Nonprofits as Policy Solutions to the Burden of Government

Herrington J. Bryce was a senior economist at the Urban Institute, a Brookings Economic Policy Fellow, a Fellow at the Institute of Politics at Harvard and a visiting professor in regional economics and planning at the Massachusetts Institute of Technology. He taught micro economic theory and public finance at Clark University in Worcester, Massachusetts, and was director of the program in legal and budget studies at the University College at the University of Maryland. He currently teaches courses at the College of William & Mary in nonprofits but mostly in corporate financial strategy and cost management-heavily reflected in this text. He has published extensively and has served on many state, local and federal government advisory committees. He has a PhD in economics from the Maxwell School at Syracuse University, and a Clu and ChFc from the American College.

Preface | xv

Chapter 1 — Purpose, Policy, Theory, Definitions and Context | 1

Purpose | 1

The Burden of Government | 2

Perspective, Collaboration, Competence | 5

Traditional, Nontraditional, Burden | 9

Organizational Design | 11

Prices, Profits and Nonprofit Motives | 12

The Context | 13

Dimension of the Problem in the United States | 13

Why the Nonprofit Option | 16

Toward a Supporting Theory | 17

Bibliography | 18

Chapter 2 – Designing, Empowering and Engaging the Nonprofit to Lessen the

Burden of Government | 19

The National Trust for Historic Preservation | 19

Crafting the Intent to Lessen the Burden of Government | 19

Federal and State Designation of an Eligible Burden | 21

Classification of Nonprofits as Doers and Facilitators | 22

The Planks on Which to Design a Nonprofit to Reduce the Burden

of Government | 26

Plank 1: Money | 28

Plank 2: Marketing and Persuading | 32

Plank 3: Membership and Public | 32

Plank 4: Management | 33

Plank 5: The Mission | 35

Plank 6: Collaboration and Cooperation | 37

Plank 7: Tax Exemption | 37

Plank 8: Powers to Act | 38

Plank 9: Accountability | 39

Plank 10: Legitimacy | 39

Summary and Preview | 40

Bibliography | 40



Chapter 3 – Empowering the Nonprofit to Lessen the Burden of

Government | 43

The Creation of the Corporation | 44

Incorporation: Process, Purpose, Powers | 45

The Powers of the Nonprofit Corporation | 48

Prohibitions | 50

Financial Advantages and Disadvantages of Exemption | 53

Some Factors that Threaten the Loss of Tax-Exampt Status

Under 501(c)(3) | 66

Summary and Preview | 68

Bibliography | 68

Chapter 4 – Nonprofits as Doers in Reducing the Burden of Government | 69

The Doers: Distinguishing Examples | 71

Categorizing 501(c)(3) Doers | 73

Doers Depending Mostly on Business Income | 78

Subsidiaries, Affiliates, and Holding Companies as Internal

Facilitators | 80

Other Categories of Doers | 83

A General Comparison of Doers | 85

Lessening the Burden of Government: The Benefits and Justification of Tax

Exemption | 86

Summary and Preview | 87

Chapter 5 – Nonprofit as Financiers and Facilitators in Reducing the Burden

of Government | 89

Two Government-Created Examples: To Be Close But Not Controlled | 89

The Nonprofit Financers | 91

The Rules of Foundation Operation | 93

The Key Characteristics of the Facilitator | 100

Hybrids: Private Operating Foundations | 102

Summary and Preview | 104

Chapter 6 – Government Created Nonprofits to Lessen the Burden of

Government | 105

Nonprofits Created by Governments to Lessen Their Own Burdens | 106

Qualifications of a Government-Created 501(c)(3) | 108

Public Authorities as Government-Created Nonprofits to Relieve

Government Burden | 110



Ports and Powers | 113

Are Authorities Doers or Financers? | 123

Summary and Preview | 123

Bibliography | 124

Chapter 7 – Decision-Making and Governance Structure in Lessening the

Burden of Government | 125

The Board | 125

Interlocking Directorates | 129

Conflict of Interest, Independence, and Board Members | 130

Dealing With Possible Conflicts of Interest | 132

Dealing With Non-Independence | 133

Standards at the Root of All Trustee Actions | 133

Excessive Economic Transactions and Due Diligence | 137

Duty of Organizations to Trustees and Their Rights | 138

Liability of Trustees | 139

Annual Disclosures of Involvement of Current and Past Trustees and Senior

Management | 141

Summary and Preview | 142

Bibliography | 143

Chapter 8 – Financing the Burden through Contributions | 145

A General Picture of Contributions and the Sector | 145

Requirements of a Tax-Deductible Gift | 152

Problems of Accepting Gifts Subject to Debt | 158

Summary, Responsibility, and Preview | 161

Bibliography | 161

Chapter 9 – Financing the Burden through Business Earnings | 163

Business Activity as a Source of Money | 163

Definition of Related and Unrelated Nonprofit Businesses | 165

Excess Profits: A Distinction Between Related and Unrelated Income | 168

Integration of Business Operations Into a Conglomerate Structure | 169

The Organization of an Unrelated Business | 169

Tax Treatment of Different Types of Business Income | 172

Key Points on Entrepreneurial Income in Nonprofits | 188

Summary and Preview | 189



Chapter 10 – Financing the Burden through Debt | 191

The Need for a Charter and Other Documentary Powers | 191

Terms of Debt | 192

Non-Deductibility and Taxability of Interest | 194

Debt as Credit Facility | 194

Covenants, Default, Bankruptcy | 195

Strategies for Treating a Loan Due | 195

Borrowing from the Securities Market | 196

Borrowing from Nonfinancial Sources | 197

Preparing to Borrow | 197

Debt Limits and the Nonprofit | 198

Subsidized Infrastructure Debt Available to Nonprofits | 198

Long-Term Debt tor Infrastructure Used by the Nonprofit | 199

Long-Term Debt Issued by Nonprofits on Behalf of the Government for Public

Purpose Infrastructure Called 63-20 Debt | 200

Issuing of Debt (Bonds) by an Authority | 202

Debt Through Tax Increment Financing | 205

Long-Term Lease Arrangements of Property | 206

Summary and Preview | 206

Bibliography | 206

Chapter 11 – Establishing Cash Flows for Sustainability | 207

The Trust | 208

Endowments: Perpetuating a Gift | 209

Specific Long-Term Assets In an Endowment: Trusts | 213

Specific Long-Term Assets for Endowments: Life Insurance Policies | 216

Gifts of Iras, Gift Annuities, and Other Such Contracts | 222

The Power of a Will | 223

Summary and Preview | 224

Bibliography | 224

Chapter 12 – Corruption and Control: Protecting the Assets for Lessening the

Burden of Government | 225

Corruption | 225

Types and Effects of Corruption in Nonprofit Organizations | 226

Sources and Opportunities for Corruption | 228

Managing the Risks of Corruption and Fraud | 230

Controls: An Accounting Approach | 230

Controls: A Transaction Approach | 231



Controls: A Flow Approach | 232

Controls: Organizational Lines of Defense | 233

A Comprehensive Approach to Corruption | 234

The Discovery of Corruption | 237

The Protection of Sources and Records | 237

Insurance Against Corruption | 240

Classification and Treatment of Certain Costs | 242

A Tool of Cost Control, Avoidance of Cost Overruns, and Detection of the

Risk of Inefficiency or Fraud | 246

Summary and Preview | 248

Bibliography | 248

Chapter 13 – Discussion and Dialogue | 251

Levels of Lessening the Burden of Government | 252

Types of Nonprofits Lessening the Burden of Government | 253

The Authority to Perform | 254

The Nature of the Promise to Lessen the Burden of Government | 255

To Exercise Authority the Nonprofit Needs Powers | 255

The Power to Finance and the Motive for Action | 256

Governance Structure | 256

Accountability and Disclosures | 257

Types and Range of Collaboration | 258

The Conflict Between Collaboration and Control | 258

Sources of Legitimacy | 259

Growth and Competition | 261

Debt and Off-Balance Sheet Financing | 262

Who Subsidizes Whom | 264

Tax Exemption as Price and Incentive | 264

The Rationale for This Direction | 265

Index | 269