Summer 1996
by Jane Katz

It is midafternoon in East Boston. Students slowly start wandering into the three-room building that houses ZUMIX, a private nonprofit group that tries to reach city kids through music. With a stage and drum set along one wall, a few old overstuffed chairs in the center, and a fridge in the back, the atmosphere is both cozy and exciting -- the perfect kid clubhouse. A mother with two young daughters in tow volunteers to teach a Central American folkdance class. In the small office, a 14-year-old labors at the computer to design a flyer for an upcoming event. Madeleine Steczynski, the group's director, questions him closely about his homework; he has recently transferred to a new school, and the adjustment is apparently not going smoothly. With their concern and respectful manner, Steczynski and cofounder Bob Grove have created a place where kids actually want to hang out, help out, even do school assignments in this low-income, ethnically diverse community bordering Logan Airport.

Though conservatives might be dubious about some of its left-of-center board members, ZUMIX is exactly the kind of organization of which they would approve. Through its various programs of music education, appreciation, and outreach, ZUMIX teaches kids to set goals and follow through. It provides role models and connects kids to a stable network of adults. And with its integrated approach to both child and community development, ZUMIX extends into the neighborhood and knits people together. All with a minimum of government money.

Viewed up close, it is hard not to be both impressed and inspired. ZUMIX and numerous other organizations care for the young and sick, teach people to read, work for community development, and protect our natural world with creativity and dedication that belie their limited financial resources. Thus it is not surprising that many Americans, frustrated by seemingly intractable economic and social problems -- and by the real and perceived failure of government to solve them -- are wondering whether private nonprofits like zumix wouldn't do a better job.

But a shift to greater reliance on such organizations would be both serious and far-reaching. Government spending on the poor significantly exceeds private charity for the poor, perhaps by up to ten times. Many human service groups already depend relatively heavily on federal funds; about 40 percent of government spending on human services is currently channeled through private nonprofit groups. So government withdrawal would create substantial dislocation; whether private charities could fill the gap is unclear. Still, nonprofits are uniquely appealing and may be singularly suited to certain tasks. Thus, it is useful to identify what they do best. It is also helpful to think about their limits.

LARGE AND GROWING

The United States relies more on private nonprofits than any other industrialized country. About 840,000 groups are deemed charitable organizations by the U.S. tax code. Their workers constitute roughly 7 percent of paid employment, somewhat less than half the size of the government workforce. And this ignores the estimated 40 percent of households that volunteer an average of four hours a week. Revenues, which include government grants, user charges (such as hospital fees, school tuition, museum admissions), as well as private contributions, totaled $500 billion in 1992.

Private giving accounts for about 20 percent of revenues and has increased steadily in real terms since 1960. Indeed, 1995 was a record year for the stock market and a record year for charitable contributions. Individual donations amounted to $116 billion, by far the largest component of private giving. Another $7 billion came from corporations, $10 billion from foundations, and $10 billion from bequests. Religion got the largest chunk: $63 billion or about half of private giving went to religious organizations. The rest was spread among half a million groups in the arts, education, health and the environment, research and policy development, civil rights, international disaster relief, and aid to the poor.

These organizations are a diverse lot. Many are long-established pillars of the comunity: prestigious private universities, major research hospitals, and big-budget arts institutions. The Metropolitan Museum of Art in New York City, established in 1870, had a budget of $89 million in 1992; the Boston Symphony, founded in 1881, spent $36 million. They also include a growing number of younger and smaller organizations; more than 200,000 have been founded since 1975.

But nonprofits -- firms in which no one has a legal claim to earnings -- are just one way to supply goods and services. For-profit firms and government are also candidates. So where do we find nonprofits?

Much nonprofit activity centers on the delivery of services, such as health care and education, where quality is hard for consumers to monitor or evaluate. Northwestern University economist Burton Weisbrod argues that nonprofits can provide better quality than for-profit firms, because they have less incentive to skimp and cut costs. Nonprofits also reach otherwise underserved customers, particularly those with low incomes, since they have less reason to raise prices.

Nonprofits have different advantages over government programs, which are frequently constrained by politics, by the views of the majority, and by a one-size-fits-all approach. Nonprofits can be especially effective in developing and testing innovative or experimental approaches. With a local vantage point, they may be better positioned to assess and meet the needs of a particular community. And with freedom to develop unusual and distinctive programs, they can satisfy diverse and even unpopular tastes. In relatively homogeneous societies such as Japan, government policies crafted to suit the majority will leave most people content, speculates Weisbrod. But in the United States, where tastes and community identifications vary widely, we have come to depend more heavily on a large number of nonprofits.

But the big advantage for nonprofits may be intangible: the commitment of the people involved. A nonprofit can marshall the resources of volunteers and donors. It can rely on staff to provide energy and commitment to the cause. This works to uphold quality in the hard-to-evaluate services that nonprofits tend to provide. And it is not an easy characteristic for government or for-profit firms to replicate.

LOCAL COMMITMENT

zumix started with a dual commitment to children and to music. "I had studied child development," Steczynski recalls. "Bob is a musician. We both believe that music--everybody loves music--can help create social bonds and connect kids who might otherwise get lost."

Newcomers to East Boston, they attended a community meeting in 1990 and heard about city funds for summer youth programs. Their flair for turning ideas into distinctive programming was evident when they developed three innovative proposals that would eventually become zumix. In the Street Program, kids learn to express themselves by writing and performing their own songs. The Warmth Program reduces generational distrust by bringing together young and old to celebrate and perform music from the past. The Research Program gives kids research experience and also ensures that future zumix programs will serve the community, by having students design and implement a survey to determine East Boston's needs.

Although the money from city hall didn't materialize right away, Steczynski and Grove were encouraged by the positive reaction to their ideas. So they forged ahead, setting up in Grove's apartment to save expenses. Soon kids were running in and out, attracted by the programs and the chance to be taken seriously. Margaret Cerullo, president of their board of directors and a sociology professor at Hampshire College, first encountered zumix through her involvement in another organization: "We were trying to put on a student performance with a number of groups. I was just knocked out by the zumix kids. They took leadership; they were responsible. They really stood out."

Over the next few years, Steczynski and Grove developed other lively and innovative programs. The Music Mentor Program pairs each child with a professional musician for individual instruction and mentoring. z-tech teaches technical skills and gives participants experience in sound and video production and computer graphics. And when kids began just hanging out and doing homework, Steczynski solicited volunteer tutors, and is now working to establish a more extensive after-school tutoring program. Henry Allen, program director at the Hyams Foundation, describes the group's appeal: "We loved the energy, the vision, and the commitment. We loved the way they involved the kids -- you can see the respect they have for them. But most important, they were very thoughtful about how to take their vision and translate it into solid programs that serve the community."

Today, zumix provides its programs free to more than 115 children every year, ranging in age from eight to eighteen. Most are from poor or working-class families. About one-third have been involved in zumix for three or more years. For many program graduates, it has been an important influence. Renée Holt was 18 years old when she participated in the first summer session: "Beyond music, zumix gave me a sense of accomplishment and empowerment. And it showed me that I liked to write." Holt graduated from Emanuel College in 1995 with a degree in communications, and now sits on the group's board of directors.

Such an integrated approach to child and community development is unlikely to come from government. "zumix is in the heart and soul of the community. Madeleine and Bob live there and know people by first name. So they are able to collaborate and increase their impact," notes Christine Green, vice president of the Boston Foundation. For example,
zumix initiated a program to bring neighborhood people together by holding an evening concert series featuring blues, jazz, reggae, salsa, and big bands. Music in Maverick Square has drawn more than 250 people each night and has improved local morale. It has increased business for local merchants and has helped spark several other community development projects.

ATTRACTING CONTRIBUTIONS

In its first year of operation, zumix collected a total of $8,000, mostly from family and friends. To expand programming and serve more children, it had to raise more money. Unlike a for-profit business, it can't offer financial inducements to attract investors. Unlike government, it can't rely on the power to tax. Instead it must market itself to potential donors. Individuals comprise the largest pool of potential contributors to nonprofits; individual gifts far exceed those of foundations or corporations. But the competition for money from all corners is intense.

It also can be idiosyncratic. Individuals give to charitable groups for a variety of reasons that range from clear-eyed self-interest to the good feeling they get from giving to pure kindness and concern for others. Gifts can support amenities that directly benefit the giver, such as contributions for a church activity or arts group in which the donor participates, or can be aimed at helping complete strangers.

The source of zumix's early support was typical. People generally give to causes and organizations in which they have a personal interest or know the people involved. Wealthy donors often value the special relationship they get with favored elite institutions. Through their gifts, board memberships, and attendance at charity events, notes Harvard sociologist Francine Ostrower, they establish and maintain their social standing. For the rest of us, giving to the church or volunteering at our child's school or a local homeless shelter solidifies our sense of identity and place in the community. Nearby groups are more likely to be involved in an activity that is known to and directly benefits the giver. So it is not surprising that most donations are made locally.

This local connection is one reason why nonprofits can be so effective at facilitating community ties. But it can also result in reduced redistribution from rich to poor, to the extent that we live in neighborhoods separated according to income. And it makes life particularly difficult for groups such as zumix that find themselves in a community with a shortage of well-heeled locals capable of large contributions. Or that can't compete with the ballet or art museum for those donors who give, in part, to improve their social standing among the elite.

So zumix has depended on other sources for money to grow. This year, almost half of its $116,000 budget came from foundations, including the Boston Foundation and the Hyams Foundation, which emphasize community development in low-income neighborhoods. National and local corporate donors, such as Oracle, Millipore, and Polaroid, accounted for another third of revenue. Government grants provided only 5 percent.

But these funds may be tough to count on. Corporations can stop giving once they no longer perceive a business purpose, or they may simply lose interest with a change of CEO. Many foundations take a tactical, time-limited approach to dispensing funds in order to support the most innovative programs and get the maximum impact from their resources. The Hyams Foundation is somewhat unusual in that it is willing to provide support over many years. But the Boston Foundation prefers to seed innovative and promising programs, then withdraw after three to five years. To secure its future, zumix may have to push harder to find individual donors. Though courting them generally requires cultivating a personal relationship, once committed, individuals tend to stay for the long haul. So the Boston Foundation staff try to help by bringing zumix to the attention of donors in hopes that this will lead to long-term financial stability.

zumix has a few other options if it is to survive. It could change its policy and charge for programs or raise money by sponsoring music performances. It could also look to enlarge its support from government, although this cannot be a solution for everyone so long as government continues its withdrawal in favor of the private sector. And it will likely face increased competition from other groups for foundation and corporate money as government funding dwindles.

GOVERNMENT'S ROLE?

Much of our nation's political conversation now centers around the best way to divide up public and private responsibilities. Dissatisfaction with government and concern about the health of local communities has led many to call for government, especially the federal government, to recede in favor of private-sector solutions to problems of education, health care, and poverty. It has also revived interest in nonprofits.

Despite their many virtues, it is far from clear that nonprofits could replace government on a large scale. Charitable giving pales beside government spending, especially for the poor. According to Lester Salamon, director of the Johns Hopkins Institute for Policy Studies, the federal government spends more than $200 billion on the poor. Private charity accounts for only $20 billion to $30 billion.

If government continues to reduce spending, charity is not likely to fill this gap, even for programs that everyone agrees are valuable. Medical research, aid to the poor, greater literacy, environmental preservation -- many of the services provided by nonprofits -- are "public goods." Once they are supplied for one person, their benefits are supplied to everybody.

The problem with public goods is the tendency to try to "free ride" on the efforts of others. While we may all want to find a cure for cancer, we all tend to hold back, hoping someone else will donate and bear the cost. Thus, nonprofits that deliver public goods will likely find that private contributions and the level of service provided will fall below what everyone desires, unless there is some way, such as government provision, to make and administer a collective decision.

This suggests that reducing government expenditures would not increase charitable provision of public goods by an equal amount. Economists estimate that for each dollar drop in government spending, gifts would probably rise at most 35 cents. So as the country contemplates spending cuts, nonprofits are understandably nervous about their ability to make up the difference. Some are especially worried that their ability to finance innovative programs may be overwhelmed by a flood of people needing food and shelter.

There are other reasons to think carefully before making large-scale change. Nonprofits are not like for-profit firms. They do not have profits or a stock price to convey information and provide incentives. Competition for donations provides some market-like signals, but has drawbacks as a monitoring mechanism, particularly when the people making donations are not the people receiving the services. Donors might have difficulty getting the information needed to assess effectiveness. Or they might not show the same vigorous interest as they would when making an investment decision or purchase in which they benefit directly.

So relying on the preferences of donors may not be the best way to choose which groups are supported. We could end up with too much environmental preservation and not enough health care. Or too many shelters and not enough literacy training. A mismatch between the tastes of givers and needs of recipients is a real possibility, and the needs of the poorest and most vulnerable may fall through the cracks.

Moreover, the transfer of government functions to private charities has profound implications for our national identity. It removes these choices from the political sphere, where every citizen has a vote, and puts it in the hands of individual donors, at least those who are willing and able to give. It makes funding voluntary, which has great appeal. But it also removes the public debate from our political life and suggests that these are areas where we have no collective interest or obligations. So the issue is worth considering.

Perhaps we would be best served by a variety of arrangements. Industries such as nursing homes and day care now have diverse providers, some private, some public, all flourishing. Preserving this mix would take advantage of what is best about each arrangement. It also would be a characteristically American solution.1

A Tax-onomy of Nonprofits

The world of nonprofits is populated by diverse groups that vary widely in size and mission. What they have in common is special tax treatment.

Charitable nonprofits [known as 501(c)(3) organizations after the relevant section of the tax code] consist of about 840,000 groups organized and operated for religious, charitable, scientific, literary, and educational purposes. They include 350,000 churches and 32,000 foundations. Many are groups, such as the American Statistical Association, the American Museum of Natural History, and the National Wildlife Federation, whose activities, though certainly worthy, are not devoted primarily to the poor.

Charitable nonprofts are granted three tax advantages. First, they don't pay taxes on income. While most could probably arrange expenses so as to eliminate income, this provision relieves them from having to do so and means that years with high revenue do not need matching outlays. Second, and probably more valuable, donors may deduct contributions when calculating their personal income tax. Contributions of property whose value has appreciated, such as art or land, are particularly favored since the current value can be deducted even though no tax has been paid on the appreciation. Third, charitable nonprofits can issue up to $150 million of tax-exempt bonds. This provision is used mostly by hospitals and schools and may reduce borrowing costs by a couple of million dollars a year.

Social welfare nonprofits [501(c)(4) organizations] are similar in purpose to charitable nonprofits except they engage in "substantial" legislative lobbying. Thus, gifts to the Sierra Club Legal Defense Fund and the National Council of Senior Citizens are not tax-deductible, nor may these organizations issue tax-exempt bonds. Another 400,000 groups, such as business leagues, labor unions, and social clubs, are also exempt from income tax, but do not receive the other tax benefits.

How Will Tax Reform Affect Charity?

Though not the primary motivation, taxes have an impact on charitable giving. For those that deduct their contributions -- typically wealthier households -- the cost of giving a dollar is reduced by the taxes they would have paid on that dollar. Thus, donating a dollar costs just 70 cents for someone in a 30 percent marginal tax bracket, and the tax code currently encourages (and subsidizes) charity, at least for itemizers. The biggest break goes to high-income households with the highest marginal tax rate.

Recent proposed tax reforms will probably affect donations. Many reforms contemplate a reduction in the marginal tax rate and thus would increase the cost of giving, though economists disagree about how much contributions would drop and whether the effect would mostly be one of timing. Complicating the calculation: If reform increased disposable income (by cutting the overall level of taxes), there would also be some offsetting tendency for contributions to increase.