A Pace University study of 700 tax returns from nonprofit organizations providing human services in Manhattan found that their efforts to raise money from profit-making activities may be bleeding the very programs they are trying to fund. The study raises questions about a significant trend in nonprofit work.
The study, by Pace University's Helene and Grant Wilson Center on Social Entrepreneurship, was conducted by Rebecca Tekula, PhD, an economist who serves as the Center's director.
The findings are timely, coming after the recent collapse or reorganization of several institutions explicitly founded in recent years to combine profit-making and philanthropic activities, including Global Giving and World of Good. The Pace study is the first to systematically analyze data on a large number of such organizations. Without question, the author says, the organizations are "important service providers for society's neediest individuals."
Nonprofits' unrelated business activities to raise money are part of the social enterprise movement, according to Tekula. "Myriad philanthropists, associations, and now federal and local governments are supporting the social enterprise movement with growing fervor, [but] without the benefit of an in-depth analysis," says Tekula. She adds: "Caution must be exercised in popularizing and glorifying the unproven benefits."
Sales up, services down
As early as 1908, the Metropolitan Museum of Art operated a sales shop, and by 1982 the Girl Scouts were selling 124 million boxes of cookies for gross revenues of over $200 million, Tekula reports, quoting the 1988 book, The Nonprofit Economy, by the economist Burton Weisbrod. By the mid 1970s, more and more nonprofits had developed a substantial dependence on non-donated revenues including membership dues and some form of sales.
Tekula examined the U.S. tax returns for the years 2000 to 2005 of a large sample of organizations randomly chosen from all the Manhattan organizations meeting the federal definition for providing human services. The organizations raised an average of more than $1 million in unrelated business income, putting it toward expense budgets that averaged over $19 million. The average organization spent an average of 82.2 percent of its total expenses on program services, or over $16 million.
But Tekula found that the more they brought in from their businesses, the smaller were their proportion of total expenses spent on programs. In other words, as income from side businesses went up, the share of a contributed dollar that went to actual services went down.
Why? Tekula speculates that many organizations with unrelated businesses were not really investing profits in their mission-related services. Instead, profits were reinvested in the business, and losses were subsidized with funds that might have gone to clients.
"The same thing happens in diversified corporations," she says. "When a division is losing money, there's a tendency to throw good money after bad." In the nonprofits whose returns she studied, the odds were low that their business divisions were start-ups operating at a loss en route to profitability; all had been in business at least a year previous to the years her survey scrutinized.
"Running a gift shop or anything that isn't an integrated part of your program may be bringing in money (gross revenues), but if it's not making a profit, you're keeping it going with funds that you could have spent on counseling and food for your clients," Tekula says.
No substitute for asking
Though Weisbrod's prophecy was not tested with data at the time, Tekula credits him for sounding the first, largely-unheeded, warning with his 1988 hypothesis that says, as she paraphrases, "as nonprofits branch out from their central mission, the quality of their principal tax-exempt activities would decline."
Social enterprise may be an innovation, she says, but one that can tempt nonprofits into a substantial "mission distraction." Tekula points out that her results represent a large random sample of organizations and that not every organization in the sample is guilty of this inefficiency. She has not analyzed data from other areas of the fast-growing nonprofit world, like museums, orchestras, and hospitals, though she feels their business activities must also be examined.
For human services nonprofits, however, she suggests that tough as it is, they might be better off with old-fashioned fundraising.
The paper, Social Enterprise: Innovation or Mission Distraction, is available at http://web.pace.edu/page.cfm?doc_id=35460