The Structure of the Nonprofit Sector as it Relates to Philanthropy

In 2011 we reported that, contrary to the all-too-common opinion that there are “too many charities”, only about 10% of nonprofits are actually philanthropic—i.e., private initiatives, for public good, focusing on quality of life, and actively engaged in the philanthropic marketplace—public fundraising for grants and donations. To help prove that, we posted a link to the IRS Master Data File for Massachusetts nonprofits on the MPD so that users can check the evidence for themselves; and as always we have invited corrections.

We have now completed a second ground-breaking study, attempting to clarify in light of the first, the structure of the nonprofit sector in relation to its philanthropic cohort. This has never been done, because the two have never been clearly differentiated. Our research examined the IRS Master File, thousands of individual nonprofit websites, and their 990s. New discoveries include:

1) Over 75%—a substantial majority—of nonprofits exist primarily to serve their own members’ interests —e.g., condo associations, credit unions, yacht and country clubs, professional and trade associations, real estate trusts, teachers retirement funds, cemeteries, etc. As such, they are clearly not ”private initiatives for public good”, which is to say, “philanthropic.”

2) The boundary between “philanthropic” and “non-philanthropic” is not a sharp, empirical, separating, line, but rather a zone consisting of various kinds of institutions, differing in many ways from each other and from those in philanthropy strictly construed. We believe that a consensus will eventually develop among scholars and practitioners on this boundary zone, but only gradually, because the designations often involve judgements— whether, for example, an institution is serving public or private good, or somewhere in-between.

In this light, the best practical approach for philanthropic scholarship would be to divide nonprofits into three sub-sectors: a) “philanthropy”, or the undisputed core of institutions engaged in the philanthropic marketplace of charitable giving and volunteering (ca. 10%); b) “para-” (i.e., “beside”, “next to”) philanthropy”—the heterogeneous middle-ground of about 15% of all nonprofits, who report no revenue from grants and donations, and whose public benefit is at least unclear; and c) “non-philanthropic” nonprofits—the large majority (ca. 75%) which exist mainly to serve their members and are supported entirely by other means than public fundraising—e.g., dues, membership contributions, fees or other earned-income, government grants, etc. These designations can open a new era of clarity and precision in public and professional knowledge and understanding.

Although many of the 90% outside philanthropy are beneficial, and almost all are private initiatives, their clearest empirical difference from philanthropy is that in their 990s and on their websites they show no engagement or interest in public fundraising for grants and donations—the philanthropic marketplace. The main reason they do not participate in philanthropic markets, even if permitted to do so by the IRS, is that they are self-supporting without it.

The largest group, about three-fifths—61% —of “non-philanthropic nonprofits” rely entirely for their revenue on sources within their own organizations—mainly endowments (e.g., real estate, land, and other trusts), or membership (or the equivalent) dues and contributions (e.g., social clubs, churches, professional and trade associations). Many have no websites, showing no interest in public identity; if they do public good, it is subordinate to their main missions, and in some ways strategically self-serving (e.g., churches, social organizations, some corporate foundations).

Beyond the 61% relying on internal sources of revenue, another 20%—a surprisingly large group—of the non-philanthropic nonprofits’ 990s explicitly (by saying so) or implicitly (by not saying anything) report no revenue. Since it is quite unusual to attempt fundraising without any success at all, we concluded that they must not have tried. They are probably not defunct, because they are at least reporting. They might be (it is often impossible to tell) entirely volunteer organizations (with no paid staff or overhead!). They could be doing good works, even of public benefit, though without support from the public. We invite them to tell us how to clarify their relation to philanthropy, so that they might be listed in the Directory and included in statistical analyses.

That leaves about 20% of the non-philanthropic, nonprofit sector. Over half of those are local para-philanthropies—they do not participate in the general philanthropic market, but have their own para-philanthropic markets, i.e., their immediate communities or even urban neighborhoods, within which they seek grants and donations. They border on the general philanthropic market—we struggled with this issue—but they have an important distinguishing feature in that they often involve more personal than public benefit. The patrons might support a public school or athletic team which their children or family members attend or participate in, and if they are not the beneficiaries themselves, they are very often related to the beneficiaries. These institutions do no broad public fundraising, nor are they even interested in the broad philanthropic marketplace—and vice-versa: foundations, corporations and major donors generally do not support them.

Of the small percentage of institutions remaining, about 3.5% support themselves entirely through earned income—fees for services, contracts, etc.—they are non-profit businesses. They can be quite large, like Massachusetts Blue Cross/Blue Shield.

An additional 1% are entirely government funded; they are quasi-government agencies, and they, too, can be quite substantial, playing crucial roles in addressing broad public issues such as homelessness or people with disabilities, but again they do no public fundraising. One of these in Massachusetts reports a $1.4 billion annual revenue, supplied by only one patron: the National Security Agency, with a significant number of its executives drawing high six- and even seven-figure salaries.

Another small number are funded by both earned income and government contracts, but no grants and donations.

Universities and hospitals supported by all three main sources—earned income, government grants, and public fundraising—are relatively few in number, but have very large revenues; they are included in the 10% of institutions in the general philanthropic market.

What is the significance of this new information? First, it means that the philanthropic market is much smaller and far less intensely competitive than has been thought—it matters a great deal whether four thousand or forty thousand organizations are seeking Massachusetts' donors’ attention and contributions. The Commonwealth probably has more grant-makers, and far more donors, than grant-seekers and fundraisers. This loose marketplace may also help to explain why philanthropy is intrinsically more collaborative than competitive. It decisively refutes the assertion—which is based on numbers for “nonprofits”— that there are too many charities; it also suggests what an extraordinary and fine thing it is when private citizens assume public responsibilities.

Second, with this smaller number of philanthropies, and current technology such as the Massachusetts Philanthropic Directory, philanthropy becomes clearer and more compassable than ever before. It can also become, and is in fact on the verge of becoming, systematic—the entire marketplace is now open to donors’ inquiries, contributions and investments; whole fields are open to strategic development; whole regions’ philanthropic resources can be strategically evaluated for their adequacy in meeting public needs.

Third, separating philanthropy from the general class of nonprofits clarifies what it is; clearing away the distracting underbrush of the much larger nonprofit sector will facilitate and help strengthen the culture of philanthropy here and nationwide, which we have found increases and improves charitable giving.

Finally, defining philanthropy clearly enough to set it apart, and analyzing the border zone between philanthropy and the rest of nonprofits, clarifies what “nonprofits” are, and are not. We come away from this study with a clear impression that the entire categories of “nonprofit” and “tax exemption” need to be re-examined for their validity and value to our society and government. It appears to us that the term ‘nonprofit’ applies to such a huge variety of organizations, that unless it is carefully qualified, it may have no meaning at all apart from the tax code.