Adam Huttler - The Business of Charity in the New Economy

Uploaded by MissouriState on 23.04.2010

OK, so back to why I'm here and what I'm going to talk about. I'm going to talk about new
models for non-profit businesses. We're going to look at this a lot of different standpoints.
We're going to look at this from sort of a philosophical angle, how we look at the thing
we do in the non -profit sector.Some sort of legal and financial models that are emerging
in recent years as alternatives to the traditional 501(c)(3) straightjacket. And certain sort
of structural approaches that are emerging in the arts and also in some other areas,
and how those might offer some promise.You know, I want this to be an interactive thing
so if you have questions or want to shout me down on something, that's fine. You don't
need to wait till the end. We can just have a conversation here, hopefully. So alright.So
just because this an economic-oriented conference, I figured I'd provide a little bit of context
for people who maybe don't work inÊ or maybe think much about the non-profit sector. This
is big business.
It's 5.2% of GDP, 8.3% of wages and salaries in the US, over $3 trillion in assets, $1.4
trillion in annual revenue and that doesn't include volunteer labor, which is estimated
to contribute an additional $225 billion a year.So this is larger than, say, the automobile
sector in America. This is a big part of the economy.It's also worth noting that this only
refers to the registered non-profits. And without going into too much tax code minutia,
there are some non-profit that are not required to register, in particular, a lot of churches
and other sort of religious organizations sort of fly below the radar on this. If we
had those numbers, this could be, I think, a lot bigger even.So a lot of different kinds
of charities, a lot of different kinds of organizations are able to get charitable status.
What's the true line and why have we decided that these organizations should exist?Well,
fundamentally, it's about doing things that society thinks are important but aren't just
going to happen if we leave it up to capitalism. For whatever reason, whether there's a sort
of fundamental market failure or sort of the people who benefit from it are unable to pay
for it or what have you, we've kind of as a society agreed that these things weren't
public subsidy.And there are a lot of mechanisms by which those subsidies happen. There's direct
public funding. And then of course, in the US model, the far bigger mechanism for subsidy
is in the form of tax deductions for charitable contributions and the ability to establish
private foundations and things like that.This is one of the things that really differentiate
the US from a lot of other countries around the world, where you can't get a tax deduction
for supporting a non-profit organization but a much larger share of tax revenues and of
government spending is directly to support those organizations.So in some sense, we've
got kind of a decentralized, distributed subsidy model.Despite that, my sort of thesis for
today is based on the principle that the old model or the old ways of doing things in the
non-profit sector don't work. Maybe they did at one point in time, I don't know. But there
are some serious fundamental structural issues today.So I'm going to focus on three aspects
of this. The first: Excessive complexity creates barriers for small organizations and non-profit
entrepreneurs. It's tough to be a startup non-profit. Can I just get a show of hands?
How many people in here if anybody has been involved in the formation of a new 501(c)(3)
charity? Was it fun and easy?Yeah, it takes a lot of time. You got to have a lawyer and
it takes a lot of money and you got to wait for the IRS to get back to you. They may come
back with questions and clarifications. They may require multiple filings. This is not
something that you can do on a Saturday afternoon.The reporting requirements are onerous. There
are federal requirements with respect to the IRS. There are, usually state-by-state charity
bureaus. They're going to have rules and require you to report to them annually.You're going
to need to get an audit every year. That can be expensive and difficult. There are, of
course, lots of restrictions on what you are allowed to do or you jeopardize losing your
precious tax status.There are different accounting rules that apply to you from really everybody
else. And you'd be surprised in the kind of ways this can impact a small organization's
ability to do their work.For example, I mean I don't know if people here are familiar with
Quickbooks but it's a sort of small business accounting software that every small business
in America uses. And trying to get Quickbooks to understand the non-profit accounting rules
which are different from for-profit accounting rules, well, it's an adventure. It doesn't
like to do it.So little things like that, also, the way you have to acknowledge donor
contributions and all the rest.And then real insult to injury, there are a lot of small
business and SMEs out there, there are tax-breaks for moving into particular neighborhoods,
where they are trying to spur their economic development. There's the Small Business Administration
that canÊ do low-interest loans for small businesses and things like that.Almost without
exception, non-profits are ineligible to participate in things, usually because they're in some
sense based on tax credits and if you're not paying taxes to begin with, tax credit doesn't
do you a whole lot of good.Alright, my second principle here allows the incentives to create
risk-averse employees and board members. Again we're in an economics conference and economists
like to think in terms of incentives.IÊ like to think in terms of incentives and how we
set things up is going to impact the way people behave, what we reward and what we discourage.Ê
So there are a lot of ways in which non-profits conventionally are problematic here.So most
fundamentally, you can't own stock in a non-profit. There is no stock. There are no owners. There
is no profit to have a share of, right?So on a basic level, unlike in, say, a startup
tech firm, there is no way to do stock options. There is no way to do employee ownership.
There is no way to participate in the upside if the organization is successful.Of course,
if things don't go well, you're screwed. You can still be fired and you can have the problems
that come when an organization fails. So what's the rational response if you get no benefit
when things go well and you're screwed if things go badly?Most people are going to play
it safe. And I would argue that, generally, that is not a good thing to play too safe.Finally,
I want to look at the sort of chronic undercapitalization of the field, of the sector. This happens
for a lot of reasons. Non-profit organizations very rarely accrue any kind of reserve funds,
cash reserves, working capital funds.There are a lot of reasons to that but, in part,
it's just because it's so cash-strapped that there's a lot of pressure to put whatever
resources you have in your programs. There's very little funding for startups.Institutional
funders tend to be extremely cautious, risk -averse and conservative and they don't want
to fund anybody who hasn't been proven over many years, which is why we get this kind
of entrenched institutional bias or an entrenched bias towards institutions, I should say.It's
very hard to get things off the ground unless you have funding which very few people can.One
that really bugs me, and I think this is starting to change. But there is a sort of a tradition
in the non-profit world of the idea that surplus budgets are a bad thing. If you're a non-profit
organization, the expectation is you're going to create a budget that balances perfectly
and that works out to zero net revenue at the end of the year or at the end of a project,
which is kind of preposterous to begin with because who can predict with that kind of
accuracy?But there is this sort of almost unspoken belief that if you have a surplus
at the end of the year or at the end of a project, it doesn't mean that you've done
better than expected or really well or that you have kind of solved the problem or introduced
new efficiencies. It means that you're hoarding money that you should have spent on the project
itself.Or that's what people think, which is a real problem because, back to Number
One, how are you supposed to build any reserves? How are you supposed to build up any war chest
over time to do kind of new, bigger, more ambitious things if you can't retain any kind
of surplus?And then in a kind of management cultural level, there are problems as well.
In part because of all these other factors, something I encounter all the time with my
peers, there's a real reluctance to take on new, especially the kind of risky endeavors
or projects without committed upfront funding for 100% of theÊ project.I mean it's sort
of the old way, the old sort of grant-funded non-profit model. The idea is thatÊ you go
out and you raise your money. And when if you got 100% of it raised then you're allowed
to do your project.That slows everything way down. It makes it really hard to take a chance
on something that may or may not pay off. That's a problem.And as a result of all of
this, there is very little investment in true long-term value and long-term institutional
organizational capacity.So this is where we are left. We are left on this treadmill of
constantly being in the position of begging for funding or rattling the tin cup and trying
to persuade the people that what we are doing is important and institutional funders should
give us grants.And in some perverse way, there is some institutional funders who, whether
they would admit it or not, like this because it's what gives them their power and influence
in the field. Of course, this is a very fragile model.I mean you look at what happened in
the stock market recently. The major institutional funders, their dominance was hit 35-40%. And
immediately that means all their grant funding gets demolished. Their budgets go way down
and their ability supporting these organizations takes a hit.And because we don't have any
reserves, we don't anything stored up for a rainy day and the rainy day comes and it's
a pretty serious storm, just as people need our services more than ever, we lose all funding
to carry them out.So this is a sort of dysfunctional vicious cycle, I would say, for a lot of the
sector.So I should admit, I don't have this problem solved. But I have some ideas. I have
some questions that I'd like to sort of pose and ways of framing this issue that I hope
would be provocative and interesting. And I really do hope that this can be a dialog
as I sort of go with this.So this word customer is a loaded term. It's not something that
you hear a lot of non-profits use because they don't think they have customers. They
think they have constituents. They think they have members, donors, people that they serve
but they don't use the word 'customer.'And I think this is actually a problem in a sense
because really I don't know if there is a more fundamental question that you could ask
a business than who is your customer?For most businesses, it is very straightforward. And
for some businesses in the arts, it is still pretty straightforward, right? Broadway, theater
or a television show kind of a commercial producer, they have kind of their heads straight
on this. They understand who they are serving, and it's the same person who's paying for
their services.But let's see how it works in the non-profit arts traditionally. And
this isn't like picking on Lincoln Center. It was just a picture which I think is recognizable,
right? So these are the people they serve. These are the people that ultimately their
programs are intended to benefit. It is the people in their audience.But the money to
carry out that program and to sustain that institution is coming from somebody else.
So realistically, really, who are you going to pay attention to? Who are you going to
focus on? Who are you going to think about day in and day out as you are trying to carry
out your operations and carry out your programs?I think for most of us, whether we would admit
it or not, our attention naturally goes to the people writing the checks. Those are the
ones who we need to please ultimately. And when these things are misaligned, I think
there are some troubling implications and ramifications for the way that we are approaching
our work and thinking about the work that we do.Now, this is actually, a pretty fairly
straightforward case, and I'm not saying it's always easy to get these things aligned. This
would be arguably, a relatively easy one, but what if this were an animal shelter, say,
right? I mean, you're not going to get the dogs to pay you to save them. They don't have
money, right? So I'm not suggesting it's always easy but I do think it's something that we
need to put more thought into and pay attention to and at least recognize when there is a
misalignment between the people paying for your services and the people consuming those
services and try to get them aligned as much as possible.It's one of the reasons why Fractured
Atlas is always operated on a fundamentally unearned revenue business model. We do go
to third party funders especially for kind of Êseed funding for new projects or expansions
or something like that. But generally speaking, if there's something that we're going to be
doing on an ongoing basis, I want to find a way to sustain it through revenue alone.I'd
want to know that people benefiting from those services or program are the same ones paying
for it. In part, because I trust the market signals that you get as a result, right? If
something we're doing is invaluable. I mean think about who our customers are. Our customers
are individual artists and very small organizations for the most part. These are not people with
a lot of disposable income, lot of excess cash lying around.So if something that I'm
providing doesn't have a very real, immediate, obvious value, they are not going to pay for
it. And that's going to be the best, most immediate signal to us that we need to change
what we are doing.And that signal and that kind of immediacy and sometimes the painfulness
of that is I think a tremendously valuable tool for keeping an organization relevant
and ensuring that it's paying attention to the field that it is trying to serve.Alright,
so let's look at this 501(c)(3). Everybody knows what I mean when I say 501(c)(3), right?
It's the section of the Tax Code that defines what a charity is. Charities or private foundations,
they're referred to as 501(c)(3)'s, right?So just back up. The conventional wisdom in the
arts, at least, has always been you're graduating from college or conservatory and you are sitting
at the dinner table at Thanksgiving or whatever, and you say, "We're going to start a theater
company." And your uncle the lawyer says, "Well, just set up a 501(c)(3)." That's the
default, the conventional approach and what a lot of people, without even really thinking
about it, assume is the only way to do this kind of work. There are some things about
that they don't think about, right?First off, these are corporations. A corporation is,
by definition, intended to be a perpetual entity. This is supposed to be something that
is going to outlive the participation of the founders, any of the employees, the stockholders,
anybody, well, there aren't stockholders in a 501(c)(3)Ê but any of the people involved
with the organization should be able to get hit by a bus tomorrow and this thing is going
to keep right on rolling, which is a little weird for an artist-driven enterprise, the
mission of which is to produce this person's work.How can it outlive that person? That's
an interesting question.Another thing about corporations is that, by default, they own
all of the intellectual property that's produced by employees of the corporation over the course
of its work. So again, and I apologize for my arts bias but that's the world that I live
in. But I think a lot of the stuff does apply in other parts of the non-profit sector.So
if you as a choreographer, you start a dance company and you are producing new dance work
over the years, it might not occur to you that you don't own any of those dances.And
that if something happens and then you are somehow separated from that corporation, that
corporation is the entity that owns the sort of fruits of your artistic labor, which again
strikes people as a little odd when you think about it.You, of course, can't have any investors.
And I think with the possible exception of large publicly traded companies, 501(c)(3)'s
have the nastiest reporting rules and governance Êrequirements of any type of entity out there.It
really is, I think, something that people underestimate when they form new 501(c)(3)'s.
Often, they don't really fully appreciate what they're getting themselves into on this
front.So I'm going to talk about a couple of alternative models to think about. First
of all, fiscal sponsors. Do people know what fiscal sponsorship is? It is a term you've
heard of? Wow, nobody, not a single hand. OK.Fractured Atlas, we're actually the largest
fiscal sponsors in the country. So what this is, we function as an essentially non-profit
umbrella for just shy of 2,000 small unincorporated arts organizations or projects or even LLCs
in some cases.The concept here is that a non-exempt entity becomes sponsored by an exempt organizations
like ours. And then if you are a donor or you are a grant-maker, you can make contributions
to the sponsor, say Fractured Atlas in this case, in behalf of the sponsee.So you say,
"It's my wish. Here is a grant for $10,000. It is my wish that this go to support the
Joe Shmo Theater Company that you're sponsoring."The project can be temporary, and actually before
I get to that, I think an important piece here. What we as the sponsoring organization
would do when we get that money is we put it in a restrictive fund, where it is set
aside and later is made available to the project or to the sponsee for project-related expenses.
So there's sort of a contractual relationship there that is very important.But I think it's
very important that the project is temporary. So it can be a group of people getting together
to tackle a particular problem or to produce a work of art or whatever.They may not work
together again, but their work is undeniably charitable. We need a mechanism supporting
it. This is a good one that works.One of the more interesting wrinkles here that we actually
wrestle with a lot is there are certain circumstances where you can have a flexible sponsorship
model that allows for both donors and investors.So we sponsor, for example, a lot of documentary
films. For the most part, these are independent documentary filmmakers. They have a kind of
purely sort of charitable artistic motivation, public good motivation. They are not really
in this for making money.But some small subset of them will have an opportunity to do that
because they are going to make a great film. And some major distributors are going to come
along. They are going to be on Sundance. Some major distributors are going to come along
and say, "We're going to distribute this. This is going to be the greatest thing ever."Well,
if they had done it in the context of a 501(c)(3) to begin with, there is nothing for that distributor
to invest in. There is nothing for investors for the film project to support that way.
There are ways that with fiscal sponsorship, you can for example sponsor the creation of
the work and then allow investors to come in later on and underwrite the kind of profit-oriented
commercialization of the work, which works nicely in a lot of cases. Film and music,
in particular, benefit from that, I think.And of course, for artists, you don't have this
corporation ownership issue. You own your own work. If you are an individual artist
who is sponsored, you don't have to sign over the rights or anything to your fiscal sponsor
which, as you might imagine, is pretty important to some people.So that's Model 1, I wanted
to look at. Model 2 is the L3C. Has anybody heard of the L3C? Alright, uncharted territory.So
the L3C is a new kind of business entity that just came into existence in, I think, 2008
in Vermont. Although since then, it has come into existence is some other states as well.The
three Ls stand for low-profit limited liability company. This is basically a subset of the
concept of an LLC. It's a regular sort of profit-oriented business in most respects
except that in your organizing documents, you explicitly state that your primary purpose
is to fulfill X charitable end.And the language and the laws allowing this actually very closely
mirrors the IRS language on sort of the restrictions imposed on charities and what they are allowed
to do. So that's quite intentional. So your primary purpose is doing some social good
but if make money while we're at it, great. The main reasons this exist or were created,
the main impetus for their creation, was to attract what is called program-related investment
or PRI from foundations. Just a little background on what PRI is.Private foundations in the
US are required by law to distribute at least 5% of their assets every year, generally speaking,
in the form of grants to charities.A very sort of under-explored wrinkle in the Tax
Code is that foundations are also allowed to do what is called program-related investment
which is where they invest in some project or activity as part of their investment portfolio,
but they make the case that making that investment itself furthers their program-related goals.And
when they do that, they are allowed to count it towards that 5%, which is pretty great,
pretty attractive. An example would be if a foundation wanted to give a zero percent
interest loan to a low-income housing development, let's say. Right?The problem is the IRS likes
to decide everything based on facts and circumstances, and generally refuses to lay any kind of bright
line rules on anything because they feel like that opens the door to loopholes.So again,
foundations being risk-averse in nature, they don't really do this. They don't take advantage
of it because the penalties claiming that something is PRI and then later, having the
IRS come along and say, "No, we don't really think this counts," are pretty severe.So there's
this really huge potential vehicle or channel for sort of social entrepreneurship and supporting
social good and charitable activities that is barely touched at all.So the idea is that
the L3C, in some sense, because in those organizing documents have said, "Our raison d'etre is
to fulfill some charitable purpose." That, in theory, creates a sort of safe haven for
PRI. It creates a context in which the hope is that that investment via foundation in
an L3C will be kind of a prima facie evidence of PRI. That's the idea anyway.Now of course,
the IRS hasn't actually ruled on this in any case yet, so we don't know if it's going to
work in practice. But this is one of the things that's really exciting with the L3C model.Another
thing that's really cool about it is that it's very flexible with respect to investment
trenches. So part of the idea is that with most L3Cs, there would be at least two classes
of investors. There would be the institutional funders, the private foundations that kind
of serves as a junior trench.And they might, because they get to count this as PRI, they
might be willing to accept a lower rate of return or they might be willing to take the
lion's share of the risk associated with the activity because they feel that even if they
lose their money, they are still supporting their mission.But of course, what that allows
is an interesting situation where then you can have a senior trench, where you're kind
of attracting investors from the general investing public People who need a regular market return
on their investment.And assuming that profit is kind of a secondary objective of this organization,
you might not be as profitable as other businesses. You might not have the same return on assets
as other alternative investments.But of course, the cool thing here is that in some sense,
the foundations are actually subsidizing the investment returns of those kind of market
rate investors. So this gives you the ability to be kind of competitive in attracting investors
with businesses that aren't sort of hamstrung by this charitable goal.Of course, unlike
501(c)(3), you can't get tax-deductible donations. So that's an important consideration here.
Although an interesting model to explore would be an L3C that was fiscally sponsored by a
501(c)(3), and then you can really have your cake and eat it, too.And then, of course,
back to this one, same benefit as before. In the arts, with this, because you can be
the owner of the L3C, you can own your work. So here's another aspect of this sort of philosophical
concept in which we do this charity stuff. Let me just give you some context here, about
the sort of the professionalization of the field that has occurred in the last few decades.
I'm not really picking on Carnegie HallÊ but they're really easy to pick on in this
one.So Carnegie Hall in the 1960s and '70s had fewer than 15 employees. And fundraising
for the organization was entirely done by volunteers. Carnegie Hall of today has fully
professional well-paid staff of over 200 people, an $85 million budget, over $5 million of
that budget is spent on fundraising so it's got a huge development staffÊ and a very
well-heeled board and all the rest.Of course, the version of Carnegie Hall, in the '60s
and '70s that have this skeleton crew and volunteer fundraising staff, they were presenting
performances by Vladimir Horowitz, Frank Sinatra, The Beatles, Pavarotti, no slouches, right?It's
the same building, same basic number of performances per year, certainly the highest possible caliber
of performers. So what is this infrastructure and what has all this professionalization
gotten them? I think a sort of disturbing case can be made to a significant degree,
this infrastructure exists to fund itself.It's this kind of insatiable beast that has grown,
that whose goal whether it knows it or not, whether it admits it or not, is self-perpetuation
of the institution. What does that mean and what does that mean how are we going to allocate
resources on a macro level to the field?Alright so the final piece that I want to look at
is a sort of structural aspect of this. I was up in Canada doing a presentation, actually,
on some very similar ideas.So the Canada Council of the Arts the arts a couple of years ago
and a co-panelistÊ of mine was woman called Jane MarslandÊ who is an arts consultant
up in Toronto. And she's kind of been a real sort of trailblazer in promoting this concept
of cluster management. This is something that some out of the higher education world, originally
but is very sort of in vogue in the arts right now.You can read her definition here if you
want this sort of technical definition, at least the way it has been traditionally conceived.
But the idea is that you have sort of a shared management infrastructure for a number of
non-profit arts organizations.It seems great, right? The idea we can maybe afford hiring
quality people if we pool our resources. We can leverage sort of economies of scale,Ê
that's the idea.I'm going to look at a couple of different approaches to cluster management.
Alright, so the classic cluster management approach, the one that Jane promotes and the
one you hear folks in the arts is talking about all the time these days, is sort of
what I think as the personnel-centric model.So let's imagine we have four dance companies
and they all get together and they decide, "We're going to cluster our management resources."
They might share a space. They have kind of four artistic directors, four different choreographers.They
are each allowed their own artistic vision but they are going to share one managing director,
one development director, one marketing director, a sort of senior administrative staff shared
across these four different companies.So the management is centralized. The art-making
is decentralized. Here's the problem with this model and why, to my knowledge, it has
never worked in practice.I think it's impossible for a managing director, if he is or she is
sort of sincere about what they are doing and really invested in the work to be equally
committed to four different artistic visions. It's just not the way it works. Right?People,
this is a labor of love. I don't care how well you are paid, you are underpaid and you
work long hours, and you've got to buy in the vision of what you are doing. And there's
just no way that that senior management can possibly split their focus in such an egalitarian
and fair way across these four different choreographers.So what does that mean for that development director
when there's a grant opportunity that three of those fur companies are good fit for? Do
all three apply, competing against each other? Do you work on application than the other?There
are all sorts of problems there.Ê And I think really this is why it has fallen apart every
time it's been tried to my knowledge. There are maybe one or two exceptions but in general,
it doesn't work.I'd like to propose an alternative approach which I'm kind of actually haven't
piloted yet but I'm working on it. I'm looking for an opportunity to try this out, which
is what I sort of think of as a system-centric cluster management model, right?So let's take
this same four dance companies. They still have four artistic directors. I think they
need for different managing directors, four different development directors, four different
marketing directors. The senior management has got to be decentralized for all those
reasons. Their loyalty has to be focused on or fixed on one artistic vision.But the basic
administrative staff, the bookkeeping staff, the office managers, the receptionists, the
administrative assistants, et cetera, the people for whom it's less important that they
be invested, body and soul, in the work of the organization. Or even if it's still important,
it's not going to be effected in the same way, they could be shared by all of these
companies.They could also have a single IT infrastructure. They could have a single accounting
platform. They could have a single network and all the rest. And if you think more about,
this is a much scalable model because if you've got one managing director, I mean realistically,
four is probably the maximum number of companies that that person could be expected to manage.Well,
with this approach, you could probably get to 40, maybe 400 before you start to see it
break down. So again in this model, management is decentralized and the art-making is decentralized
but the systems, both people-based and technology-based are centralized, shared.And I think, to a
large extent, technology here can be the glue that ties it all together. So if anybody want
to try this out, let me know. I'm looking for an opportunity to do that.So that's all
I've got but I want to have a discussion here. So I guess we can open it up to questions.Not
too long ago, Prof. Mohammed Younis was on our campus. That was on the month of March.
He was our featured speaker for provost convocation lecture series on public affairs.And the main
thrust of his talk was "How to create social business." And in a sense, that's where he
thinks capitalism is headed or should be headed. And that was a very inspirational talk.I'm
sure you are familiar with his work. But the way he defined social business, it sounded
so similar to your L3Cs in many ways, because he also thinks these businesses, what he calls
social businesses are cause-driven, not necessarily profit-driven.They make profit but the investors
do not get anything beyond their principal back so the rate of return is reaped back
into the business and that would again help people get the product at a lower price and
so on and so forth.So my question for you is this. In all this alternative that you're
suggesting, I think they're fascinating ideas, would you call them like a social business
L3C? Or is it different from what he's talking about?No, I think it's aÉ I'm sorry.So that's
my general question. And I mean I'm sitting here listening to you and it sounds so similar
to what he was talking about a month ago. So that is basically my question.Yeah, absolutely.
I mean the sort of umbrella term that you hear a lot is social entrepreneurship, right,
which he has obviously tied into and connected with. There's also other aspects of it as
well in terms of the way that we sort of think about donors as investors and things like
that.But absolutely, it's part of the same kind of philosophical movement throughout
the non-profit sector. And really, frankly beyond it because there are for-profit businesses
like the L3C or like the ones that Younis is involved with that, in many senses, really
kind of leading the charge on this.So yeah, absolutely. I mean the kind of mirror image
of social entrepreneurship in a sense is the idea of venture philanthropy, which is also
kind of connected to what Mohammed Younis works on. It's a kind of social entrepreneurship
but viewed through lens of the philanthropist and how do they think of themselves in terms
of investors, whether they're providing seed capital or different kinds of support.My name
is Richard Vornick. I'm the director of an operating agency called the Connections Handyman
Service and we're a part of a larger organization called the Council of Churches here in Springfield.A
501(c)(3), we're only 40 years old. We're still trying to figure out exactly how to
make this thing work, so a lot of your questions about the big guy and the little guy are very
appropriate, apropos.The point is that we are nine operating agencies, nine different
entities under one system. And I will email you that you were saying well, you don't know
whether or not this would work.Like I said we're 40 years old, we're experiencing some
very interesting challenges now with this new concept of capacity-building, can't we
have reserves? In other words, we're chafing a little bit at that IRS constrictions and
that we're exploring the idea of doing foundations which are actually a for-profit entity foundation
that is funding something that for profit so that we can go ahead and have a reserve.I
just want to point out that we have an ongoing experiment in the systems approach.Oh, great.In
the last 15 years, it's been very dynamic. That's a buzzword for saying that it's had
its own fair share of problems. And we have successfully explored some of those and we've
actually fixed some. And we actually are at a loss on some of that. So if you would be
willing, I would email you.Yeah, that would be great.And maybe we can visit a little bit
about it. It's my survival. OK? It's an ongoing struggle right now but a lot of the questions
that you point out with regard to that list of systems approach, we already have that
in place. And to the degree that works, perhaps you can give us some insight on that.Well.
So two things. First,, please. And then I guess a question for you
is how smart are you guys on technology?That is the thing that the last ED that we had
and about every 8-10 years the not-for-profits turn and churn EDs, that's pretty common.
However, we were started by a very charismatic leader. He was there for 30-plus years.He
realized that at the end of his tenure that that in and of itself is a stumbling block.
He was not technology-driven but the last ED was technology-driven. So we have then
completely updated that, spiffed that up to where not only the auditing process is much
more streamlined.We are currently trying to merge, if you can imagine the madness of this.
We're trying to merge nine different operating agencies that have different budget years,
fiscal years, grant years. You know how complex that is. We're trying to merge that into one
financial model.We realize that's survival because the large institutions and the large
granters are looking at "How can we be assured this money is going to be spent uniformly
or consistently. And yet on the other hand, as the director of one of the operating agencies,
"Hey , I'm different than anybody else. I got my own needs."And we are really working
through the implications of that model right now.Right. I would love to hear more about
it.I kind of lost my question already but I was just still curious about what you were
just talking about in the last frame, just those two models. In a way, I just want to
know more about it.Are the dance companies paying for those models? They are the ones
supporting them, keeping them going.Certainly sometimes, yes. I mean I have seen cases where
a dance company, it could be a theater companies, it could be anything really. But I think it's
often driven by small companies that feel they have some similar needs or similar philosophy
or whatever.I mean I actually think in some sense, it might work better if it wasn't for
dance companies. If it wasn't a dance company, a classical music, group theater and poetry
press, because at least then it will be a little bit easier to navigate some of those
conflicts of interest.But I mean I think a lot of is artist-driven. Some of it is funder-driven
as well. I mean I think I sit on grant panels sometimes and I've seen a lot of proposals
for experiments in this kind of approach. And it generally gets funders excited because
they like thinking that their money is going to go further or that it's going to be leveraged
in some way.I usually discourage funding those projects. I think they are far more likely
to fail than not.I mean I guess my question is also when I was looking at that slide,
it just seemed like when I'm looking at the right side at what you're suggesting, there
was a whole lot more people involved than there was on the left-side.Because everyone
had their individual so we went from like eight to 12, 13. It's just hard for me as
an artist to look at that and think, "OK, well, so now, in a way, I got to ask for more
money to make that happen." Again, it's not going to the art. It's going to the administration
to keep it going.I'm working on the assumption that you started on not only those things
but with the support staff and the systems as well. So it is saving money and it is streamlining
operations, not in some sense as aggressively or as radically as the personnel-centric model
attempts to.But I think on a practical level, youÕre going to get a better return. In part,
I think because it scales more. I mean, I really do think you could do that with maybe
40 or 400 companies depending on how you structured it. It can be entirely possible.The last part
of the question, so what would you suggest for the really small people.For the really
small people, I mean I'm biased, but I think you'd want o get to organizations like Fractured
Atlas. I mean that's what we do.I mean in a sense, we kind of provide the kind of baseline
of the sort of maximally scale. I mean we've got 12,000 members, right? So forget 40 or
400.If you're at a budgetary level where you're, by necessity, doing everything yourself, find
a sort of service organization or other resource providers that allow you to outsource as much
as the non-art-making as possible, as cost-effectively as possible. I've often seen how the energy-zapping
process of putting together a 501(c)(3) can kind of take the wind out of the sails of
a group of really passionate people. And I loved your analysis of fiscal sponsorship
because it seems like that is a model that can help keep the passion in the right place,
and allows someone else to handle some of those reporting and management details.I wonder
if you can talk about if there are downsides or if there is something that is lost for
a group in choosing that kind of an approach, rather than their own organization.Sure. I
think there is one major practical downside and there's one sort of theoretical but not
very practical downside.The major practical downside is that there are a lot of big institutional
funders, the kind of organizations that make six-figure, seven-figure grants who don't
like fiscal sponsorship, who have a bias against organizations that are fiscally sponsored
or sort of through that vehicle.So if you're operating at a scale that you're really kind
of eligible to compete for that caliber of funding, then you might need your own 501(c)(3)
to be credible to those folks.This is something we are really working on. We're kind of leading
the charge for advocating for both to government agencies and to larger institutional funders
on the benefits of fiscal sponsorship as a model and why more of them ought to be more
comfortable with it.But part of the reason why they're not comfortable has to do with
the theoretical downside that I referred to which is the whole thing operates in a very
gray area of the Tax Code. I mean the IRS has never, and they know about fiscal sponsorship,
but they have never certainly come out and say it's OK or it's not OK.There have been
cases where they have looked at a fiscal sponsorship relationship and said, "This is fine. This
is all above board." But there have been other times when they have basically considered
that it is money laundering. And they have refused to lay down any kind of clear rules
for what gets into Column A or Column B. And so there is uncertainty about it and I think
if you're going to be looking for a fiscal sponsor instead of starting your next 501(c)(3),
you're going to be really careful about who you pick. There are many out there like ours
that kind of do it in the right way and have all of the safeguards and sort of the legal
mechanisms in place to ensure compliance and appropriate levels of oversight.But there
a lot of even well-intentioned and well-meaning fiscal sponsors out there that are just breaking
the law. And you don't want to get caught up in that because if the shit ever hits the
fan, then you're in trouble and they're in trouble and it makes us all look bad.So I
do think that's something that you want to be careful about.I have a question. In your
fiscal sponsorship, do you take a percentage and if so, how much? And can you talk about
your membership fees?Sure. 6% is our fee. We actually started off at 5%. We had 5% for
years which made us by far the lowest of anybody out there. And it was actually as the percentage
of donations coming in shifted heavily towards online credit card contributions, I don't
know if anybody knows but credit card processing fees are very high.When you process an AMEX
transaction, AMEX takes 3.5%. So we were only left with 1.5% on that 5% fee which was tough
overall infrastructure on just 1.5%. So we raised it to 6% and we're doing fine.Membership
structure, about half of our members pay no dues at all. Membership is free and then if
they take advantage of a particular service, there may be additional charges involved.
So we kind of get our earned revenue more directly, I guess, in that sense.And then
the other half pays dues that are either $95 a year for an individual artist or $195 a
year for an organization.In business and technology, the incubator model has been around for a
long time. Can you relate any of what you're doing or things you've spoken about in the
non-profit world to the traditional business incubator approach?That's a great question.
People mean a lot of different things when the talk about incubators? The incubator has
this sort of small, agile and sexy kind of feel to it but I sort of think of it as being
a kind of top-down model.It sort of curatorial, usually you've got an investor of venture
capital, a venture capitalist or whoever, kind of hen-pecking organizations and entrepreneurs
that they want to support. And then providing a lot of guidance or instruction or whatever
on how to do their business, which I just don't think would work all that well for the
arts because of the necessity of artistic economy.ÊSo again, I kind of feel like it's
fairly close to the old classic cluster management model in the sense in that it sort of addresses
the top tier. I'm more interested in keeping kind of that high-level autonomy and addressing
shared infrastructure at the bottom level.But certainly, conceptually, there's some alignment.I
just wonder if there are examples on the website of companies that are set up as the L3C structure.There
are not a lot of L3Cs in existence. It's, as I said, a kind of brand new thing. It only
even exists in a few states. And until the IRS comes out and starts to rule on some particular
use cases, a lot of people are taking a wait-and-see approach.I can tell you, we started one. We
have a subsidiary L3C that we have created, one of the first ones in the country accredited
in Vermont.And we created it in connection with our liability insurance program. We have
the only arts-specific liability program in the country so we can help insure event productions,
venue rentals, film equipment, things like that.And we are actually looking at the idea
of actually starting an insurance company and capturing a larger share of those profits
and putting it back into lower premiums and all the rest and subsidizing other services.Well,
starting an insurance company is not cheap. There are huge, huge capital requirements.
On the other hand, it's quite reasonable to think that it could be profitable.So I felt
this was a great opportunity to try out the L3C and see if we can attract some of the
institutional funders who want to support the work that we're doing and the community
we serve and ask them to put up $5 million, let's say.They're not going to give us a grant
for $5 million to start this but they might be able to loan us $5 million at 2% interest
or something like that to get this thing off the ground. So that's the idea. I don't know
yet if it's going to work.I was just curious to see if there is a way of looking at what
people are pursuing with that kind of a structure.I'm sorry.I wondered if there's a way of looking
at that, the type of business or the type of arts organization people are pursuing with
that type of structure.Yeah, I mean it's not something that's being used much in arts.
I don't know if anybody else in the arts who is experimenting with this.The example that
you always hear is the one I gave earlier, the low-income housing development. That's
a very kind of common example. And I think what that has in common with the insurance
scenario that I talked about is that it's very capital-intensive. They're huge capital
requirements but it's a basically profitable undertaking, or at least mildly so.So I would
think if you look at that, there's a common thread. That or cases where you might believe
you have a chance to attract investment based on some kind of subsidy.Right. Thank you.Anybody
else? What time is it? Only a little bit early. OK.