On Political Books

March/ April 2013 Charity Case

How taxpayers subsidize failing philanthropies.

By Georgia Levenson Keohane

With Charity for All: Why Charities Are Failing and a Better Way to Give
by Ken Stern
Doubleday, 272 pp.


In 2006 the oil tycoon T. Boone Pickens gave $165 million to his alma mater, Oklahoma State University, to build a new football stadium, marking one of the largest charitable gifts on record to an American university and the most gargantuan to an athletics program. Pickens directed that the money be spent on a new west end for the Boone Pickens Stadium, for fields and practice facilities, and for a residential village and dining buffets for OSU athletes.

Less than an hour after Pickens’s donation landed in the bank account of Cowboy Golf, one of the athletic department’s fund-raising arms, the money was rerouted to BP Capital Management, Pickens’s hedge fund, where it was soon matched by an additional $37 million in unrelated donations that the university had agreed to invest as a condition of Pickens’s largess. With the funds now illiquid, OSU took on debt to construct the stadium—a strategy, notes author Ken Stern in With Charity for All, that is not unusual for a nonprofit organization, which can “leverage” its tax-exempt status to borrow at lower rates and invest existing assets in matching but higher-yield, taxable securities. The resulting arbitrage, in theory, produces a lower-risk cash flow for the organization, particularly when the matching funds are allocated in a relatively conservative way. OSU’s investment with Pickens, in an oil and gas fund betting on changes in commodity prices, initially spiked in value to $300 million. Then, in the 2008 crash, BP Capital Management lost more than $1 billion—and with it most of the OSU donations, Pickens’s and otherwise.

Stern’s account is not an indictment of college athletics nor of university resource management, though the Pickens affair begs important questions about both—particularly in the wake of this recent recession, which has nearly eviscerated state and private financing for education programs in many institutions of higher learning across the country. Nor does Stern single out Pickens, a man who, as he says, “never did things in a small way,” whether as a ruthless corporate raider, the sponsor of the Swift Boat attack ads that helped derail John Kerry’s presidential bid, or the godfather of OSU sports. After all, Stern concedes, “it was Pickens’s money and he had the right to dispense with it as he pleased,” as did the philanthropists John D. Rockefeller and Andrew Carnegie a century before, who distributed their ruthlessly acquired wealth in the form of libraries, museums, and major research centers. The difference today is that the charitable sector is shaped and supported by a wealth of public subsidies: substantial tax breaks in the form of deductions for donors, and waivers on income and property taxes (among others) for charities themselves, which render acts of private giving anything but. “In the end,” Stern reminds us, “the public does pick up the tab for a significant portion of such gifts, and it is entitled to question whether they are a wise use of public resources.” His insistence on this fundamental question about the purpose of American charity is the great and original strength of this book.

Stern is an engaging storyteller, and his catalog of venality and graft in the charitable sector borders on farce—and would be, were the theft not approximately $40 billion each year that donors and taxpayers had intended for public purpose. We hear about the double lives of priests who minister to the poor by day and spend millions on trips to Las Vegas and escort services in their off hours. Politicians who lard local social service organizations with government funds to employ their family and friends, who, in turn, get out the vote on election day. Executive directors of charities of all sizes who regularly raid the till for personal perks, and scam artists who prey on public sympathy with words like “hurricane relief,” “veterans,” and “cancer” to raise money for nonexistent organizations and services. The remarkably low barriers to entry for new non-profits (inexpensive filing fees, almost certain approval of charitable status), along with minimal government oversight and virtually nonexistent “market” mechanisms to shutter fraudulent or incompetent organizations, has led to unchecked growth in the number of nonprofits in the United States—two million up from 12,000 in 1940.

Part of the problem, Stern contends, is the lack of definitional clarity about just what constitutes a publicly subsidized charity. While we cling to historical, legal, and cultural expectations that nonprofits must be engaged in “purposes beneficial to the community” that serve some kind of “public function,” we regularly encounter organizations that may not fit the bill. For example, Stern cites a roller derby league in Bend, Oregon, the All Colorado Beer Festival, and the Grand Canyon Sisters of Perpetual Indulgence, a drag queen sorority, and surely we can all name tax-exempt nonprofit organizations of questionable “public function” within our own communities. Stern’s critique is hardly one born of cultural elitism, as he questions whether the Metropolitan Opera, priced well beyond the reach of most New York City residents, serves a community benefit sufficient to warrant forgone tax revenues.

Even more complicated are highly profitable charities. Here, too, some seem to fall squarely outside of the “public function” domain, such as the various football bowls that earn hundreds of millions of dollars each year and pay executives in salaries and golf club memberships on par with their corporate peers. Other cases are thornier: what happens, Stern asks, when nonprofit hospitals become “virtually indistinguishable from for-profit institutions” in terms of lavish facilities and compensation, high-end procedures, aggressive bill collection, and, in some cases, very little true charitable service? Should these institutions and their donors still receive significant public subsidy?

Stern argues that, more than malfeasance or subsidized profits that do not return commensurate social benefit, the greatest affliction of the charitable sector is “the absence of market mechanisms that reward good work and punish failure.” This theory of inefficient social capital markets isn’t new; it has been brewing, particularly in the “new” or venture philanthropy corners of the nonprofit world, for more than a decade. The most business-jargoned dialect of the theory tends to be spoken by philanthropists or executives who come to the charitable sector from the commercial realm. Pierre Omidyar, eBay founder turned ├╝ber philanthropist, has described his journey thus: “Every business person who first engages in the nonprofit sector goes through a lot of growing pains, disappointments. It is a very different kind of sector, a different cultural environment.” Stern, by his own account, seems to have experienced something similar in becoming COO, and then CEO, of National Public Radio, evident by his faith in “market discipline, a new culture of effectiveness, and efficient, results-oriented service.” Although there are many strands of inefficient social capital market theory, at its heart it is about measurement and evaluation (M&E) and demonstrating “social impact”—what works and what doesn’t—in the delivery of social services. Or, as Bill Gates announced on the cover of the Wall Street Journal in January: “My Plan to Fix the World’s Biggest Problems: Measure Them!”

Georgia Levenson Keohane is a fellow at the Roosevelt Institute and most recently the author of Social Entrepreneurship for the 21st Century: Innovation Across the Nonprofit, Private and Public Sectors.

Comments

  • Watson on March 05, 2013 10:52 AM:

    I'm all for measurement across all sectors in society. The question that must be deeply reflected upon and answered in regard to philanthropy is "what constitutes evidence." When striving to improve complex, interrelated social structures or create parallel tracks that will perform where existing structures are failing, it is critical to know what to measure, how to measure it, and what time horizon makes sense. New Profit and Youth Village are, indeed, great organizations. But somewhere, sometime, someone supported them before they became what they are now. What was the evidence that they would work before there was evidence that they do work?