We think…

by David Roth and Ardie Geldman

What should be the relationship between the nonprofit and public sectors? What are the roles of philanthropy and government? In a democratic country, which one knows best what is in the public’s best interests? Which one is most capable of meeting the public’s needs?

To answer these questions, we will discuss recent trends, explore the pros and cons of different government and philanthropic models, demonstrate how we see the breakdown in the roles of the nonprofit and government sectors, and offer recommendations on what the government and nonprofit organizations can do to encourage philanthropy in Israel.

Background

These matters have gained prominence both in the United States and Israel with the onset of the current economic crisis.

In the United States, the government has increased its role as a major economic player through its efforts to bail out the financial sector and its stimulus packages for the broader economy. The Obama administration is undertaking major reforms in healthcare, education, and other areas. This funding, however, comes with strings attached. Financial institutions that received cash assistance from the U.S. government now face increased regulation and scrutiny, and President Obama has proposed partially paying for the healthcare reform by making adjustments to the charitable tax deduction for wealthy donors. Critics during the Bush administration argued that unbridled free market capitalism would harm the weaker sectors of society. They now contend that the credit and mortgage crises that sparked the recession were at least partially caused by greed and selfishness. Yet, since the advent of the modern global economy, actions in one industry and region affect other industry and regions; the world economy is interdependent.

The Israeli economy has evolved from a social welfare state during its first decades into a more free market economy. Here too, critics of current Prime Minister Binyamin Netanyahu’s economic reforms as finance minister during Ariel Sharon’s government claimed that his policies helped Israel’s overall economic ratings for investment, but did so at the expense of the society’s weaker sectors.

The current economic crisis has led to opposing calls coming from Israel’s nonprofit sector. On the one hand are advocates of increased government intervention in the sector. They are calling for the easing of bureaucratic restrictions on organizations as well as a financial bailout for nonprofits at risk of shutting their doors. Yaron Sokolov, director of Civic Leadership (ICLA), is among the most vocal supporters of this agenda. He claims that the government’s policy of privatization has enabled it to shirk its responsibility for the weakest populations by outsourcing the delivery of services. Yet, when times got tough, the government reduced its funding of these services. To avoid a total collapse of the sector and the populations that depend on them, the government must step up to the plate and restore its funding to these organizations.

On the other hand are advocates of decreased government intervention in the sector out of concern that the nonprofit sector will lose its independence and become a mere shadow government. Prof. Hillel Schmid, director of The Center for the Study of Philanthropy in Israel, part of the Paul Baerwald School for Social Work and Social Welfare at the Hebrew University of Jerusalem, is among the most vocal supporters of this approach. To maintain a strong civil society, he claims, nonprofit organizations must not be controlled nor have their agenda determined by the government. It is critical for nonprofits to maintain their independence, and they should therefore resist the temptation to accept bailout money with strings attached.

Government models in democratic countries

In western democracies, governments are elected by and accountable to the public. In between elections, citizens have a right to advocate for changes in public policy in a variety of ways. Citizenship comes with rights and responsibilities including paying taxes so that the government may, in turn, provide a range of programs and services for the public in line with its agenda and allocation policies.

In strong social welfare democracies, like Sweden, the government takes responsibility for its citizens’ welfare. Taxes are high, but many services come free or are highly subsidized, such as healthcare and education. The “pros” of this system are that the government can control the implementation of its agenda; there is a more or less equitable allocation of public resources; and there is a safety net to protect the weaker groups. The “cons” of this system are that it can lead to dependency upon government support, and tends to reduce personal incentive and entrepreneurial initiative. Those who earn the most pay taxes at a higher rate in order to support the social welfare system.

In strong free market economies, such as the United States, the government is more “hands off.” It seeks to provide economic opportunities and incentives for citizens. Their tax rates are lower, but government policy encourages, and even depends upon, philanthropy from within the private sector. The “pros” of this system are that it encourages creativity and fosters entrepreneurship. Citizens are empowered with more freedom to take responsibility for their fate. The “cons” of this system are that it tends to lead to the rich becoming richer and the poor becoming poorer. Weaker populations might suffer, certain critical needs might not be served, and the interests of the wealthy may dictate the public agenda.

Philanthropic models

Philanthropy has been referred to as “private initiative for the public good.” Yet who has the right to define the “public good?” A closer look at the role of private wealth for philanthropic purposes suggests two models – “public-focused” and “private-focused.”

Public-focused philanthropy occurs when a very large number of smaller philanthropists participate in a democratic process of setting the agenda of a nonprofit organization they fund. The representative nature of this endeavor implies an authentic concern for the public good.

Private-focused philanthropy occurs when a relatively small number of wealthy philanthropists exercise undue influence and control in setting the agenda for some major nonprofit organization they fund. To the extent that this occurs, it represents how the public agenda may be co-opted by the interests of the wealthy, even in a democratic country.

In the United States, the IRS has made a clear distinction between two types of 501(c)(3) tax-exempt organizations that may also offer donors a charitable income tax deduction – public charities and private foundations. A tax exempt organization can be recognized as a public charity if it meets certain requirements. The most common method is to pass the “public support test.” Essentially, this refers to an organization that receives more of its income from donations and charitable-related income than from investment income and business-related income. (More information can be found at www.irs.gov.) Public charities provide greater incentives to individual donors and face less stringent regulation. Private foundations, on the other hand, provide fewer incentives to donors and face more stringent regulation. The reasons for these differences are that the government wishes to encourage gifts to public charities that are more democratic and clearly fulfill a public purpose, as opposed to gifts to private foundations that are often governed by a single family and only payout a percentage of the invested endowment.

In sum, the purposeful legal distinction in the United States between public charity and private foundation underscores the government and public’s discomfort with “private-focused” philanthropy.

Breakdown of roles of the nonprofit (private) and government (public) sectors

Nonprofit and government roles should be broken down into three zones: private, public, and private-public partnership.

Private – Nonprofit organizations that focus on developing a strong civil society, and work on advocacy, public policy, and lobbying efforts. Philanthropy’s role might be more adversarial toward government, and therefore organizations should not accept government funding.

Public – Government-run agencies that are funded by tax revenues, and provide a social safety net in the form of core services (basic healthcare, education, social services…) for all. The role of nonprofits would be as a service provider funded through government contracts.

Private-Public Partnerships – Government encourages the development of private philanthropy and the nonprofit sector. Philanthropy funds innovative pilot projects to be eventually picked up by the government. Nonprofits fulfill a complementary role to government by providing extra services (health, education, social services, culture) to specific populations. Funding can be from both philanthropy and government.

Encouraging philanthropy in Israel

To better fulfill its partnership with government and serve the public good, private philanthropy must be encouraged in Israel. We recommend the following:

The Israel government:

• should encourage private philanthropy.
• should switch from offering donors a “tax credit” to a “tax deduction” as is offered in the United States and many European countries.
• should eliminate the floor and ceiling for charitable tax credits from the current range of 400-4,208,000 NIS based on actual amounts. However, a ceiling should be set at 50% of the donor’s gross income (as in the U.S.).
• should establish the “private foundation” as an independent legal entity. As in the United States, it should be more strictly regulated than public charities (Amutot), with greater reporting requirements and with less tax incentives than gifts to public charities (30% of the donor’s gross income as in the U.S.).
• should eliminate the need for public charities to gain tax credit status (46-a) only after being approved by the Knesset Finance Committee.

Nonprofit organizations:

• Nonprofits and philanthropic foundations should gain greater public legitimacy by placing the public mission, (shlichut in Hebrew), at the forefront of their activity.
• Nonprofits and philanthropic foundations should be more professionally run, with strategy, effectiveness and accountability at the core of its operations.
• Nonprofits should be governed by a strong, diverse, and dedicated board of directors to set the agenda and oversee operations.
• Nonprofits should strive to raise funds from numerous sources to demonstrate that they are serving the public’s interests.
• Nonprofits and foundations should invest in shaping a more positive public opinion about the use of private wealth for the public good.

In today’s highly interdependent world, both the nonprofit and government sectors play important, distinct and sometimes overlapping, roles in representing and serving the public interest. Each sector must be a responsible team player and strive to act professionally while placing the public interest at the center. To advance their mutual interests, both sectors will benefit from increased philanthropic giving in Israel, which can be encouraged through a variety of means.

David Roth and Ardie Geldman are philanthropic consultants with Donor Associates in Israel, Ltd. and regular contributors to eJewish Philanthropy. Donor Associates in Israel, Ltd. (DAI) exists to guide donors in making wise philanthropic decisions. We invite you to touch base with us for an initial consultation prior to making your next major gift to Israel.