October 14, 2013

The Dangers of Shutdown Philanthropy

Andrew D. Brosig/The Daily Sentinel/AP Images

Laura and John Arnold provided $10-million to continue Head Start programs.

As the federal shutdown limps on, donors large and small have stepped forward with gifts to maintain shuttered government programs.

Laura and John Arnold provided $10-million to continue Head Start programs. The Fisher House Foundation worked with donors and the Department of Defense to ensure a timely payout of survivor benefits to families of fallen service members.

The Arnolds made clear that they don’t want government to think philanthropists can or should step in to provide the payments. Perhaps that is why the Arnolds made their contribution a loan that must be paid back when the shutdown ends, and Fisher House, too, is expected to be paid back.

But their gifts, no matter how well intentioned and generous, send the wrong signal to lawmakers. They also pose dangers to our democracy because they allow wealthy individuals, rather than voters and legislators, to decide what public programs deserve help. We expect our government to distribute public benefits fairly and transparently, but when donors step in, neither may happen.

Practical concerns abound as well. Cash-strapped charities increasingly find themselves competing with government for scarce dollars. In an Indiana study, nearly one in five education and human-service groups report they compete with government agencies for gifts.

While the shutdown has focused attention on the private money paying for government services, this is not a new practice. Local, state, and federal governments have been relying for generations on charitable gifts to supplement the taxes that underwrite public services. But the trend is most definitely growing: According to my research, charities created to support government programs are growing faster than the nonprofit world as a whole.

As Rick Cohen of The Nonprofit Quarterly has observed, there now seems to be a charitable arm for every federal agency, from the Centers for Disease Control to the Central Intelligence Agency.

In public education, the effects are sometimes splashy (Mark Zuckerberg’s bailout of Newark Public Schools), sometimes controversial (the Los Angeles Public Schools’ pursuit of corporate gifts in exchange for naming rights), and sometimes subtle (the generational shift in the mission of parent-teacher organizations away from advocacy toward fundraising).

Chances are that your public library’s budget is supplemented by a “Friends of the Public Library” organization. And that your city’s parks-and-recreation department has a charitable foundation. And that your public school’s extracurricular activities rely on dozens of booster clubs and the fundraising energy of hundreds of parents and students to make ends meet.

Such generous donations coming from philanthropists have persuaded at least some members of Congress that it’s easy just to let donors pay for needed programs.

When a 2010 earthquake damaged the Washington Monument, Congress appropriated only half the $15-million cost of repairs and required private sources to match that money. The financier David Rubenstein stepped in to provide the money, his third gift to the federal government in a matter of months

Legislators defend their efforts to create charitable foundations for government agencies by observing their ability to bypass legal obstacles to public-private partnerships, increase flexibility, and minimize red tape. And the tax code is clear that 501(c)(3) status covers broad public goals such as “advancement of education or science; erection or maintenance of public buildings, monuments or works; [and] lessening the burdens of Government.”

But these new charities are also permitted to circumvent democratic processes. They create a less transparent world in which donor information can be concealed. Many of the “burdensome” regulations from which they may be exempted are designed to encourage government efficiency. For example, new state laws in California and Florida facilitate charitable support for public parks by allowing them to bypass competitive bidding and public referendums.

Just as worrisome as the loss of transparency is the lack of equity that will arise if philanthropy is expected to take over more government services.

In Indiana, when the state legislature slashed property taxes a few years back, school districts statewide faced enormous budget gaps. Threatened with an end to all extracurricular activities, my middle-class college town made up the difference through five weeks of frenzied but successful fundraising. But not every district succeeded. For our town, was this a wonderful reflection of community social capital or a sinister version of the future of public education?

Our legislators need to know the limits on the public’s tolerance for an elitist distribution of public benefits. And we should be worried that the rise in government fundraising operations is coming about with very little research on their impact, especially if potentially opportunistic lawmakers may be tempted to make temporary situations permanent. 

Policymakers, nonprofit officials, and researchers alike should be asking hard questions about this trend and its impact on nonprofits. Among them:

  • How does the balance of power change when government officials need to rely on donors for money? Do the same kind of issues come up as with campaign contributions? 
  • Do privatized services make it harder for citizens to hold government accountable for results?
  • When donors support public services, what level of transparency about the source and goals of a gift should citizens be entitled to?

We must also ask about the impact on clients when some government services are available only when donors want to pay for them. Are the benefits fairly distributed? And we must ask about the impact on charities expected to do the work of government. Based on mission constraints or capacity, many nonprofits are not necessarily the best vehicles for permanently or temporarily erasing the disparity between what government offers out of tax revenues and what local citizens want.

For now, the surge in philanthropy is helping to fill a gap in critical services. But legislators and philanthropists should tread carefully into this territory. This practice cannot and should not become the standard way of operating until we understand fully what is at risk.

Beth Gazley is an associate professor at Indiana University School of Public and Environmental Affairs, in Bloomington.