Philanthropy and the Third Sector
To this point we have considered the evolution of the institutions of philanthropy and of widespread individual support of philanthropic enterprises. We have a pretty good idea as to what philanthropy is and how it functions. But, to really appreciate its functioning we must understand the "Third Sector," the arena in which most philanthropic activity takes place.
Perhaps the best recent book on this subject is that by Lester M. Salamon, professor at Johns Hopkins University and Director of the Johns Hopkins Institute for Policy Studies. In his "America's Nonprofit Sector: A Primer, second edition", (1999) he presents a clear picture of the sector.
(It was his first edition that was employed in the course at Wayne State University. We are all fortunate that he has updated that work. The new edition should be in the library of any serious student or teacher in the field of philanthropy).
I recommend each of you get a copy of this book and that you review thoroughly at least the first four chapters. What I intend in this paper is to present just a few highlights.
He quotes Alexis De Tocqueville at the start: "Nothing, in my opinion, is more deserving of our attention than the intellectual and moral associations of America." And, Salamon adds, "...in this, the third century of the American democratic experiment, the private sector remains at least as potent a component of American life as it was when de Tocqueville observed it more than a century and a half ago."
The nonprofit sector is diverse, ranging from small, one-room soup kitchens to major hospital complexes, museums, art galleries and symphony orchestras. It includes some institutions devoted to service or preservation of culture, others devoted to advocacy or civic action, and some to both. It constitutes 9% of the Gross National Product (GNP), based upon 1996 expenditures.
Organizations in the sector are:
- institutionalized to some extent (not ad hoc, informal or temporary gatherings)
- private, as opposed to governmental,
- non profit distributing,
- self-governing,
- voluntary, and
- of public benefit.
Member serving organizations are social clubs, business associations, labor unions, political parties and member cooperatives. These organizations do receive favored treatment under the tax laws in that they are exempt from federal taxation and (usually) from state or local taxes.
Public serving organizations are those that receive even more favorable treatment under the Federal Tax Code (Section 501 (c) 3.) In addition to being exempt from taxation, they are eligible to receive tax deductible gifts from individuals and corporations. These gifts may be reported as deductions on the returns of the individuals or corporations, thus giving them an incentive to contribute.
The public serving group of organizations includes churches (352,000), service providers (655,000), funding intermediaries (50,000) and political action agencies (140,000).
This last group, by the way, is an exception to the general rule that public serving organizations are covered by Section 501 (c) 3 of the Tax Code. These organizations, which are heavily engaged in direct political action (campaigning and lobbying for legislation) are covered under a special section, 501 (c) 4. Contributions to them do not qualify as deductions for the donor.
It is the public serving organizations most people have in mind when they speak of the nonprofit sector. Therefore they are the principal focus of the material in Salamon's "Primer."
The 352,000 churches for the most part are congregations that engage in sacramental religious observance (churches, synagogues, mosques).
The 655,000 service organizations provide services such as education, health care, counseling, adoption services and a host of others, and some may advocate for specific causes.
The 50,000 funding intermediaries are those that function chiefly to provide funds for other parts of the sector, such as foundations, federated funders (United Way, etc.) and professional fundraisers.
The 140,000 public benefit political action agencies devote a great share of their effort to supporting particular pieces of legislation or candidates for political office.
Private foundations such as Ford, Kellogg, McGregor or Earl-Beth "are among the most visible components of the nonprofit sector," Salamon wrote, "so much so that there is a tendency to overstate their role..."
There are more than 41,000 foundations (1996). Most, nearly 37,000, or 90%, are private, independent foundations. These control some 85% of assets and account for 77% of all foundation gifts.
Another category of foundation is the corporate or company sponsored foundation. Unlike the independent foundations, which typically receive an endowment from an individual, these foundations receive funds from the corporation, and very few are fully endowed. The corporation will contribute to build up the corpus of the foundation in good years, but may give little or no funding in lean years. Surplus built up in good years will carry the activity of the foundation in poor earnings years. There are nearly 2,000 corporate foundations, controlling 4% of foundation assets but accounting for 13% of all foundation grants.
It is important to note that not all corporations establish foundations. Many have programs of corporate giving channeled directly from the resources of the corporation and even those with foundations are likely to have at least a small direct program to accommodate smaller gifts and matters pertaining to fundraising events.
A third form of foundation is the community foundation. Unlike the independent and corporate foundations, which are private foundations and not public charities (and as such subject to an excise tax of up to 2% and other restrictions under the Tax Code) , the community foundations are accorded public charity status.
Where the independent and corporate foundations receive their funds from a single source, community foundations receive them from multiple sources within their community. Further, their governance must be broadly representative of the constituencies and interests in the community. These foundations also account for 6% of foundation assets and some 7% of all foundation grants (1996).
Finally, although most foundations specialize in grantmaking, some exist principally to operate specific programs (although they may do some additional grantmaking as well). Known as operating foundations, there were more than 2,300 such foundations in 1996. They hold about 6% of assets and make about 2% of grants. The huge Getty Trust (which operates the Getty Museum) is the a prominent example of such a foundation.
Although there are a great many foundations, most are quite small---94% have less than $10 million in assets. On the other hand, the largest 1% are big and can exercise great influence through their grants. The top 1% control seventy percent of the assets of all foundations.
But, as impressive as it may seem, the some $268 billion ($0.268 trillion) in foundation assets (1998) pales in comparison to the financial assets of other U.S. institutions . Commercial banks control about $3.3 trillion, pension fundsl $3.03 trillion, life insurance companies about $2.2 trillion and money market funds, $891 billion (.891 trillion).
Further, the some $14 billion in private foundation giving (1996) represents only about 10% of all giving that year. And, it is important to remember that private charitable giving, although important, is by no means the only, and not even the largest, source of income supporting nonprofit organizations.
More than half (54%) comes from earned income such as from fees, tuitions, ticket sales and such (1996 data). More than a third (36%) comes from government contracts and grants. Just 10% comes from private contributions (direct gifts and bequests), although the share from private sources is far greater than 10% if the value of voluntarism is included. One estimate is that would bring the value of support from private sources roughly in line with the value of support from government (25% from giving and volunteering, 30% from government).
The big news from careful study of the material in Salamon's "Primer" is that what we really have in this country is a partnership of the three sectors, business, government and the nonprofits, in addressing the public good. There are no clear lines separating the sectors and their relationship to voluntary action for the public good (i.e., philanthropy).
Business is involved in philanthropy. We have organized corporate contributions programs (where corporations have not elected to set up a foundation to channel giving) and we have a multitude of smaller, often privately held businesses, that are philanthropic.
Government is involved, too. The ways are innumerable. Government at all levels supports nonprofit activity through grants and contracts. Government receives contributions to carry forward activity for the public good. For example, most public universities and colleges are involved heavily in fundraising. They are major participants in the philanthropic process.
And, we must not forget that job and wealth creation---only accomplished through the activity of the business community---is clearly of paramount importance to the public good (albeit that the prime motivator for business, by definition, is profit for the owners).
