How the rich can get richer––and help the poor

From ANIMAL PEOPLE, January/February 2000:

INDIANOLA, Washington–– Richard Linzer, author of It’s Simple: Money Matters for the Nonprofit Board Member, hadn’t seen the December 1999 edition of ANIMAL PEOPLE when he wrote a guest column attacking “unimaginable accumulations of wealth by large nonprofit institutions” while the problems the money was meant to rectify continue.

Linzer was not yet aware that the Animal Rescue League of Boston ended the most recent fiscal year with cash and securities worth $98 million, more than 16 times the ARL program spending; or that Dogs’ Home Battersea, of London, England, had cash and securities worth $67 million, nearly ten times as high as the Dogs’ Home program budget; or that the relatively small Holiday Humane Society in southern California has cash and securities worth $14 million, amounting to $42 in reserve for every dollar it spends.

But Linzer, who advises philanthropists in “Microsoft country” near Seattle, did know about similar situations in other branches of charity.

A 1998 IRS study found that the biggest 5% of nonprofits hold 89% of the assets and raise 80% of the revenue, Linzer said. In addition, Linzer charged, “93% of the accumulated assets of private foundations and 55% of the assets of other nonprofit groups are in various forms of savings and investment. A pattern of hoarding has developed,” Linzer said, which actually perpetuates “hunger and homelessness” among both humans and animals.

However, Linzer suggested, rumblings in Congress about forcing nonprofits to spend more of their money are misdirected. Instead, Linzer suggested, wealthy nonprofit organizations could put their funds to work while still increasing their endowments. The key is in changing modes of investment.

“Rather than quibble over rates of payout,” Linzer explained, “the time has come for nonprofit organizations and their Congressional allies to urge private foundations and the largest 5%” of publicly funded charities “to use their endowed funds as a source of working capital,” by encouraging the wealthy organizations to form pools to guarantee bank loans to smaller nonprofits.

The wealthy nonprofits could even become lending institutions.

Linzer cited as model for such activity the success of the Federal Housing Authority mortgage program. “That a guaranteed loan program could create the basis for a profound change in American home ownership––with bankers, investors, homeowners, and the government all winning––is a prime example of how credit-based strategies are well-suited to dealing with social concerns,” Linzer wrote.

Wealthy animal protection groups could either guarantee loans to enable smaller organizations to build shelters, neutering clinics, and care-forlife sanctuaries, or could make the loans directly. They could collect interest at near market rates. The lending organizations wouldn’t lose, since the property acquired with the loan would be collateral. The lendees could doubly gain, by acquiring more of the material means to fulfill their missions while avoiding the need to raise building funds––which would free revenue for program work.

“I think it’s a fantastic idea,” Maddie’s Fund executive director Richard Avanzino commented. Maddie’s Fund initially considered making low-interest loans available to grantees for capital projects, as well as granting money outright.

Maddie’s Fund dropped that idea, Avanzino explained, mainly because in working with consortiums of animal care organizations instead of single agencies, it is already involved in more complex arrangements than most grant-making foundations, and didn’t want to add complexity.

This might not be an issue for many other nonprofits, Avanzino added. But he cited other possible problems.

“Leveraging assets any way you can to empower people to fulfill a charitable mission is good, from our point of view,” he said. “But we have learned that trying to use business models in working with nonprofits can be a bumpy road. The first bump is the lack of experience that most people in nonprofit management have with using credit to take calculated risks. People in animal work tend either to be mission-focused to the point of being heedless of risk, or are reluctant to undertake any risk at all. Some directors are willing to put their entire capital in jeopardy in hopes that enough donations will come in to make up for any losses. Others, who may have had experience with running into trouble and not being bailed out, try to do everything with money already in the bank. And getting enough money in the bank to do anything big or innovative may take forever.

“The other side of the coin,” Avanzino added, “is that from the lender’s point of view, a nonprofit cannot be as demanding and merciless as a bank. Neither can a bank or any lender be as merciless in approaching a nonprofit lendee who is in arrears. When a partner in a for-profit arrangement fails, the business approach can be quite harsh. Loans are foreclosed and property is seized. Society accepts this as necessary to insure the security of investment and the integrity of credit. In the nonprofit sector, foreclosure would be seen as a cruel and hostile act toward people who mean well.”

A nonprofit lender, on the other hand, could take over and run a failing nonprofit creditor as an affiliate or subsidiary, reorganize the failing organization so as to become successful, and then spin it off again as an independent entity if it chose to.

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