China’s Financial Crisis and Nonprofits: What to Expect

Global stock markets are reeling after the widely predicted (yet no less jarring) Chinese financial crisis caused the Shanghai Composite to plummet, stoking fears that the world’s second largest economy is facing a bleak economic outlook. The Dow Jones plunged 1,000 points (before rebounding a bit). Markets from Europe to Southeast Asia also suffered big loses.

Throughout the summer, Chinese markets had been on the rise. Between 2014 and 2015, the stock market rose 150 percent, in part because 40 million Chinese citizens entered the stock market for the first time.

Many of these new accounts – however – were founded on borrowed money. Analysts projected the eventual reversal of fortune, as China’s debt-fueled economy and speculative investing were unsustainable bedrocks for the country’s surging financial sector. Last minute efforts by the Chinese government to regulate debt-based investments, pump the economy full of cash, and suspend new public offerings were ultimately too late.

The global financial plunge comes at a poor time for the nonprofit sector. With an amazing post-recession rebound, the philanthropic sector has benefited over the last year from an uptick in giving and other positive developments, such as the growing popularity of #GivingTuesday.

The continued resurgence – however – may be tempered by a growing financial storm, as nonprofit professionals head into the biggest fundraising season of the year with markets in the doldrums. Top-income level donors who leverage assets to make their charitable gifts may be less inclined to give this holiday season, as well as other giving demographics that choose to spend conservatively amidst the confusion and pessimism that may emerge from the Chinese crisis.

Development and nonprofit professionals eager to continue the positive fundraising trends of the last year need to begin gearing up for year-end giving immediately. Only through careful planning and considerable time commitment can fundraisers excel in times of financial uncertainly and flux.

Delaware Museum Sells Art, Contravenes Mission

Howard Pyle’s “Marooned,” as pictured at the Delaware Art Museum

Our recent coverage at Key Elements Group LLC has looked at areas of the world that are either currently witnessing or bracing for the loss of their cultural heritage. From the looting, destroying, and blackmarket dealing of Syrian treasures perpetrated by ISIS, to the mass public-asset selloff scheduled in Greece, nations across the globe face myriad threats to their national pasts and the artifacts that tie global populations to their history and identity.

For the philanthropic sector, these developments are a harsh reminder that the culture and art that we cherish and work to protect is, ultimately, vulnerable to the conditions that surround us.

In June, this reality struck a painful note as the Delaware Art Museum sold off iconic works of art in order to climb out of a $19.8 million debt, largely accumulated through the institution’s 2005 renovation and expansion.

Following the museum’s first flirtation with private auctioning last summer, The Association of American Museum Directors issued a sanction that essentially revoked the Delaware Art Museum’s certification. In a way, this exacerbated the museum’s pressing financial situation, as it complicated its financial status and its ability to receive loans.

Featuring works by Alexander Calder, Winslow Homer, William Holman Hunt, and Andrew Wyeth, the fire sale transferred a handful of masterpieces from the public domain into private hands. A desperate act, the sale was the end result of institutional mismanagement and poor planning. The Delaware Art Museum finished doubling its size in 2005, a bitterly timed addition that coincided with a consistent decline in membership and attendance.

Perhaps a thorough feasibility study that took a hard, honest look at the Delaware Art Museum’s finances, development capacity, and patron base could have positively influenced or even jettisoned the expansion plans. While flashy, Guggenheim-esque museum renovations are popular across the globe, it’s unlikely that the Delaware Art Museum’s decision to move forward with such a scheme was based on the evidently unanalyzed realities surrounding the institution’s operations.

This trend may continue – the Detroit Institute of Art (DIA) has been staving off private auctions for years as it continues to struggle amidst the city’s general economic doldrums. Popular sentiment is opposed, indicated in the formation of a formal nonprofit organization called Defend the DIA. Perhaps the Ford Foundation – which recently announced a new operational strategy that explicitly targets inequality – will expand its role with the DIA, and support it as a symbol for broadly public accessibility to culture.

No matter the course of this phenomenon, there is a lesson here. Development professionals must look at the bigger picture in order to avoid threats to their organizational missions. Hasty plans with unclear or unrealistic targets can jeopardize an organization’s ability to perform on even a basic level, or even force its hand to operate in complete opposition to its guiding principles.

Rikers Social Impact Bond Fails: What Next?

The first Social Impact Bond (SIB) in the United States ultimately failed in its mission to reduce youth recidivism at Rikers Island by 10 percent, generating a host of questions as to the scientific and analytical usefulness of the data gleaned from the experiment, as well as to the efficacy and future use of SIBs.

As Key Elements Group LLC has previously discussed in our ongoing series, SIBs are a unique intersection of public and private sectors working to ameliorate pressing social issues. A private investor – in the case of Rikers Island, Goldman Sachs – fronts money for a program that employs new or innovative strategies to address an intractable problem. Following a third-party evaluation at contractually predefined benchmarks, the initial investors can potentially profit from these projects if they succeed in saving the government money.

The key selling point is the minimal risk to the tax-payer, who is theoretically off the hook if a project goes south. If a project succeeds, proponents argue that everyone wins: the government secures future savings, individuals assisted by the program lead better lives, the investors receive a return on investment, and the tax-payer benefits from an improved social state and lower social spending costs that require fewer tax dollars.

Popular on both sides of the Atlantic, SIBs have made waves in elite British and U.S. philanthropy circles. The Obama Administration has displayed its interest, earmarking millions of dollars in federal funding for potential SIB projects.

The Rikers Island project – however – failed to make a measurable impact. A therapy program designed to decrease recidivism among interned youth, the project sought to reduce return-to-prison rates by 10 percent. A third-party assessment by the Vera Institute concluded that recidivism among the youth population at the prison did not decrease. 

Looking at the program’s trajectory, the failure is not surprising. A number of essential components fell apart, setting the experiment up with a number of sizable hurdles. Wardens were organizationally incapable of maintaining the project’s control group, thus complicating scientific comparison and accurate assessment; the New York City Education Department withdrew its operational support; and a contractual complication reduced the budget of the nonprofit organization slated to actually implement the program. Some project insiders also point out that incidental costs accrued by in-kind support from public officials and staff still cost public dollars.

Even outside of the contours of this one project, critics point to a number of issues concerning SIBs. Some fear that they divert philanthropy dollars from other causes. If the liability of SIBs proves greater than proponents originally thought, philanthropic underwriters may step in to mitigate the potential loses for investors. For the Rikers Island project, Bloomberg Philanthropies guaranteed over $7 million, meaning that Goldman Sachs could only lose $2 million max on the investment. This not only contradicts the claim to cost-cutting and private risk, but could also saps valuable philanthropy dollars from other causes and projects.

A single failure – especially in the first-ever project of this type in the United States – is not sufficient enough to spurn SIBs. In fact, as a scientific and quantitative system, SIBs stand to benefit from the hard data of underachieving projects. New methodologies for enacting social policy are virtually never perfect when first instituted. Only a number of similiar projects, faithfully followed through to their completion, can begin to construct a clearer idea as to how well and to what extant SIBs will fit into U.S. philanthropy.

Indictment: Rep. Chaka Fattah Exploited Charities

Chaka Fattah – the longtime congressional representative for Pennsylvania’s 2nd district – was indicted this week on racketeering charges, potentially paving the way for a long prison sentence if found guilty.

Rep. Fattah purportedly used funding from his network of charitable nonprofits to pay off loans from his failed 2007 mayoral bid in Philadelphia. Other charges include using federal grants designated for his charities to line the pockets of Fattah family and political allies, as well as to pay off student loan debts for his son, Chaka Fattah, Jr.

Following the indictment, Rep. Fattah dismissed the charges as politically charged. The evidence against him – however – seems extensive, and paints a tragic portrait of how nonprofit organizations can fit into a nexus of greed, manipulation, and political power.

The FBI probe into the representative’s nefarious dealings have brought a number of potential infractions to light: Rep. Fattah engaged in a scheme to attract millions of dollars in federal grant monies to a scam charity, allegedly by using his privileged position on the House Appropriations Committee; he misused grant monies by doling out hundreds of thousands of dollars in consulting fees to closely-aligned friends and family; a former staffer and head of a Fattah-aligned scholarship charity directed $600,000 in federal money to pay off campaign debt following a failed mayoral bid; additionally, close political allies apparently funneled more than $22,000 of campaign funding to Drexel University and Sallie Mae in order to pay off Chaka, Jr.’s student debt.

The younger Fattah faces his own host of legal issues, as a trial is set to begin this fall over alleged bank fraud and scam consulting enterprises.

Whatever the result of the indictment and resultant trial, these allegations are an unfortunate blow to the Philadelphia nonprofit sector. Corruption and philanthropy for poor bed fellows, and any consequent distrust of the region’s predominately upstanding nonprofit professionals is a sad outcome of one political clique’s abuse of power.

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