Invest in Our Community!

Do Nonprofits Impact Our Economy?
by RaeAnne Marsh

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Nonprofits are businesses. That’s obvious, of course, to anyone who has served on a nonprofit organization’s board of directors. They have to operate in the black in order to continue to fulfill their mission.

It’s “the mission” that takes center stage in most discussion about impact and purpose with respect to nonprofit organizations. And that’s understandable, given that nonprofits are, generally, created to fill a void in care for an identified population, whether through advocacy, research or hands-on programs. Nonprofits play on the need of their given constituents in their fundraising efforts, and “the ask” is a big part of their public presence.

What they give, according to the “Arizona Nonprofits: Economic Power, Positive Impact” report being released this month, goes well beyond performance of their identified mission. The report supports the validity of the goal to “empower and position the nonprofit sector as a leading driver of economic development, positive social change and enhancement of life quality for Arizonans,” which, according to Richard Tollefson, lay at the heart of the Arizona Nonprofit and Leadership Initiative and the Arizona Leadership Forum launched a few years ago by The Phoenix Philanthropy Group and National Bank of Arizona. It may, indeed, be an eye opener to many in the nonprofit sector; Tollefson, president of The Phoenix Philanthropy Group, relates that many in that sector took the position that “our role is to impact the social sector, not the economic sector.” But, he says, “You can’t have economic impact without social, and you can’t have social impact without economic.”

The study behind the report, conducted by the L. William Seidman Research Institute at ASU’s W. P. Carey School of Business based on 2014 data, found that the nonprofit sector contributed more than $22.4 billion to Arizona’s Gross State Product. GSP is a measure of the value of the final goods and services within an economy, says Anthony Evans, Ph.D., a Seidman senior research fellow, explaining it includes activities such as Boys & Girls Clubs, which offer people an opportunity for their children to be taken care of so they can, for instance, further their education or hold down a job. The dollar figure represents 8 percent of the state’s GSP, which is on a par with the state’s entire retail trade.

To avoid confusion, we will continue to use the term “business” to refer only to for-profit organizations. However, as Alliance of Arizona Nonprofits CEO Kristen Merrifield points out, “‘Nonprofit’ is a tax status. They’re still a business.” After all, they spend on all the usual expenses – office supplies, employee benefits, insurance – in addition to the cost of providing their service, such as Goodwill operating its trucks, stores and job training programs.

Revenue and Economic Impact

The nonprofit sector generated $27,981.8 billion in revenue, which, the report points out, is on a par with the annual revenue generated by the construction sector, one of the famous “Five C’s” of industries historically at the core of Arizona’s economy. And the value of the assets that nonprofits, collectively, hold is $48.7 billion.

Businesses’ support is part of the 27.3 percent of nonprofit sector revenue that also includes contributions, gifts and grants from individuals, foundations and trusts. But it’s important to note that philanthropic contributions are not the mainstay of nonprofit revenue. More than 72 percent of that revenue is generated by earned revenue, fees for services, and government contracts. And while approximately one-third of nonprofits’ revenue comes from government, Evans notes that a greater percentage comes from their own programs and services, contracts, investment income, special events income, members’ dues and net sales — four of every 10 dollars raised. Furthermore, 40 percent of nonprofits generated an increase in their non-government revenue in 2014 over 2013.

Laurel Kimball, founding principal of The Phoenix Philanthropy Group, cites Chicanos Por La Causa (whose president and CEO, David Adame, is this issue’s Guest Editor) as an example of an organization that has leveraged public and private investment. “CPLC uses business relationships that generate income to support some of its social goals, and also leverages government funding to make that possible — while picking up needs that government is not able to support.”

There is tremendous diversity in types of organizations that comprise the nonprofit sector. The 21,137 nonprofits registered in Arizona include healthcare, educational, human service, arts and culture, environmental and animal welfare, and religious, and range in size from those with multi-million dollar budgets to all-volunteer operations. Funding differences are similarly disparate. Tollefson notes, “Hospitals and other health-related nonprofits rely the most on program/service revenue. Environmental, public and social benefit, and religious nonprofits rely mostly on contributions, gifts and grants.”

Breaking down the income information within the nonprofit sector, Kristen Merrifield, CEO of Alliance of Arizona Nonprofits, says human services organizations derive 60 percent of their income from government and 25 percent from earned income while health organizations derive 45 percent from the government and 54 percent from earned income.

Dr. Evans points out that hospitals and healthcare account for a significant amount of revenue generated — of the roughly $28 billion that nonprofits generated in 2014, almost $12 billion was from hospitals.

Revenue also includes taxes paid by the nonprofits. Although they are exempt from corporate income tax, Dr. Evans points out they paid approximately $1,160 million in direct taxes and $930 million in indirect taxes (such as employment tax, property tax and taxes on good purchased) — a total of nearly $2.1 billion to state and local governments, which represents 9.5 percent of their total sales tax revenue.

Employment 

Nonprofits, the report found, are Arizona’s fifth-largest non-government employer. Regarding their significance, Merrifield shares, “I was pleasantly surprised to see that the nonprofit sector rated right up there with construction and manufacturing — which are a huge part of Arizona’s economy.”

Direct wages paid by nonprofits came to more than $7.7 billion in 2014, approximately 6 percent of the total wages in Arizona. That is also the percentage of jobs statewide, says Dr. Evans, adding, “For every direct job, we believe they’re creating another job around the state.” In other words, he says, the total result of nonprofit activity — direct, indirect and induced — is approximately 12 percent of Arizona employment. In actual numbers, that is 167,000 paid staff and 158,000 indirect and induced jobs. Observes Dr. Evans, “That just underlines the importance of the sector to the economy and why big business should be paying attention and be at the table with nonprofits to talk about ways the state can develop further.”

And it’s a growing sector. According to the report, Arizona nonprofit employment grew by 12 percent over the five years 2009 to 2014, with wages growing 12.7 percent during the same period.

Leadership Talent and Knowledge of Issues

Leadership guru Jim Collins, whose books include Great by Choice and Good to Great, gave the keynote address at the 2013 Arizona Leadership Forum, where he talked about Arizona being an entrepreneurial state. Tollefson, referring to that, notes, “Many of our nonprofits are very successful entrepreneurial businesses.” And one of the goals of the report, he says, is to “demonstrate the efficiency with which nonprofits are filling the gap in social services resulting from government cuts.”

Noting that nonprofits are very careful about their spending, Dr. Evans observes, “Their aim is to make a difference, so they minimize overhead rather than cut back on program or services, and they collaborate with other nonprofits.”

In addition to directly benefitting their constituent community, nonprofits offer businesses a benefit as well. Notes Merrifield, “Businesses gain by their employees serving on boards [of directors].” While the nonprofit gains from these employees contributing talent and/or financial resources, “the employees develop professional skills and expand their network.”

This aspect is also emphasized by Phoenix Mayor Greg Stanton: “In addition to great services it provides to the people of this state, don’t underestimate the nonprofit sector as developing talent — political and business.”

This may be an especially significant role, given the fact that a Gallup poll conducted shortly before the Leadership Forum made what Kimball characterizes a “striking finding” that only 10 percent of Arizona citizens think we have the leadership we need.

In fact, says Mayor Stanton, “I would argue in terms of leadership development there’s no greater laboratory for leadership than the nonprofit sector. I’m a much better mayor because I had the opportunity to serve on the city council. I got to see a lot of community issues up close; I got to make very important budgetary decisions; I got to lead strategic efforts to grow an organization.”

“I’ve been impressed by the emergence of this sector over the last 25 years,” says Lattie Coor, Ph.D., who founded the Center for the Future of Arizona in 2002 following 15 years as president of Arizona State University. “When I came to ASU in 1990” — returning to Arizona, where he had been born and raised — “I was interested in the foundation laid by the nonprofit community.” Referring to capacity to serve, financial impact and the impact in helping shape the agenda for Arizona and its future, he says, “The organizations have increasingly become thought leaders in pointing the way to aspects in our state that need attention.”

The diversity among nonprofit organizations allows businesses to be strategic in their involvement with nonprofits, supporting an organization toward a particular focus area. Dr. Coor believes that employers, understanding the significance of the nonprofit sector, want their employees to get involved, from senior leadership serving on boards and commissions to individual employee volunteer services. “Without a large and healthy nonprofit infrastructure, companies wouldn’t have this opportunity for themselves and their employees.”

Economic Development Planning — with Nonprofits, Business and Government

“It is vivid to visitors who come: the various ways nonprofits are enriching our life,” Dr. Coor says. Observing that a highly effective nonprofit sector is a symbol of the maturity of the community, he notes, “Companies that come here are aware of the presence of the sector and are increasingly attentive to the nature of that sector here.”

Merrifield points to nonprofits supporting business by providing services for low-wage workers and arts for a better community that also helps attract employees. Mayor Stanton expands on that in noting not only that, “We don’t end chronic homelessness among our veteran population unless I have great nonprofits leading the way at the table,” but also observing, “We don’t have successful economic recruitment without GPEC [Greater Phoenix Economic Council] — a great nonprofit that brings together Valley cities and business leaders. And the Greater Phoenix Chamber of Commerce is a nonprofit with awesome business leaders of the highest caliber who help make sure we retain outstanding companies and employees and that local companies grow — that’s how you grow an economy.”

In fact, he says emphatically, “Nonprofits is the economy. It’s huge!” And he believes nonprofits play an important role in economic development, “trying to create the right kind of jobs and economy so we can compete in the 21st century.”

Whether it’s the economy, the physical environment or the people, Dr. Evans observes, “Businesspeople want a healthy environment in which to operate.” And Arizona’s nonprofits make a real difference to the lives of people in the state, plus, he adds, “Thanks to the nonprofit community, we have a healthier workforce that businesses can take advantage of.”

The “Arizona Nonprofits” report points out nonprofits also receive government grants and contracts, and that government at all levels is increasingly looking to nonprofits to pick up more and more services. It concludes that, given these facts and figures, it only makes sense for nonprofits to actively participate in policy discussions — although, in regard to nonprofits “having a place at the table” in discussions impacting economic development, Merrifield shares that one Alliance of Arizona Nonprofits board member opined, “No, we need to be setting the table.”

Observes Mayor Stanton, “Leaders I know in the nonprofit sector are as talented, strategic and impactful as the leaders I know in the for-profit sector. There’s an incredible amount of talent in the nonprofit sector.”

 

 

Business Involvement and the Tax Exempt Status

Businesses widely support the nonprofits, and the cover story of last August’s issue of In Business Magazine focused in-depth on a few examples of local businesses putting their philanthropic interests into action.

Corporate funding, however, is but a small percentage of nonprofit funding overall, and Alliance of Arizona Nonprofits CEO Kristen Merrifield points out this is exacerbated by the numerous mergers and acquisitions. As local giving programs go to companies’ national operations, “We’re losing the local connection,” she says, citing PetSmart as example. Not that support is lost completely. “It’s more about engaging employees; having them volunteer with programs, serve as board members, provide a matching gift or a check that follows a certain number of volunteer hours.”

Businesses are increasingly interested in the social return on investment. In this regard, says Richard Tollefson, president of The Phoenix Philanthropy Group, their concern is how to make key decision in addressing economic and social issues, and where to invest their money to have the most potential impact. Being able to base decisions on data and an understanding of the sector’s economic impact was, indeed, he shares, a key goal Arizona Community Foundation president and CEO Steven Seleznow had for the Arizona Nonprofits report.

Information in the report “will give an indication of social return on investment that will help nonprofits, funders, policy makers and business leaders determine how best to partner with nonprofit organizations to address those economic and social issues,” Tollefson says.

Nonprofits have a legal responsibility to the businesses that support them. Explains Laura LoBianco, a partner in the Phoenix office of Fennemore Craig, “A business could have a claim if the charity does not do what it said would do with money received.” However, no liability attaches to a business that is involved with a nonprofit through such activities as donation or sponsoring events. Through its involvement, she notes, “a business can impact the social sector by working with and donating to charity that is in the industry it wants to impact, and directing that donation to a specific purpose.” For instance, she notes, Fennemore Craig wants to “support an organization that helps the indigent, but directs the funds to be used for legal services.”

Businesses may also use their human resources department to support nonprofits. LoBianco cites SRP as the model that began, many years ago, to bring employees together to support a program of a charity. “Many businesses have fallen along in that pursuit,” she observes, “and many try to connect their charitable dollars with some volunteer program because they want their employees to be connected to the community and giving back to the community.”

Another way businesses and nonprofits can work together is through a public-private partnership. “They identify a specific need, and work together to address it; both put their resources toward that need.” She points to what she calls a “high-visibility need” now of education in Arizona. This is important to both nonprofits and for-profits because “they want to make sure Arizona has an educated, ready workforce.” Key in this partnership is that they nonprofit must continue to further the purpose it gave the IRS when it got its specific 501(c) tax-exempt status, LoBianco notes.

If a nonprofit and for-profit wanted to do something that was not within the nonprofit’s exempt purpose, the level of that activity in comparison to the nonprofit’s main purpose must be insubstantial. Where, exactly, to draw that line is not defined by IRS, LoBianco says, but she shares as example a 50/50 partnership between a university and an organization that provides curriculum to hold classes off campus: Being off campus makes them not part of the university and also not substantial to all of the university’s other activities, so this partnership does not jeopardize the university’s exemption.

Another situation could be a nonprofit and for-profit working together and the nonprofit having a level of control over the business’s activity, such as directing how the business’s funds are spend. “The IRS sees this as the nonprofit directing the business toward a charitable purpose and not a for-profit purpose, so the IRS will be more accepting of this structure,” LoBianco explains.

Relatively new to the playing field is Arizona’s new benefit corporation statute, which went into effect January 1 of 2015. Intended to enable for-profit enterprises to impact social issues more specifically, it could be a vehicle through which a nonprofit and for-profit could come together in a joint venture, LoBianco says, but suggests a limited liability company provides a similar opportunity but with greater flexibility “because they are joined by an agreement, which governs what they do.” Even more to the point, “A limited liability company gives the nonprofit more control, so it will not lose its exemption.”

Or, in a turnabout that LoBianco says could happen, a nonprofit could make a donation to a benefit corporation because the corporation’s identified charity aligns with the nonprofit’s mission. Says LoBianco, “The IRS would see it as a program-related investment.”

A New Model for Business-Nonprofit Partnership?

An interesting case arose earlier this year Back East regarding how a community can help a for-profit organization keep going and redefine itself. Philadelphia Media Network owner H.F. “Gerry” Lenfest donated his newspaper conglomerate, which included Philadelphia Enquirer and Philadelphia Daily News, to the nonprofit Institute for Journalism in New Media, part of the Philadelphia Foundation. The nonprofit’s owners will manage the newspapers, and use the funds that were donated along with the newspaper ownership to conduct research around journalism and the future of the media – and implement that research in its ownership of the newspapers. Because of the research and education component, LoBianco explains, “the foundation can operate the newspaper in a for-profit manner because it’s not necessarily a substantial part of the organization’s activities.” It still must generate enough profit to sustain itself, but being part of the nonprofit foundation that has a social or charitable purpose provides it the benefits of being a tax-exempt organization.

 

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