Speaking Up for the Nonprofit Sector

A view from the trenches

There's a troubling trend in commentary on the nonprofit sector, exemplified by Josh Freedman's recent Forbes article on "Why the 'Nonprofit Sector' Needs to Go." There have been a number of exposés lately on the supposed ease by which all manner of organizations can acquire 501(c)3 status, with minimal oversight or supervision, such as "Anything Goes: Approval of Nonprofit Status by the IRS," by Rob Reich, Lacey Dorn, and Stefanie Sutton. The substance of such attacks is that too many nonprofit organizations are spending too much on themselves, and too little on fulfilling their stated mission. 

Freedman makes it easy for himself by focusing his argument on wealthy institutions such as certain hospitals and universities, specifically Harvard (those of us in the Bay Area can easily bring our own local examples to mind), questioning whether these are charitable, or "charitable," organizations (imagine the word spoken with two fingers making sarcastic quote marks in the air). Harvard, says Freedman, is "really rich, with billions of dollars in its endowment and billions of dollars of property, all of which are untaxed regardless of what they're for." Most of its students, he claims, also fall into the "really rich" category (it's perhaps ironic that Reich, Dorn and Sutton's 2009 study stems from Stanford’s Center on Philanthropy and Civil Society). 

By focusing exclusively on such institutions, it seems that he disregards ordinary nonprofits that do not by any stretch of the imagination fall into the "really rich" category. But let's be clear: if you think that Freedman is only talking about wealthy institutions, he qualifies this with: "Replace either of those words ('hospital' or 'university') with 'pretty much any nonprofit' and it would still apply." In other words, in Freedman's argument, all nonprofits engage in activities that do not further the cause that they support. 

There are certainly examples of organizations whose definition of what is "charitable" seems extremely loose. The Agitator’s Tom Belford notes that "it might surprise you to learn that the PGA Tour is a nonprofit business league (501(c)6, like the National Football League and the National Hockey League) and many of the tour's tournaments are set up as individual 501(c)3 charities. Of course, the benefit of charitable status for these sports charities is tax avoidance … hundreds of millions of dollars." 

These claims for nonprofit status are certainly a stretch, making it easy to see why Freedman argues as he does. Not taxing certain activities comes with societal costs, he claims, and creates a false distinction between nonprofit and for-profit sectors. "The primary goal of nonprofits is often to make more money, which serves to boost their status and thus bring in more money in a perpetual cycle."

But comparing Harvard or the NFL to your local chapter of the Boys' and Girls' Club of America is hardly comparing like with like. Freedman's beef, to be fair, is not with charity per se, but he believes that pretty much all nonprofits, rich or poor, engage in activities, some of which serve a charitable purpose, some of which do not. He argues that only those activities that provide direct support to the mission should be given nonprofit status.

But where do we draw the line? When I turn on the lights at my nonprofit in order to do my job, is that a "charitable" activity? Nonprofits need staff, resources and infrastructure as much as for-profits to meet their objectives. Freedman’s article bumps up against activist and fundraiser Dan Pallotta’s recent widely-publicized insistence on the contrary argument: "Too many nonprofits," he says, "are rewarded for how little they spend – not for what they get done." The insistent focus in too many nonprofits with limited funds on minimizing overhead—forming what Pallotta, unlike Freedman, thinks is a false distinction between charitable and non-charitable activities—limits what we can accomplish. Pallotta asks us to "start rewarding charities for their big goals and big accomplishments (even if that comes with big expenses)."

Shannon Foucault, Campaign Manager at Oakland Zoo, thinks Freedman’s article does provide food for thought: "What I grasp onto is that the general public has no idea what we actually do, why colleges and hospitals are nonprofit despite massive endowments and high fees, and how we are separate from the work government does (and why government helps to fund our work). What I am hearing over and over again is the need to improve our communications and public relations, for the whole sector."

Think about it. What work does your organization do that is not "important to your ultimate charitable mission?" And how can we as an industry help our donors understand that we have to engage in the full range of activities of any business in order to be effective at what we do? 

Pallotta's TED talk "The way we think about charity is dead wrong" tried to begin this outreach, though his views may not have circulated much outside the nonprofit sector itself. Obviously there is work to be done here – voices from within the sector speaking up when articles such as Freedman’s emerge. 

Foucault agrees. "As it is, charitable organizations are held so tightly accountable for how money is spent—especially on leadership and administration—that nonprofits can't recruit the talent needed to produce the changes society wants to see." And Barbara Stevenson, of Lumenos LLC, sees Freedman’s argument as "a thread in a larger conversation that I find alarming – in which many voices seem to be saying that the nonprofit sector has to go because businesses will do a better job." 

The argument, in other words, is going round in circles: nonprofits should be treated like businesses by taking away their tax-exempt status, while at the same time being punished for acting like businesses by having high ambitions that involve big expenditure.


About the author
Andrew Alvarez is Digital Fundraising Specialist at KQED, and serves on AFP Golden Gate's Marketing and Communications Committee.