Letter to President Obama

The President
The White House
1600 Pennsylvania Avenue
Washington, DC 20500

Dear Mr. President,

There are many calling for you to create a cabinet level position for arts and culture. There are certainly many factors involved in such a decision. There is a necessity to exhibit how the country values arts and culture by providing leadership, but also revising the way we fund these disciplines. You may not be aware, but the section of the tax code under which many non-profit arts and culture organizations operate, 501 (c) (3), does not mention the arts and culture at all. Despite this, it is fortunate that the generosity of the American people, businesses, foundations and endowments flows to arts and cultural organizations under the auspices of this section of the tax code. Whether or not arts and culture find a greater representation within your administration, you can do a great service to the community by creating an improved, more focused way for the arts to acquire support.

For a sense of why the current method of funding the arts is in need of change, one might read John Kreilder’s “Leverage Lost The Nonprofit Arts in the Post-Ford Era.” In the third section of the piece, Kreilder notes that the theory employed by the Ford Foundation was that support they provided could be leveraged by stimulating donations from other sources. This same approach has been used by the National Endowment for the Arts, many state arts agencies and some private funders.

But as Kreilder notes:

“Any student of biological, physical or economic systems would immediately recognize the flaw in the logic of funding leverage, as it has been practiced not only in the arts, but also throughout the nonprofit sector. One of the fundamental tenets of systems studies is the “free lunch” principle: no system can depend on the unlimited growth of resources. The leveraged funding strategy of the Ford era can be likened to a chain letter, a Ponzi scheme, or any other pyramidal growth system. The initiators of chain letters and Ponzi schemes often claim that, for a small effort or investment, a virtually limitless return will be realized, and though initially this prophecy may appear to be feasible, inevitably all such arrangements must fail because resources are finite. In other words, there is no perpetual free lunch. Ultimately, funding leverage will become unsustainable.”

Five years ago the Independent Sector issued a statement calling on foundations and endowments to shift their focus to long term broad support of organizational core programs rather than the short term project support prevalent today. The Independent Sector felt this short term emphasis keeps non profit organizations focused on reinventing their programs to comply with narrow guidelines rather than investing their energy in building institutional capacity.

If your administration were able to provide leadership and incentives to encourage longer term, core support of non-profit organizations, it would be a boon for the entire sector. But for non-governmental funding of non-profits to thrive, there needs to be greater opportunities both in the way these entities can incorporate themselves as well as the mechanisms by which they can raise money. The origins of both these solutions will be found in the tax code.

One of the ways this might manifest is by providing increased options for the formation of non-profit entities. Among the possible processes by which a company might form could be as hybrids between the current 501 (c) (3) and for profit methods of incorporation. It might be necessary for such an entity to pay more taxes than a current non-profit but such arrangements will expand the avenues by which people can pursue serving myriad constituencies while facilitating opportunities for greater self-support.

As for diversifying the means for garnering support, Douglas K. Smith had an intriguing idea a few years back he termed, Dynamic Deductibility The piece he authored explains it in detail, but simply, a person would buy X amount worth of shares in an organization but doesn’t take a deduction until he sells the shares. If the share value goes up, he takes a bigger deduction than he would have had he donated directly. If not, he takes a smaller deduction.

The primary way this would differ from the stock market is a non-profit would get money every time the stock changed hands rather than the one time infusion a for-profit gets at its initial public offering. This option doesn’t exist as yet because there are no laws creating or governing such transactions. Certainly there is much to be considered in how the tax code and laws might be written to accommodate such an arrangement and guard against abuse. When I first read the article, I wondered if the activities of non-profits would be substantial enough to attract investment interest. Having since learned of the financial instruments in which people were investing that lead to the current financial crisis, I am convinced these organizations offer more than enough tangibility. Donors employing this avenue to support an organization realize returns in the form of both observing how the non-profit is able to serve its constituencies and tracking how the organization is valued via its shares.

My hope would be that smaller non-profit organizations who did not feel they could garner significant interest on their own, or even larger organizations looking to enhance their value, would come together to offer shares in partnership with one another. I am an arts person so my immediate vision is of visual and performing arts organizations cooperating to increase their shared value. It doesn’t take much effort, however, to also imagine social work and health care organizations working together to improve the value of their shares by improving the lives of the communities they serve.

I hope you have noticed, President Obama, that while our endowments and savings, small as they were already, have shrunk severely we in arts and culture have not asked for a bailout. Certainly it has been suggested. It is difficult not to want a portion of the billions of dollars being distributed. Yet the loudest cries right now aren’t for you to increase the budget of the National Endowment for the Arts, but rather to create a cabinet position. We don’t want a bailout as much as we want the esteem and respect of our government and our countrymen. We want to be better organized and educated so we can achieve and serve with greater efficiency.

What I ask is in the same vein. Assist us in becoming more viable and integral contributors to the economy, the national cultural and social identity.

Most respectfully,

Joseph Patti