennial) Revenue Impact: $116,300,000 Loss [Loss of tax revenue] 2009–11 (biennial) Revenue Impact: $24,200,000 Shift [Tax burden shifted to other payers]

(State of Oregon 2010, 280) [explanations added]

Each local government sits in context with its polity network of nonprofit service providers, related governments, for-profit providers, advocacy groups, and citizens. A Greek term for the form or constitution of an organized unit of governance, polity emphasizes the organic interrelated social, economic, cultural, and political components of a community that combine to form its distinct identity and character. Just as local governments must develop and maintain sources of govern- mental revenue, nonprofit members of the surrounding polity network must also raise and maintain revenue flows. Nonprofit-sector revenues are similar to governmental revenues (chapter 6)—but with important differences. Charges and reimbursements for services form the primary revenue base for many nonprofits, including large education and health services providers. Membership dues help to cover the program costs of member service and public interest nonprofits. Most non- profits engage in some form of donor development and fundraising, and an understanding of the motivations of charitable and philanthropic donors is critical to successful fundraising. Additionally, many nonprofits rely on the revenue from government grants and contracts to fund programs. In appropriate circumstances, nonprofits rely on commercial credit markets to borrow funds.

The need to develop revenues for all members of a community polity network forces local government and nonprofit organization leaders to consider a larger view that transcends economic-

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sector boundaries. From this broader integrated perspective, leaders can understand that the polity relies on a single common pool of resources. How a community or region generates resources from the different economic sectors defines how it uses the mixed economy to solve complex issues of the public good. This chapter explores how communities have taken on this task of multisector resource development and allocation.

The Upper Cascadia County public safety services levy teaching case points to the issue of revenue generation by polity members in different economic sectors. In that hypothetical case, the community foundation representative seeks to understand the possible size and scope of so- cial service programs the county government intends to support so his organization can develop a program response to assure continued services to the community. Local governments will use the taxation and charges for services to raise their share of revenues, while the nonprofit sector must use fundraising and other techniques to tap other sources and forms of community wealth. This chapter explores such a complementary approach and encourages administrators, elected officials, and financial analysts to define and manage resources and revenues at the community and regional levels.

The policy decisions of how to develop wealth and revenue generation capacity in a community can raise difficult questions of fairness. A healthy commercial sector of businesses is critical to revenue generation for government and for charitable giving. Tax relief to businesses provides an important economic development tool that can attract and retain key businesses in a jurisdiction, but the decision to give a tax break to a business places an additional burden on all other taxpay- ers. Exempted and noncollected tax revenues reduce the governmental funds available to fund programs and grants/contracts in the nonprofit sector. How a community and its polity decide to balance business development and long-term revenue generation against the immediate needs for social services, education, and other requirements is a major policy question. The last section of the chapter explores some of these trade-offs and dilemmas.

To discuss these issues, this chapter begins with a very brief overview of nonprofit-sector revenue trends. It then turns to a discussion of nonprofit organization–level revenues, including charges for services, grants and contracts, fundraising and donor development, enterprise revenues, and credit- based income. Charitable and philanthropic giving form major revenue sources for many nonprofits, and the chapter examines the donor intentions behind using these forms of giving. This leads to a discussion of recent trends and changes in fundraising such as ethical behavior and professional- ism in donor development and fundraising. A look at the process of blending government-sector and nonprofit-sector resources follows, demonstrating an understanding of polity network–level resources. This discussion includes an approach for assessing network resources. The chapter then takes on the policy issues of granting tax relief to increase justice in the community and for economic development to grow revenue bases for taxation and giving.

hISTORICAL TRENDS IN NONPROFIT REVENUES

Federal policy and spending decisions condition the amount and type of intergovernmental revenue that reaches state government and local communities. A very brief historical review provides context for our discussions on nonprofit revenues and polity financial resources. In the 1960s and 1970s, funding from the federal and state governments provided a substantial share of social welfare re- sources used by nonprofit organizations (Salamon 2012, chap. 5). This support fell steeply in the mid-1980s with the Reagan administration, but then later rebounded in the 1990s, especially in the areas of health care (Froelich 2001, 183). The entitlement and consumer choice–driven bases of the federal Medicare and Medicaid programs have led to increasing and continuing revenues to nonprofit and for-profit health care service providers. Additionally, a number of social services have been recategorized as health programs, which fall under the Medicare and Medicaid revenue

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streams (Salamon 2012, 100). The federal welfare reform act of the mid-1990s block-granted pay- ments to states, but with a strong economy and falling caseloads, surplus monies often became available. This unexpected combination of conditions marginally increased federal and state social service resources. These federal health and social welfare policies and revenues helped to sustain nonprofit-sector revenues and employment over the late 1990s and through the two years of economic downturn from 2007 to 2009 (Salamon, Sokolowski, and Geller 2012). The American Recovery and Reinvestment Act of 2009 (ARRA) provided funds to state and local governments for a variety of recovery and capital investment programs. ARRA funds helped to sustain the flow of funds for social service and workforce development nonprofit grants and contracts into 2010. However, the expiration of the ARRA, a drastic reduction in state tax revenues, constraints on state intergovernmental funds shared with local governments, and reduced property tax revenues led to deep cuts in government employment in the post-downturn period (Pew Center on the States 2012a; Baden 2011). Reduced state and local government resources also led to fewer and smaller grants and contracts to social service providers (VanderHart 2010; Hannah-Jones 2011). Although conditions varied by state and regional economies, reduced government funding often resulted in service nonprofit closures and consolidations.

For nonprofit organizations outside of health care and related services, the economic down- turn of 2007–2009 was especially challenging, particularly for nonprofit organizations heavily dependent on philanthropy and charitable gift income. The downturn resulted in a severe hit to private wealth and charitable donations (Salamon 2012, 204). This adversely limited revenues to arts and cultural nonprofit organizations. In response, nonprofits increased charges for services and enterprise revenues, providing some offset to the drop in philanthropic donations. Recent (2012–2013) improvements in the financial and investment markets have generated some im- provement in donor resources.

NONPROFIT ORGANIZATION RESOURCES

Unlike the coerced nature of tax revenues that fund governments, nonprofits must raise funds in a competitive marketplace. Without a steady and sufficient stream of revenues, program delivery will grow inconsistent, and client and donor confidence in the organization will waiver. No mat- ter how needed a service or how honorable a mission, nonprofit action and service delivery rests on a foundation of revenues. Resource development is a critical and ongoing task for almost all nonprofit organizations. From a leadership perspective, obtaining sufficient funding requires both short-term opportunistic and broad-picture strategic behaviors. Nonprofit fundraising often takes place in a competitive environment, with organizations vying for a share of too few resources, not unlike the jump ball in a basketball game where players jostle for possession.

Nonprofit organizations typically strive to build a revenue base from diverse sources (Froelich 2001). Relying on an array of revenue sources allows the organization to better withstand changing economic conditions such as a major loss of revenue, an unexpected increase in service demand, or an abrupt change in mission. Most nonprofits rely on an evolving blend of revenue sources. Grants and contracts begin, run their course, and then end; major donations allow for specified program development but then expire; annual fundraising events have strong and weak years; and the ebb and flow of financial market conditions the availability of donor resources. Nonprofit executives, chief financial officers or finance directors, and resource development directors must constantly work across a spread of sources to ensure a steady flow of resources to meet the orga- nization’s ongoing expenses and program costs. In the end, organizations size their organization structure, staffing, and programs to match the available resources, and sometimes must adjust the organizational mission to subordinate it to a particular funding source.

Most nonprofit scholars and consultants recommend that nonprofit organizations undertake a

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comprehensive strategic planning process to guide development of a mission, organization program goals, and financial goals (Bryson 2005, 182; Jackson 2007; see also chapter 10 of this book). A financial strategic plan including an analysis of the fundraising environment is a critical element of a broader organizational strategic plan. The essential elements of a fundraising environmental analysis include:

• the evaluation of the threats and opportunities in the revenue environment; • the identification of current and potential revenue sources; • a recognition of donor perceptions of the organization; • a recognition of donors’ sense of confidence in the organization; • an identification of trends in giving and the fundraising behavior of similar organizations;

and • the level of resources needed by the organization to deliver its current and potential

programs.

Jackson (2007, 120) explains that a nonprofit must develop a solid donor base and a solid revenue stream in order to effectively engage and build confidence in new and larger donors. Ad- ditionally, a nonprofit’s strategic plan must clarify mission priorities and the sources of resources that it will accept to support those priorities. An effective strategic plan also encourages a small nonprofit to think of itself as a larger, successful organization (Jackson, 162).

As we will describe further in chapter 10 on financial forecasting and planning, strategic plans are helpful guides, but a nonprofit organization must effectively operationalize and implement its plan. Operational plans, often known as business plans, provide the critical bridge needed to translate strategy into actions and outcomes. Operational plans should include a detailed schedule of all cur- rent and potential revenues. A comprehensive revenue schedule should include (for all revenues), the source, type, beginning and ending availability; access restrictions; speculative or certainty of availability; sequential timing; and reporting requirements (see Dropkin, Halpin, and La Touche 2007, 21 and 70). Alternative scenarios of revenue combinations and availability schedules should also be considered. Where sufficient data is available and valid assumptions can be developed, analysts should develop mid- to long-term forecasts for continuing sources of revenue. Where multiyear government and foundation contracts allow annual cost adjustments for inflation, revenue forecasts should be adjusted as well. Once forecasts are developed, an organization should look back and compare projected versus actual performance. Nonprofit organization revenue forecasts will typically include the following broad categories of revenues: charges and reimbursements for services; grants and service contracts; charitable and philanthropic gifts; investment income; enterprise funds; and borrowing from commercial credit sources. These operational planning procedures parallel those we describe for governmental organizations in chapters 10 and 12 of this book.

Charges and Reimbursement for Services

Charges for services (fees for service) and reimbursement for services provide an important revenue foundation for many educational, health care, arts and culture, recreation and sports, and social service nonprofits. As examples, private religious-affiliated primary and secondary (K–12) schools and academies charge students tuition. Nonprofit hospitals and medical groups charge fees for their services. Theater, opera, and orchestral organizations sell tickets by seasonal subscription packages or individually by event. Other charges and fees for services include sports league operating fees and organization annual membership dues. Private universities and colleges charge students tuition and fees to cover the majority of operating costs. Such charges provided almost 77 percent of all revenues collected by nonprofit universities and colleges in 2009 (Salamon 2012, 150).

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Charges and fees based on production costs provide a means for organizations to recover costs in total or in part. The mechanics of rate determination and cost recovery are the same as those used to determine governmental fees in chapter 7. Organizations initially set rates for charges and fees to fully recover all direct program costs and indirect administrative costs for the volume of services produced. Nonprofit organizations, however, operate in a competitive marketplace. Their program charges and fees must be competitive with their peer providers, or the value added to a service by a nonprofit must justify its added expense over the governmental-sector alternative. For example, a religiously affiliated private elementary school must have competitive prices with other nearby private schools, especially those of the same religious denomination. Additionally, parents must see sufficient added value in educational quality or cultural training to justify paying substantial private school tuition as compared to the lower costs associated with a local public elementary school. While nonprofit organizations always face the need to recover costs, orga- nization missions may specifically provide for services to disadvantaged populations. Here, the organization may purposefully charge reduced rates to needy clients, and proportionately raise charges on other paying clients to ensure total cost coverage.

Nonprofit organizations often receive reimbursement income for services that have been rendered. For example, nonprofit hospitals accept Medicare, Medicaid, and state health plan reimbursements for patient services. Here, the reimbursement rates set by governmental programs or private insur- ance define the revenues earned per patient or procedure. Once reimbursement rates are determined, nonprofit providers can forecast annual caseloads and then determine expectations of total future reimbursement revenues. For many hospitals, reimbursement income amounts to a substantial portion of the total organizational income. Thus, federal and state administrative and legislative policy- and rate-setting decisions have far-reaching effects on both nonprofit and for-profit providers. Restricting reimbursement rates is one method of limiting governmental program costs and expenditures.

Grants and Service Contracts

Grants and service contracts are a major subcategory of charges and reimbursement for services. This revenue source is of such importance that it merits separate discussion. Grants and contracts for services are agreements between a service provider and a purchasing government, an intermedi- ary nonprofit, a foundation, or a commercial corporation to purchase services (see LeRoux 2007; Ott 2001, chap. 7; Cooper 2003). The two terms, grant and service contract, are used somewhat interchangeably, but a grant often implies a request for work that involves substantial professional judgment and discretion in work accomplishment. A foundation, intermediary, or other private purchaser may offer a grant without executing a competitive procurement process. Governments, however, typically must use open, competitive procurement procedures to purchase program and professional services. The criteria for competitively evaluating vendor bids or proposals usually considers (1) the professional qualifications and work capacity of the proposing organization, (2) its past performance on similar tasks, (3) its proposed package of services, (4) the quality and quantity of services in its proposed package, and (5) its cost to accomplish the work. The bid or proposal with the highest scores on the selection criteria is selected to perform the desired work. The grant or contract agreement spells out the tasks to be accomplished, the work completion schedule and performance requirements, the resource and staff contribution from each party, a reimbursement amount and payment schedule, the audit and reporting requirements, and the dis- solution and other administrative provisions. The reimbursement to the provider may be structured on a scheduled basis to coincide with task completion, on a quarterly basis for ongoing services, or as a lump sum total payment.

To ensure a continuous flow of grant or service contract revenues, nonprofit administrators must dedicate staff time and resources to identifying and researching project opportunities and

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procurement applications. Preparing proposals, responding to solicitations and procurement pro- cedures, preparing bid and proposal documents, and following through on legal, administrative, and project details involves a major amount of staff time and resources. Proposals and bids require high-quality content and readability, and they must be delivered on time and in the correct format. Even with the best of efforts, many of the proposals submitted by an organization will not result in a winning bid or obtaining a grant award. Organizational leadership must strategically target potential funders, carefully manage the preparation efforts, and evaluate the cumulative rejection ratio as part of the larger effort to obtain revenues for the organization. Administrators must care- fully balance the resources diverted to grant and bid preparation relative to more effective uses in other revenue development tasks or in program delivery.

Fundraising for Charitable and Philanthropic Gifts

Charitable and philanthropic gifts provide an important source of revenue for many nonprofit organizations. In many organizations, charitable and philanthropic revenues complement other revenues from charges for services, reimbursements, and grants and contracts. Organizations face competition in their efforts to obtain charitable and philanthropic donations. Small-scale charitable donors and large-scale philanthropic donors have choices, and they can easily contribute to a vast array of organizations. Donors also have the very real option of not contributing at all.

Successful resource development requires organizational commitment and investment. Do- nor research, fundraising events, and campaign planning, event and campaign implementation, long-term contact information management, development of an Internet presence, and sustaining personal donor relationships takes considerable staff time and effort. In smaller nonprofits, the chief executive officer, board members, and staff directors all contribute to the fundraising effort. Recognizing its importance, larger nonprofits typically dedicate an executive-level position with full support staff to the fundraising and development tasks. Additionally, the chief executive officer spends a substantial amount of his or her time in fundraising activities. Fundraising initiatives are often recognized and managed as proactive business development activities that bring little short- term benefit. Building a donor relationship to fruition may take years, while yielding marginal or substantial results in the process. Nonprofit budgets rarely cover the full cost of fundraising activities. In the short-term, funds allocated to fundraising and resource development reduce the funds available for mission and service operations, but failure to develop resources threatens the life of the organization.

The size, purpose, and mission of different organizations distinguish and differentiate their fundraising strategies and sources.

Small Member-Benefit Groups

Citizen-led service organizations, youth groups, and religious organizations typically generate revenues on a small volume and from familiar sources. Youth groups sell candy, popcorn, and holiday decorations; hold barbeque and meal fundraisers; organize raffles; and sell services or entertainment. Churches and religious organizations collect membership dues and tithes. Gifts, memberships, and grants as cash contributions; noncash contributions; donated services; and do- nated facilities and equipment may also contribute to the revenue streams for small-scale nonprofit and local religious organizations.

Federated Intermediary Nonprofits

Regional community chest organizations and other combined campaigns, known as federated intermediary nonprofits (Salamon 1992; Frumkin 2010) typically raise large volumes of revenues

POLITY REVENUES AND GOVERNANCE DECISIONS 225

through a network of donors often tied to a parent organization or geographic community. Federated intermediaries may solicit funds to support their own programs and administrative needs, or they may raise funds on behalf of other organizations. Federated intermediary nonprofits that use access across many employers to raise funds include regional United Way chapters and combined national campaigns for federal government agencies. Fundraising by religion-sponsored and religiously affiliated federated organizations relies on donations from individual members and from member churches, synagogues, and branches. Examples of familiar religious-affiliated intermediaries include Catholic Charities, Lutheran Community Services, and the Jewish Community Center Association (Gelles 2001). Federated intermediaries also raise funds through grants and bequests, endowment income, donated services, fees for service, special events income, rental income, and other sources. From the money raised, federated intermediaries then act as donor organizations by giving substantial grants and contracts to other nonprofits and even to government agencies.

Federated intermediary fundraising campaigns tend to give a face to the entire community and its needs. Through this shift in scale to the community, federated organizations can provide a structure for community coordination and planning. General, unspecified giving to a federated intermediary provides a flexible resource that the organization can prioritize and allocate to meet administrative costs, polity network administrative costs, or a broad array of community needs.

Public Community Foundations

Foundations are another form of intermediary nonprofit. Public community foundations gather donations and other resources from numerous individuals in the community. The foundation staff assesses community needs, provides grants to service providers to accomplish services, and then evaluates provider performance and community progress. A board of directors with broad representation of business, civic, government, and religious leaders typically guides community foundations from the community. Like federated intermediary nonprofits, community foundations can represent the community as a whole and work to respond to its issues. Community founda- tions use a variety of fundraising campaigns to build donations, and we give further attention to foundations and their donor motivations in the next section.

Major Service Delivery Nonprofits

Major service delivery nonprofits have sufficient organizational capacity to both deliver services and to act as an intermediary donor to other service providers. These organizations include nonprofit schools, colleges, universities, hospitals, public broadcasting organizations, and com- munity service organizations such as the YMCA and YWCA. These medium to large nonprofits typically have well-developed fundraising and donor development capacities. While they often raise donations from the community at large, many of these organizations draw on their extensive donor bases of clients, members, or alumni. The emotional connection that donors hold for an organization triggers continuing and often substantial donations. Defined donor lists allow these organizations to repeatedly contact donors through preferred message channels and for specific requests. These strong contacts lead to extended relationships that may result in multiple gifts over a donor’s lifetime. Donor development activities include holding special events, direct mail contact and newsletters, interpersonal meetings, and online contacts through social media. Donors may contribute gifts as single or multiple donations or as a bequest from their estates at their death. Community action organizations (CAOs) rely on donations and fundraising activities for a portion of their revenues, but as Exhibit 8.1 relates, these organizations also receive funding from federal government grants. In many ways, these federal grants are comparable to the intergovernmental revenues received by local governments as we discussed in chapter 6.

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Investment Income

Nonprofit organizations collect and invest resources for investment income and equity growth. These resources may come to the organization as donations of land and real estate, financial securi- ties, or cash. Should an organization receive or accumulate a substantial level of investment assets,

Exhibit 8.1

Community Action Organizations (CAO) Rely Extensively on Government Funding

Over 1,000 community action agencies nationwide serve as important antipoverty service delivery and coordination agents in rural and urban communities. Community action organizations are blended private and public nonprofit organizations established under the Economic Opportunity Act of 1964 as part of the Johnson administration’s War on Poverty. Each organization has a board of directors containing members from various walks of life: at least one-third being low-income members; one-third public officials; and one-third from the private sector, which includes businesses, faith organizations, charities, and civic organizations. Under strong local control, community action organizations select and tailor emergency services, food and nutrition programs, child care, counseling, information and referral services, and other family support programs to meet local needs. About 54 percent of community action agencies serve rural areas; 36 percent serve both rural and urban; and 10 percent service urban areas (Community Action Partnership 2012; Washington State Community Action Partnership 2013). Community action agencies are important service providers and actors in community and rural polities. In addition to delivering their own programs, community action agencies complement the efforts of local governments, state government agencies, community foundations, and federated intermediaries in a polity network. In contrast to most foundations and federated intermediaries that rely heavily on charitable and philanthropic giving, community action agencies rely heavily on state and local government funding. In this reliance, community action organizations typically provide the local service delivery for federal child care, Head Start early childhood education, job readiness and training, and weatherization/energy subsidy programs. The federal Community Services Block Grant (CSBG) provides a foundational source of funding for community action agencies. Appropriations for FY 2013 provided about $635 million in funding to the states, the District of Columbia, and Puerto Rico and the other U.S. territories (Spar 2013). The states then provided grants to the local community action organizations and to other qualified service providers. Ninety percent of the federal grant must reach the local organizations for service delivery. Five percent may be used for administration, and the remaining 5 percent may support state-initiated projects to eliminate poverty. The funds must support programs targeted toward low-income residents. Community action organizations receive funds under federal grant and contract guidelines, and they must be responsive to federal audit requirements and procedures. Grants from other federal programs supplement the CSBG funding. Forecasting the potential revenues for community action programs requires close attention to the annual budget and appropriations debates in Washington, DC. Analysts can follow the proposed funding levels in the president’s budget request, and then follow the appropriated funding levels adopted by the House of Representatives and the Senate. Close attention to the committee reports and tables prepared by the appropriations subcommittees for the federal Departments of Education, Energy, Health and Human Services, and Housing and Urban Development indicates the range of likely funding for the coming fiscal year. The national Community Action Partnership provides information on emerging appropriations and policy issues related to these agencies.

Source: Community Action Partnership 2012.

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it may establish an endowment from which to draw an annual flow of interest and investment income while leaving the principal intact. Under any arrangement, the organization’s board should establish investment goals and objectives, investment policies, and risk management policies to guide the staff or financial professionals. Based on its policies, the organization may keep donated securities that complement its investment objectives, while it may sell other donations that do not comply and then invest the proceeds into more desirable investments. Nonprofits often hold a portfolio of long-term investments in land and real estate, as well as in financial instruments including bonds, stocks, and investment funds. Larger nonprofit organizations and foundations may accumulate cash from donations and routine operations. These resources are available for safe, short-term investments as part of a cash management policy (see chapter 17).

Enterprise Activities

For charitable public service organizations, the revenues and profits from a commercial or enterprise activity such as food services, gift stores, or gym memberships can provide an independent revenue stream to complement the typical nonprofit revenue streams from charges for services, grants, contracts, and donations. Nonprofit public service organizations are allowed by tax regulations to operate for-profit businesses as long as the proceeds are not distributed back to the organization shareholders and owners. These commercial-style, revenue-generating activities have become increasingly popular under the name of social entrepreneurism (Young 2001; Weisbrod 2001; Massarsky 2005). Revenues from enterprise activities usually provide a revenue stream that is unrelated to the other sources of revenue used by the organization. Donors, clients, and the public often raise concerns that commercial activities by nonprofits will divert the organization’s mission and activities away from its intended public service functions.

Credit-Based Revenues

Nonprofit organizations also tap the credit markets for revenues, especially to fund capital pur- chases. On a small scale, churches, synagogues, other local religious organizations, and other local nonprofit chapters take out mortgages to finance buildings and other infrastructure. Pledges based on the wealth and income of the organization membership typically drive the size of the building effort (chapter 16, Exhibit 16.1). On a larger scale, private nonprofit hospitals, colleges and universities, museums, and libraries often tap the municipal bond markets or sell a certificate of participation (COP) to obtain funds for major building, infrastructure, and equipment invest- ments. The institution normally identifies future revenues such as patient fees or student tuition as a stream of dependable revenue that will cover the debt principal and interest payments over a period of several decades. In the case of a COP, the physical project is the collateral for the note. State governments use their creditworthiness to give major private institutions access to low- interest debt through the municipal bond markets (National Association of Health and Educational Facilities Finance Authorities 2008).

DONOR INTENTIONS IN ChARITABLE AND PhILANThROPIC GIVING

Charitable giving allows individuals, corporations, and other organizational entities to donate funds to public service “religious, charitable, and educational” nonprofit organizations with tax benefits (Salamon 2012, 36). Voluntary charitable giving enables citizens and businesses to respond to community needs without the perceived taint of government coercion. For many donors, the choice and voluntary aspect of giving exercises a form of personal economic liberty. Charitable giving in the United States totaled almost $291 billion in 2010. Individuals were

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responsible for over $211 billion of this total—about 73 percent (Giving USA Foundation 2011). An estimated 65 percent of all U.S. households donate to charities (National Philanthropic Trust 2012; Morningstar 2007).

Direct, small-scale, charitable giving allows individuals, young and old, to support their local religious organizations, local youth groups and sports leagues, human and social service groups, arts organizations, and local schools. Direct giving may respond to donor personal initiative, fundraising events, direct mail solicitations, or annual campaigns. Though effective, small-scale charitable giving often fails to provide sufficient resources over a sustained period to make a substantial difference in meeting community needs and complex social problems. Furthermore, most small-scale charitable donors make a contribution trusting that the receiving organization will effectively deliver services to those in need as promised (Frumkin 2010, 34–37). Arrillaga- Andreessen (2012, 81–84) recommends in-depth research of the recipient organization before making a direct charitable contribution.

Large-scale, strategic philanthropic giving allows donor involvement and emotional satisfac- tion and can often provide a more effective response to public needs. Strategic philanthropy can include a planned program of giving that sets goals, sets a strategy to achieve those goals, defines metrics to measure goal attainment and achievement of success, and requires the assessment of returns on the philanthropic investment (Arrillaga-Andreessen 2012, 283). Effective philanthropic gifts should have the capacity to enable individuals and communities to make transformative changes in their well-being. Philanthropic giving also has the potential to locate and support social innovations, to restore equity in society, to enhance pluralism in society, and to counteract the perceived overarching influence of government. Philanthropy responds to the donor’s needs for self-actualization and emotional satisfaction as well (Frumkin 2010, 3–4).

The motivations behind philanthropic giving are complex. At one extreme, donors may give instrumentally to respond to community priorities and needs, but with minimal thought to personal emotional satisfaction or involvement in the project. On the opposite extreme, donors may give with strong attention to their own emotional needs, perceptions, values, and agendas, but without sufficient attention to understanding community needs and priorities. Frumkin (2010, 45) argues that effective philanthropy balances the motivations of instrumentality and expressivism. From the public’s perspective, philanthropic donations are also a public statement of legitimacy for the receiving organization and its mission (Froelich 2001, 183).

Philanthropy raises multiple concerns of legitimacy (Frumkin 2010, 5–9). While a donor may wish to give funds to a particular cause, the receiving community or group may question the legitimacy of a wealthy donor interpreting public needs, defining public policies, and implement- ing public solutions through a personal agenda, or seeking to meet personal emotional needs. Frumkin argues that effective philanthropy must evaluate the effectiveness of the giving program and its strategy, the program’s mechanisms for financial and performance accountability, and the legitimacy of donor motive and strategy.

Philanthropic donors often struggle to understand community needs and priorities. Recent government budgets provide one indication of public needs and values in the community. Pat- terns of giving by federated intermediary organizations and community foundations can provide a second source of information about relative public needs. These local government budgets can indicate areas of strong community investment and resource gaps.

Effective and accountable giving requires some form of legal and financial structure to receive resources, select projects, distribute funds, and monitor effectiveness. Family trusts, private foun- dations, corporate foundations, community foundations, Internet foundations, and donor-advised funds provide mechanisms to meet these needs. Effective giving selects the appropriate structure to meet the donor’s and the recipient’s needs (Frumkin 2010, 129–156; Arrillaga-Andreessen 2012, 90, 264–265). Quasi-public, government-sponsored private foundations represent a blend-

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ing of the private, corporate, and community foundation models. Because of their concentrated resources and social ties, trusts and foundations of all types are important constitutive members of a local community or regional polity.

Private Personal and Family Trusts

Family trusts are legal structures commonly used by middle-income and high-wealth families to transfer wealth to successive generations on the death of an individual. The trust structure presents a mechanism to manage resources, to designate and make gifts, and to receive a variety of tax advantages. Bequests from personal estates often provide individuals and families with an opportunity to step above routine small-scale charity to make substantial charitable donations. Donations from personal and family trusts typically express the values and wishes of the individual or the family. Charitable giving by bequests totaled about $23 billion in 2010, or about 8 percent of all contributions (Giving USA Foundation 2011).

Private Family and Independent Foundations

Private foundations established by families or individuals usually rely on the interest income generated by their investment endowments (Salamon 1992; Boris 2001) to fund projects or to meet goals. Once a substantial endowment is developed with sufficient revenue generation to achieve its goals, the private foundation becomes relatively insulated from the need to raise funds (Frumkin, 129–156). This makes foundations unusual among organizations in the nonprofit sec- tor. A board of directors controls a private foundation, which may or may not have a professional staff. Family foundations are typically private foundations with family members as the board of directors. The Gates Foundation, the Ford Foundation, the Getty Trust, the Robert Wood Johnson Foundation, the W.K. Kellogg Foundation, the David and Lucile Packard Foundation, the Lilly Endowment, and the Pew Charitable Trusts represent some of the largest and most widely known family foundations (Salamon 2012, 48). As generations pass, members of the named family may have diminishing involvement in the foundation, leaving its management to an independent board of directors.

Corporate Foundations

Businesses and corporations may establish a private corporate foundation to further their interests and presence in a community. A corporate foundation may have an endowment but also may rely on transfers of corporate revenues to sustain philanthropic giving. Corporate foundation giving can provide major grants for community purposes, but with the strategic purpose of furthering the organization’s presence in the community.

Community Foundations

A community foundation (Salamon 1992, 18; Boris 2001) is a public foundation that focuses and limits giving to a defined community or region. Tax regulations require community foundations to have broad public participation from many donors and broad participation in their governance. The coordination and consolidation of wealth from many contributors then allows the foundation to address major community needs not covered by government programs. Community founda- tions may have an endowment or may raise funds for direct distribution. Alternatively, a group of citizens may establish an independent foundation to complement government programs. For example, parents, teachers, and community leaders may establish a community fund to support

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local schools. Community foundations may employ a professional staff to assess community needs, propose policies and strategies, distribute funds, and evaluate program effectiveness. To receive grants, nonprofits in the community follow procedures and typically make proposals to the community foundation. Based on their policies, strategic plans, and giving priorities, community foundations can have a substantial impact on service program design and implementation. The major federated intermediary nonprofits are closely related in design and mission to community foundations.

Governmental Foundations

Governments and government agencies establish allied nonprofit governmental foundations to support and augment their missions. These quasi-public foundations typically blend attributes of a corporate and community foundation. As examples, at the national level, U.S. Congress has established governmental foundations to support federal agencies. Locally, a school district, its parents, and its teachers may establish a foundation to raise supplemental funds for schools and extracurricular activities. The boards of governmental foundations may include a blend of public officials and private citizens. Governmental foundations provide a means for government agen- cies to accept private donations without having to send the donations along to its general fund. Governmental foundations may be authorized to establish and grow an endowment. Because they receive both public and private monies, governmental foundations are quasi-public organizations, and maintaining accountability over governmental foundations is challenging. Governmental financial and policy controls become limited because private funds and nongovernmental indi- viduals contribute to the foundation. These nongovernmental donors influence policy and affect service delivery.

Donor-Advised and Gift Funds

Donor-advised funds or gift funds (Frumkin 2010, 148; Arrillaga-Andreessen 2012, 78–79) pro- vide an alternative to personal trusts and private foundations for individual philanthropic giving. These funds, established by financial services companies, provide an efficient giving pathway for investors. The investor-donors typically provide their own research into charities and community needs; the funds verify tax-exempt status of recipient organizations, make payments, and keep records of donations. The donor provides any research and strategic direction to focus the giving. Donor-advised funds are similar to federated intermediaries in that they act to collect funds and then distribute them to designated organizations, but they are quite opposite in terms of professional strategy, program evaluation, and oversight. Donor-advised funds distributed about $7 billion in 2011 (National Philanthropic Trust 2012).

Donor Motivations and Behavior

The particular choice of philanthropic method—trust, foundation, donor-advised fund, and so on—reflects the donor’s many needs. These include the need for personal satisfaction, the need for personal involvement and control, responsiveness to financial and legal concerns, the type of service delivered, and the administrative costs. However, donor restrictions on charitable and phil- anthropic gifts may have downsides for nonprofit administration and effective program response. This includes limiting fund use to a specific, designated purpose, or limiting use to a specified period (Dropkin, Halpin, and La Touche 2007, 22).

Many donors prefer to specify the cause or activity for which their funds will be used, but the specified donations given to a particular activity or service may not match with the reality of

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service needs. A specified donation may bring emotional satisfaction to the donor for responding to an immediate identified need, but a specified donation cannot be used to address the underlying structural and long-term issues causing the problem; nor can it be transferred to address an even more pressing need. Unfortunately, a donor’s future giving is often dependent on demonstrated successful performance on the immediate “band-aid” response. Donor-specified giving may indicate a desire to meet an advertised need, but it may also indicate a lack of confidence in the nonprofit’s judgment and a desire to control performance to prevent the waste of resources. High levels of program performance become difficult when problems are complex, with significant factors beyond the reach of the nonprofit and its programs. Generous, one-time donations to a specific program may allow a needed increase in programs and staff, but without continued support from donors, programs must reduce capacity when the funds run out. Clear messages during fundraising, along with communication between the nonprofit leadership and the donor, can help to define common understanding of the need situation and of nonprofit performance expectations. Where a com- munity issue or problem remains, and donor resources are insufficient or intermittent, nonprofit administrators need to turn to their polity network peers to find additional resources.

The acceptance of large donations, large foundation grants, or major governmental contracts has the potential of diverting a nonprofit’s core mission from previously planned strategic directions. Major donors often expect a nonprofit to conform to their perceptions, expectations, objectives, and values. Nonprofits must carefully balance the sources and diversity of their revenues with control of their organizational mission (Froelich 2001, 190). Some donors have ethical objec- tions to charging fees for services and to using entrepreneurial and business activities to generate enterprise revenues. Enterprise revenues may be perceived as undermining the altruistic values of the nonprofit organization. Based on their strategic plans and predetermined financial policies, nonprofit boards and executives must carefully assess the relative benefits and liabilities of ac- cepting different revenue opportunities.

Finally, in addition to effective program performance, knowledgeable donors demand effec- tive financial management by grant recipients. Jackson (2007) argues that trustworthy nonprofits develop strategic plans that include strong financial controls and risk management systems. These attributes become marketing points that can reassure and encourage donors. The acceptance of a grant or contract by a nonprofit may require the modification of systems and procedures for financial record keeping, performance measurement, reporting, and audit systems. Full compliance with reporting and audit requirements may be a critical criterion for grant renewal.

TRANSITIONS IN FUNDRAISING

Nonprofit administrators face the challenge of working in real time to ensure sufficient revenues for their organizations while at the same time adapting to a fast-changing world. Two areas of change—Internet- and web-based fundraising and the rise of professional fundraising practitio- ners—deserve special attention because of their widespread and deep implications.

Technological Transformation of Fundraising

Nonprofit fundraising and donor development techniques have evolved tremendously over the last two decades. Much of this transformation has been propelled by the revolution in computer technology, social media, and information management. In the past, fundraising relied on direct mail solicitation, telephone marketing, and print advertising. While these methods remain in use, the Internet and social media systems have steadily replaced the traditional solicitation techniques. However, multiple interpersonal contacts and sustained relationships form the basis for most large charitable and philanthropic gifts. Building the relationship between the donor and the foundation

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or nonprofit requires repeated contacts in person, by mail, or electronically. The administrative tasks of donor identification and development have also been transformed. Paper records and staff work have been replaced by electronic databases that can efficiently recall, sort, and identify the most appropriate donors. However, the maintenance of up-to-date donor records and information remains an important, continuing task.

To effectively raise funds by online means, nonprofit organizations must establish and maintain a presence on the Internet (Arrillaga-Andreessen, chapter 2). This presence includes maintaining a web homepage for the organization, establishing webpages and links on social media systems, recording and posting videos and podcasts, hosting and maintaining blogs, and working to boost traffic to the organization’s site (Genn 2009). Online newsletters and emails provide another avenue of communication to organization members and potential donors. Additionally, organization websites must have a mechanism for collecting and processing donations. This usually requires a webpage that can accept credit card information, a service that can process credit card information, and a merchant services account with a bank or third party provider (Genn 2009, 133). However, small nonprofit organizations may not find it worth the effort and cost to accept online donations, and webpages with instructions for telephone or postal contacts may provide an effective alternative.

Direct appeal to donors via the Internet is a growing phenomenon. The global reach of the Internet can bring awareness of needs and service organizations to donors from outside the local community and region, which can help to expand the resource base available to local nonprofits. The Internet has also allowed donors to take an active role in building support for issues and or- ganizations (Arrillaga-Andreessen 2012, 45). However, extensive and large donations by distant donors can raise legitimacy issues of external control over local decisions. The Internet provides donors with a powerful tool for research into issues, specific nonprofit organizations and their performance, and social activists engaged in their interests. Nonprofit organizations need to respond to the information needs of potential donors by ensuring that program performance, budget, and financial information are available for online review.

In recent years, directed giving through the Internet has begun to compete with and even replace unspecified giving to major intermediaries and nonprofits. In directed giving, donors specify the exact use of their gift to particular organizations on a master list. Internet websites allow busi- ness and corporate employees to direct donations to a desired organization without intermediary support. Electronic directed giving obviates the need for a fundraising campaign and the expense of involving an intermediary organization. However, directed giving bypasses the professional judgment important to strategic fund allocation and the monitoring of program performance that effective intermediaries provide (Arrillaga-Andreessen, 57–58). While e–philanthropy may expand donor flexibility and offer an increased sense of personal liberty, bypassing the regional intermediaries may weaken governance and accountability structures in the community polity. Note that this loss of community capacity is of little importance to corporate benefits managers who simply desire an efficient, responsive employee donation procedure.

Growing Professionalism in Fundraising

The complexities of diverse revenue sources, changing fundraising techniques and tools, donor activism, and changing client and member needs demonstrate the need for the services of profes- sional fundraisers and donor development experts. Fundraising and donor development has gained increasing professional status in recent decades. Tempel (2010) and Greenfield (2002) provide detailed overviews of fundraising techniques and strategies. Grant writing and proposal develop- ment have also become a refined professional art.

While not constrained by regulations to the same degree as their government colleagues, nonprofit administrators must also work within a structured set of practices and roles as they

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raise revenues for their organizations (Gelles 2001; Jeavons 2001; cf. The Giving Institute; cf. Association of Fundraising Professionals).1 Transparency, integrity, and conformance with pro- fessional practices provide part of the trust and confidence necessary for a donor to voluntarily commit resources to an organization. An organization must effectively perform and fulfill the donor’s wishes and intentions in order to encourage future support. Unsolicited reviews by state regulators and independent third-party evaluators provide public scrutiny on administrative costs and organization performance.

Many states require the registration of nonprofit organizations to prevent fraud and to increase the financial and performance information available to donors (Jackson 2007, 24). Nonprofits must be in full compliance with state incorporation and registration requirements, state tax reporting requirements, and federal tax and reporting requirements if they are to be fully successful in their fundraising activities. Independent professional fundraisers who contract with nonprofits may also need to register in some states.

COMMUNITy-LEVEL RESOURCES: FINANCING ThE POLITy

Extensive contracting and grants making, widespread comprehensive public-private partnerships of extended duration, and the rise of quasi-public governmental foundations have blurred the once bright line between the governmental and nonprofit sectors. A polity network with discretely separate actors is now integrated contractually, financially, by policy, and by opportunistic ar- rangements. This blurring has forced a recasting of the public revenue framework. Increasingly, governmental, charitable, philanthropic, and bond and credit revenue sources define the resource base that sustains the community polity and its network of public service organizations. The polity revenue base is the most complete and integrated local public budgeting perspective.

Full understanding of the polity revenue base requires shifting from an organization-centered perspective to the broader community, metropolitan area, or rural substate region perspective. This is a shift to a broader social and economic scale. In an urban and suburban context, the pol- ity revenue base might approximate the metropolitan area’s land-use planning or urban growth boundary. In rural areas, the polity revenue base may be centered on the nearest city or town that acts as a social, commercial, or political center (cf. Kemmis 1995). The physical boundary of a rural polity might stretch from the city or town center across miles of sparsely inhabited ranch, farm, or forest lands. In both urban and rural contexts, a polity revenue base integrates revenues from the governmental, charitable and philanthropic, and commercial sectors to generate combined revenues to meet local and regional needs. This chapter’s opening epigraph reinforces the flexible nature of public service revenues and delivery mechanisms.

A polity-level focus also shifts attention to the network of organizations within the region or community (see chapters 1 and 4). Typical networked organizations include county and other local governments, special district governments, state and federal government agencies, quasi- governmental foundations, community and major personal foundations, corporate foundations, federated intermediary nonprofits, nonprofit service providers, service groups and other citizen associations, and religious groups. The perception of a network as a holistic entity shifts the focus from the activities, needs, and survival of an individual nonprofit or organization to consideration of the population of resources, assets, and service providers available to the region (McKnight and Kretzmann 1996; Perrow 1986, 192–200). For major donors and governmental agencies, the issues of how to link community needs and clients with the most responsive, effective, and efficient service provider and funding source becomes the critical budgeting and procurement challenge.

Recognition of the presence and importance of the regional or community polity network forces local governments, federated nonprofits, and local foundations to pay attention to the revenue sources and usage across the network. A formal polity-level assessment of resources helps to identify

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where governmental revenues are available and where they are limited. Similarly, an assessment can demonstrate where charitable and philanthropic donations may exceed or fall short of com- munity needs. Resource planning helps to prevent community overspending and underspending, and it allows complementary funding for programs and initiatives. A comprehensive, polity-level revenue assessment tracks the trends of resource flows from all sectors of the economy over the forecast period. A comprehensive assessment might follow the proportional contribution from different sources, the certainty and dependability of sources, any dedicated purpose restrictions on resource availability, and constraints on the future availability of resources. Past revenue trends form the basis for forecasts of future revenues. Based on past giving, an assessment develops an expected base level of small-scale charitable and large gift philanthropy in the community given certain economic conditions. Exceptionally large philanthropic gifts would be recognized as more sporadic in appearance. For instance, one polity-level revenue analysis for social services aligned government-sector revenue trends with revenue trends from the nonprofit and for-profit sectors. The analysis concluded that the governmental sector was failing to provide its share of resources relative to the other sectors (United Way of the Columbia-Willamette [UWCW] 2008).

Major intermediary nonprofits, local governments, or government agencies acting as network lead organizations may be in the best position to develop and maintain a polity-level revenue analysis. Networks administered by a formal, independent network administrative organization (NAO) would rely on that organization for a network-level assessment of member contributions. Alternatively, a nonprofit dedicated to community planning and analysis or analytic talent from local universities could be contracted to provide revenue and needs analyses. This latter approach might be more acceptable to members of participant-governed networks featuring decentralized structures with high-trust member relationships (Provan and Kenis 2007; Isett et al. 2011). At a minimum, local government analysts should look beyond their own organizational revenue pic- ture and consider the availability and potential of other revenues in the polity. Elected officials and government administrators need to see government revenues and programs against the larger community resources (McKnight and Kretzmann 1996). Polity-level revenue assessments allow governments to identify and respond to the limits of their peer community foundations and fed- erated intermediaries. Similarly, a polity assessment allows nonprofits to monitor governmental finances and public support for tax, fee, and intergovernmental revenues.

Especially difficult, complex, and resistant community problems often require the development of special community initiatives both to raise revenues and to target resources over a defined, extended period. For example, several metropolitan regions have developed 10-year initiatives to eliminate homelessness (cf. United Way of King County [UWKC] 2010, 2011; and United Way of the Columbia-Willamette [UWCW] 2008). Special initiatives serve to focus attention and channel sustained resources to the root causes of a social problem or community need. The special initia- tive label can focus charitable and philanthropic donors on the issue and provide opportunities for donors to leverage or combine donations to a critical level for effective programming (Frumkin 2010, 61). A local government or major foundation may make an initial seed donation to spark support for the initiative. Other donors may make their own donations based on the initial donor commitment. Careful planning to support an initiative encourages governments and nonprofits to develop integrated goals, objectives, and operating plans to address the problem. Success in planning helps to demonstrate the effectiveness of the combined multisector approach. This suc- cess in turn generates added donor confidence in the effort. Detailed assessments and concise demonstrations of program success encourage donors to fulfill their commitments and to provide additional resources when needed. Even with the best-developed community plans and initiatives, philanthropic donors have perceptions of community needs and how best to approach solutions. A donor’s approach may not match the size or complexity of the issue, and there may be more technically and administratively effective approaches available.

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Administrators raising funds at the community or polity level must consider the constraints and limitations faced by their peers in other sectors of the polity network. Effective fundraising in the polity context requires recognition of the regulatory and organizational constraints faced by each network member. Government organizations face a constrained context of detailed and specific regulations related to raising taxes, setting fees and charges, and accepting intergovern- mental revenues. Government administrators may have limited discretion in how government funds may be applied to meet community needs. The philanthropic fundraising and development context is constrained differently. Nonprofit organizations and foundations engaged in fundraising must comply with state regulations and IRS requirements. Professional ethics and best practices serve to guide the behavior of fundraising and development professionals. Restrictions placed by the donor or granting foundation on philanthropic gifts may serve to limit their use and avail- ability. The competitive context of the nonprofit sector defines the policies and behavior of these organizations. While most nonprofits have adopted a wide level of transparency in an attempt to build donor support, antitrust compliance requires a minimal level of independent decision making and often competitive behavior. This behavior may seem disconcerting to a government administrator accustomed to extreme openness and high levels of public scrutiny. Nonprofit organizations must carefully balance their behavior and policies between public openness and competitive behavior.

A comprehensive perspective on the polity and its revenue sources opens a series of important mission and financial policy issues of how best to integrate public and private resources. These are financial policy issues that governments and major nonprofit organizations typically address at the organizational level (see chapter 10); however, these policies often have implications for the organization’s community or network partners. For example, should a local government provide a base level of funding across all youth, substance abuse, elderly, veterans, and housing programs, or should local government provide funds to supplement only private and nonprofit resources? The relative contribution of any major contributor to the polity provider network will condition the response and behavior of all other members of the network. The level of government funding can condition the response from the nonprofit sector, but a major reduction of resources from a major community foundation can affect the response by other nonprofits and government. If severe economic conditions force a major drop in philanthropic giving and a reduction in intermediary and foundation grants, should governments step up to fill part of the gap with tax revenues? Another policy issue asks how government should behave as a major community donor. Should government have the authority to take the lead in providing the initial “seed” grant donation against which private donors can leverage their funds? Understanding how state agencies and local government revenues and resources fit in context with other resources in the community is an important step in community or polity budgeting.

The economic downturn of 2007–2009 demonstrated the implication of these types of financial questions. The loss of revenues from foundation and philanthropic sources and from declining government contracts placed severe pressure on nonprofit service providers in many communi- ties. Long-standing nonprofit organizations were forced to close facilities, stop service delivery, lay off staff, reorganize, and consolidate their remaining capacity to a smaller, more sustainable level. Nonprofit organizations serving as partners and subcontractors to larger nonprofit orga- nizations were affected in turn. The closure or retrenchment of nonprofits across a community raised issues of how the community as a polity would deliver needed services. Forecasts of local government revenues and program support can raise the issue of whether the community needs to raise new revenues or to adjust program capacity. Major nonprofit intermediaries, community foundations, and major nonprofit service providers can contribute information to this discussion, but each may have to make independent decisions on costs and service levels to comply with federal antitrust laws.

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TAX RELIEF FOR SOCIAL JUSTICE AND ECONOMIC GROwTh

The polity revenue base integrates government tax revenues with private wealth and income to support a service delivery network that serves a metropolitan area or rural region. Revenue-related decisions made in one sector of the network often have ramifications on other network actors. Local voters and their governments make the decisions to adopt or to increase a tax, but within the structure of state law and regulation, local governments can also make the decision to not collect and to forego tax revenue. Not collecting tax revenues limits the resources available to meet immediate program needs, but the reprieve from taxes may encourage citizen or business behavior with long-term benefits to the community and its polity. Decisions to forego tax revenues are polity-level choices sometimes decided by voters, but often made by elected officials and government administrators through regulatory actions.

The policy decision to forego and not collect authorized tax revenue is known as a tax expen- diture. In not collecting tax revenue from a particular source or group, all other contributors to the tax base must step up to meet community needs. The uncollected tax burden is shifted to the remaining taxpayers, and the government in essence gives an appropriation of funds to the tax expenditure recipient. Tax expenditures carry a pejorative label due to their misuse and inappro- priate adoption in legislatures; however, tax expenditures provide important tools to increase the fairness of the tax regulations and to accomplish desired community objectives. A major group of tax expenditures are designed and adopted to support the production of public goods and to support community goals and values. Nonprofit and governmental organizations are major beneficiaries of these tax expenditures. Local governments also use tax expenditures to attract businesses and to sustain a tax and wealth base. In this type of application, a county, city, or special district govern- ment may reduce, defer, or forgive annual property taxes for a specified period for new businesses or for major expansions of existing businesses.

Exactly how far and to what degree a local government should go to build a diversified and sustainable tax base is a policy question for the polity that reflects community values and eco- nomic vision. A community must have a strong economy to generate the resources for good works. Intentional policy and program choices by state and local governments can help to encourage development of a diverse revenue base with sustainable yield.

Perhaps most important, state and local governments must have a clear understanding of the revenue foregone to support each tax expenditure. A clear presentation of this information ex- plains the intent and public value behind each exemption and gives transparency to the reasons and risks behind it.

Tax Expenditures to Promote Community Goals and Social Justice

Tax expenditures to support nonprofit organizations and government can cost state and local governments millions of dollars annually in lost tax revenue. The state tax code and its expen- ditures provide most of these tax breaks. Local government policy supplements the larger state code. Tax expenditures in the form of exemptions can take three levels: full exemption, partial exemption, and special assessment. Exemptions may be permanent or may last for a specified period. Administrators must carefully consult their state tax code to understand where and how exemptions apply.

Nonprofit organizations benefit from tax expenditures in numerous and far-reaching ways. The largest and most evident are exemptions from local property tax for religious and nonprofit facili- ties, along with exemptions from retail sales and use taxes. Taxes on property owned by charitable and religious organizations for day care facilities, schools and academies, student housing, senior centers, museums, and private parklands are all typically exempt. Property leased by charitable

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and religious organizations may also be exempted, as may retail stores operated by charitable organizations (see epigraph at the beginning of this chapter).

Tax exemptions for government-owned lands and facilities also support public benefits and community social justice. Housing authority rental units receive a full property tax exemption, low-income housing may receive a partial exemption, and newly constructed low-income hous- ing may receive an extended exemption. State and federal facilities, including public community colleges and universities, dormitories, and parking garages, are usually all exempted from local property tax. The land under public streets, roads, and highways, called rights of way, is likewise exempt from property taxation. Federal agency property and Native American property on reser- vations are also typically exempted from local property taxes. When all of these exemptions are aggregated, one begins to appreciate the growing constraints on local revenue generation and the need to take a polity-centered focus to revenue development. In many instances, nonprofit organi- zations and government agencies will make a voluntary annual contribution to local governments to compensate for a portion of the lost property tax revenue.

To compensate local governments for lost revenues due to federal land ownership within county boundaries, the federal government established tax reimbursement programs as early as 1908. The most widespread federal compensation program is the payment in lieu of taxes (PILT) program, which pays local counties on a per capita and acreage basis. Other federal programs provided substantial revenue sharing to county governments based on a percentage share of federal timber, recreation, mineral, and other resource sales receipts. Under the Secure Rural Schools and Com- munity Self-Determination Act of 2008, counties with substantial acreages of U.S. National Forest (USFS) and U.S. Bureau of Land Management (BLM) natural resource lands could elect to receive transitional federal payments based on historic payment levels.2 Due to its transitional nature, the Secure Rural Schools Act expired in 2012 with a substantial reduction in federal revenues to these rural counties. A drastic reduction in county road maintenance, K–12 education, and general fund public safety, health, and library services has followed the loss of federal revenues (Gaid 2009; see epigraph). Recent federal legislation in 2013 restored payments to rural schools and counties for an additional year (U.S. Forest Service 2014).

Senior and low-income homeowner deferrals on property taxes represent another widely of- fered tax expenditure (NCSL 2002). These expenditures are typically adopted into state law but are largely implemented and have their effect at the local government level. Under these pro- grams, a qualifying senior or low-income resident typically receives an exemption for a portion of the home’s value, or a deferral of all or a portion of the annual property tax bill until he or she dies or sells the property. For each year of exemption or deferral, the state government pays the taxes that are due and places a lien on the property for the value of the tax. Local governments do not incur a loss of revenue, but the state government must forego the opportunity cost of the reimbursement funds and take the risk that the future property value at sale will cover the value of deferred taxes.

Tax expenditures and their related tax exemptions provide key incentives for citizens and busi- nesses to support and participate in nonprofit programs. Many exemptions give behind-the-scenes support that clients never see. On the other hand, as Exhibit 8.2 details, tax exemptions may provide a critical tool to build personal dignity and economic justice in the community.

Tax Expenditures to Promote the Community Economy and wealth

Targeted tax exemptions are a widely used tool for local and regional economic development. Economic development activities are focused to attract new businesses and to retain and grow businesses already in the community. Local governments and economic special districts develop incentive packages with several forms of tax relief, permit fee reductions, and favorable zoning

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and permitting policies. Targeted tax exemptions allow a community or region to effectively compete for new businesses at the state, national, and international levels. Successful economic development generates economic activity that in turn stabilizes and grows the business property, residential property, retail sales, and income tax bases. An increased philanthropic donor base also results. However, in the short term, tax exemptions reduce the flow of tax revenues that may be needed to attend to community problems and needs. Excessive tax expenditures may reduce the flow of revenues needed for other business support activities, including roads and transportation, utilities, planning and permitting, and the schools, colleges and universities needed for workforce development. The decision to grant an economic development and incentive package must balance the tax benefits granted to the recipient business with the loss of revenues and the shift of burden to other taxpayers. The decisions to grant tax expenditures as part of an economic development package are polity-level governance decisions. A polity must decide how it values and supports business and economic growth relative to its other needs and service demands.

Incentive packages with tax expenditures represent a risk for both government and business. For government, an incentive package is a calculated trade-off: business property tax and corporate tax revenues foregone today with the expectation of enhanced personal wealth, enhanced taxes and fee revenues, and economic activity in the future. Local governments have no ownership and only indirect control of businesses in the community, and government actions and investments may or may not generate the desired response of business activity and success. Similarly, for business, committing to settle and to build a facility in a community opens a risk that the jurisdiction will successfully provide the promised tax treatment, transportation and utility infrastructure, labor and worker availability, worker education and quality, community amenities and facilities, and sense of quality of life. The business decision to settle in a community assumes that the package of incentive and support features remains competitive and more favorable than in other states or regions. (The Oregonian Editorial Board 2010a).

Local governments—especially counties, cities, towns, port districts or authorities, and redevel- opment districts—can play a key role in setting an environment to sustain and attract businesses.

Exhibit 8.2

Partial Tax Exemption for Affordable Housing

A partial tax exemption for residential property owners is one tool that the Portland Housing Bureau (PHB) of Portland, Oregon, is using to restore blighted areas of the city and to bring social justice to home ownership. The 10-Year Limited Tax Exemption program encourages contractors to build new homes in all neighborhoods of the city. The PHB continues taxation of the land at the normal adjusted assessed value, but grants the new homeowners a 10-year exemption on the value of the dwelling. The program is aimed at encouraging home ownership for low- and middle-income buyers. To qualify, the builder must apply for the program before beginning construction. Also, the home must be priced for $291,000 or less and the buyer must have an income of $69,400 or less for a family of four. The purchaser must remain in the house for the full 10-year period. After that, full taxes resume on the house. Minority group purchasers make up more than half the buyers of these new houses. Active participation by minorities meets city goals of building diversity in homeownership. The program also helps to renew the city’s housing stock by replacing distressed, deteriorating, and unsafe housing with new construction (Behrs 2011). Statewide for the 2013–2015 biennium, the tax expenditure for the program was $8.5 million. About 2,100 houses in the city of Portland and in surrounding Multnomah County, Oregon, are involved in the program (State of Oregon 2012, 296–297; City of Portland, Oregon 2014).

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Many local governments establish an economic development staff group or department to develop policies and programs to support business. Business decisions to locate in a community often reflect a complex blend of factors (Center for Economic Development 2012), and a community’s attitudes toward business are of primary importance. Community attitudes include regulatory environment, fiscal climate of taxes and fees, and a perception of community support of business. Other factors include distance to customers, cost of property, and financial incentives.

The decisions to establish and offer tax expenditures for economic development reflect a com- bination of state and local government policies. Any local option to grant tax exemptions must be authorized in the larger state tax code. Incentive packages and offers to attract businesses reflect a combination of state and local law and policy, and state and local decisions to offer a particular set of incentives (NCSL 2002, 25–29). Incentive packages may be targeted to small businesses with just a few employees or to large multinational corporations. Incentive packages granted to large corporations may be worth hundreds of millions of dollars over the life of a manufacturing or research facility. In this latter situation, a major portion of the economy of a region and its business and personal wealth may rest on the presence and viability of one or two corporations. In these instances, state support for the economic development is critical.

Tax expenditures granted to business take a variety of forms. These include exemptions and reductions in property taxes; relief from taxes on business inventory and finished goods; and relief from sales, use, and other taxes over a specified period. Property tax relief may be offered as a complete exemption from assessment, a deduction of value on an assessment, or as an abatement or reduction in the tax rate (NCSL 2002, 27; Center for Economic Development 2012). Property tax relief can apply to land, buildings, manufacturing equipment, and business personal goods and furnishings. Tax relief can also apply to inventories and finished goods awaiting shipment (NCSL 2002, 25; Center for Economic Development 2012). Other tax expenditures offered to businesses include relief from retail sales and use taxes, favorable equipment depreciation sched- ules on income taxes, and credits for worker retraining, worker training, and job creation. Tax relief typically expires after a specified period and rates return to full tax burden. At the point of expiration, both government and the business must review the incentive package for renewal, modification, or discontinuance. The blend of tax types and rates in a package can encourage or discourage particular sizes and types of businesses. Reduced property taxes and favorable depre- ciation schedules are especially effective for businesses with large capital investments in facilities and equipment. Reduced personal income taxes and moderate capital gains taxes are especially helpful for entrepreneurs and small businesses.

If state law allows, state and local governments may establish enterprise zones to focus and stimulate economic development in a depressed area. The specific requirements for an enterprise zone vary, but they often include extremely high and sustained unemployment and a major loss of business activity. Businesses coming into an enterprise zone typically receive some form of tax relief for an extended period. In return, a new business must employ a specified number of work- ers at a certain pay level, make a facility investment, and establish a permanent presence. In lieu of tax payments, the business may make specified compensatory payment for services provided by the local government. As in any contract, the agreement must be implemented, supported, and monitored by both parties. Effective monitoring causes both the community and the business to perform up to standards. Where companies fail to meet standards, local governments may actuate claw-back provisions to recover damages (Babwin 2010). The period leading up to the expiration of an exemption agreement allows the community and local governments to review the provisions and its success. Reevaluation allows the community to reconsider if the balance between lost tax revenues and immediate program needs on the one hand, and an enhanced economy and tax base on the other, supports community goals and values.

Tax increment financing (TIF) provides another commonly used tool for local governments

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to remove blight and to accomplish urban redevelopment. Forty-eight states allow some form of tax increment financing.3 This public funding tool typically requires a city or county to establish a renewal tax district, which usually has a finite lifespan during which redevelopment occurs. The property tax base in the district is then frozen at a beginning point in time. Any increase in property tax value after the starting point generates tax revenues that are redirected to a district improvement fund rather than to the city, county, school, or other revenue recipients. The directed funds may be spent directly on improvements but more typically are used as a revenue stream to make payments for bonds. Because all the other taxing districts that overlap the renewal district are affected by the redirection of the increased revenues, all districts must support the renewal district establishment. Gaining political support for the redirection of revenues is often the major challenge to acceptance of a TIF district. The renewal district expires when all projects are completed and all expenses and bonds are fully paid off. Upon expiration of the district, the flow of tax revenues returns to the permanent underlying county, city, or special district taxing districts.

The key assumption with TIF is that the property values in the renewal district will increase sufficiently over time to pay off any improvement expenses or bond principal and interest. Re- newal districts are typically designed to hold debt (bonds or loans), which allows projects to be funded up front and the debt service to be spread out over future years. Key renewal investments may change the site sufficiently and successfully attract additional investment. Property tax values may increase new tax revenues in sufficient quantity to cover all bond payments. This is often, but not always, the case. Tax increment financing arrangements are not without risk. If the property values in the renewal district do not rise, or if the flow of anticipated revenues fails to meet expectations, revenues may not be available to make investments or to make timely debt payments. Local governments rely on several mechanisms to help ensure timely debt payments. These include state agency review and financial backing (e.g., Pennsylvania TIF Guarantee Program; State of Pennsylvania Department of Community & Economic Development 2013), establishment of cash reserve funds, and obtaining tax revenue interruption insurance. Financial ratings agencies also routinely review the financial health of the renewal district and its revenue stream. Where the revenue stream fails, the district defaults and the parent local government may become liable for debt payments, since the debt was originally secured with the full faith and credit of the parent local government.

Several authors point out a number of shortcomings with TIF. Kerth and Baxandall (2011) note that the TIF process often lacks transparency and accountability. Government administrators may hold wide discretion in how redirected tax revenues are used, and uses may be largely unrelated to redevelopment efforts (O’Toole 2011). O’Toole (2011) further argues that favoritism may occur in the selection of contractors and redevelopment projects. Dye and Merriman (2006) question the assumed increase in property values and counsel caution and care in using tax increment financing. TIF is an important tool for improving community infrastructures and for attracting new businesses. However, local governments must rely on conservative financial assumptions, place strong controls on redevelopment projects, and ensure transparency of the TIF process and performance. The decision to adopt a renewal district and a TIF program may require a citizen ballot initiative and adoption. Effective political and administrative leadership are an absolute requirement in order to establish a successful TIF renewal district.

Summary

Targeted tax exemptions provide polities with important tools for revenue base development, for supporting the nonprofit sector, and for enhancing justice in the community. Certainty and stability in exemptions are critical to support investment decisions by businesses and nonprofits. An exemption must be in place for a period sufficient to allow its financial payoff to occur. The

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expiration of an exemption, enterprise zone, or economic renewal district provides an important period for a community to reconsider the trade-off of meeting immediate needs or of making long-term investments that could build the community into the future.

ADMINISTRATIVE LEADERShIP TO BUILD PUBLIC REVENUES

Developing revenues for local governments has always been a responsibility of government administrators and elected officials. The blurring of lines between the economic sectors of the community reinforces the notion that the polity revenue base supports an interdependent network of government, nonprofits, and for-profit organizations. Both government and nonprofit administra- tors must proactively work to build a diverse, robust revenue base to support the service delivery network. Public administrators can step into this challenge, use their professional discretion, and make a tremendous difference for their organization, their community, and their polity. Adminis- trators bring important technical expertise, communication skills, and the political understanding necessary to build community support for revenue enhancement initiatives.

STUDy qUESTIONS

1. Select a nonprofit organization with which you are familiar. Does the organization have a strategic plan? An operational business plan? How does the plan assess current and potential revenue sources, describe and structure a fundraising and donor development program, and set policy for the selection and rejection of grants and offers of revenue? How does the organization balance governmental revenues, revenue from small-scale charitable giving, revenue from large philanthropic grants, and fees for services and enterprise revenues?

2. For a familiar functional service area or issue, map out the revenue sources supporting the community or regional polity. Include any state government sources, local government tax and fee sources, regional intermediary federated nonprofits, state-level foundations, community foundations, corporate foundations, major family and charitable trusts, service delivery nonprofits, and commercial service providers.

3. Consider your own personal charitable giving. What factors cause you to give to a cause or organization? Do other donors have the same or different motivations and concerns? Do you consider a nonprofit’s ratio of administrative expenses to total donations an important factor that conditions giving?

4. Imagine that you received a major inheritance of $2 million. How would you structure a program of philanthropic giving? Consider your own emotional satisfaction, how you might complement government spending or lack thereof, how to develop a strategic focus of giving over time, how to leverage your gifts with other providers, and the selection of a legal structure such as a trust, community foundation, or donor-advised fund.

5. For one branch of social service programs (e.g., low-income health care, youth, elderly, homeless, child care, etc.) map the polity network of governmental and nonprofit or- ganizations. Does any nonprofit, foundation, intermediary group, or local university research group in your network take responsibility for development of a compre- hensive polity-level assessment and forecast of revenues and grants? If you were in charge of such a research group, how would you structure an analysis and forecast of revenues?

6. Position yourself as the finance director for a medium to large nonprofit serving youth and the elderly. The organization operates extensive child care, after-school care, child summer camps, and senior center operations. What analysis process and policies do

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you use to set fees for service rates? Are your donors and board supportive of your fee structure?

7. Consider your community. List at least five tax exemptions provided to governments and nonprofits in your community. For each exemption, to whom is the tax burden shifted?

8. Review the commercial and industrial base in your polity. What economic development programs have the state, local governments, and business groups established? Has gov- ernment granted any property tax exemptions or abatements to attract or retain business? Describe the risks to governments and to businesses of a tax relief program for business development.

9. Does your state allow the establishment of enterprise zone or tax increment financing districts? Describe the major risks inherent with each of these programs. How would you explain the complexities and risks of tax increment financing to voters considering a ballot initiative?

NOTES

1. Websites for these organizations are as follows: The Giving Institute (www.givingusa.org/) and As- sociation of Fundraising Professionals (AFP; www.afpnet.org/) (both accessed on March 16, 2014).

2. Citations for these three federal statutes are as follows:

• 25 Percent Fund Act of 1908, P.L. 60–136, 25 Stat. 260, shares 25 percent of federal national forest timber sale revenues with local counties for county schools and local road maintenance.

• Payment in Lieu of Taxes Act of 1976 (PILT), 31 U.S.C. 1601–1607, substituted by the Money and Finance Act of 1982 chapter 69, P.L. 97–258, Stat. 1031, 31 U.S.C. 6901–6904. PILT provides federal compensatory payments based on federal land area and population to counties, boroughs, and parishes; cities and districts certified as independently providing local government services; the District of Columbia; Puerto Rico; and other U.S. territories. PILT funds may be used for any governmental purpose.

• Secure Rural Schools and Community Self-Determination Act of 2000 (SRS), P.L. 106–393, pro- vided counties with declining 25 Percent Funds and Bureau of Land Management O&C County payments with transition funds. The SRS act was reauthorized for four additional years 2008–2011 in P.L. 110–343.

These federal payments have been extremely important during the economic downturn for western state rural counties with double-digit unemployment. Consult the National Association of Counties, “Legislation and Policy,” at www.naco.org/legislation, or the U.S. Forest Service. “Secure Rural School and Community Self-Determination Act of 2000,” at https://fsplaces.fs.fed.us/fsfiles/unit/r4/payments_to_states.nsf for ad- ditional information on these programs. On the 2013 reauthorization, see the U.S. Forest Service April 4, 2014 press release at www.fs.fed.us/news/2014/releases/04/rural-schools-payments.shtml (accessed on May 10, 2014).

3. For additional information on tax increment financing (TIF) districts, see the Council of Development Finance Agencies (CDFA) and the International Council of Shopping Centers (ICSC), Tax Increment Finance Best Practices Reference Guide (Columbus, OH: CDFA, November 2007).