Coyote Blog

I am not going to get into some of these more recent twists and turns, but I do want to shatter the mythos that the word "non-profit" is somehow equivalent to "charitable" or "well-intentioned".  I know of many non-profits that do good work and for whom we should be grateful, but many many more do very little that is positive and are able to draft off the reputations of the ones who do.  I want to describe what I call the original non-profit abuse, one that goes back to the very beginnings of the income tax system.  I went to a private school in the 70's and an Ivy League University in the 80's and have seen what I am about to describe many times with my own eyes.

Let's say mom and dad have a business that they are going to be able to sell for $100 million.  They have three classic failure to launch kids with expensive degrees in things like art history and anthropology that are not very marketable.  All three from time to time have been employed in various roles (some real, some made up) in the family business.  Over the years mom and dad have created a non-profit and donated half the equity of the family business.  Once the business sells there is now a non-profit they control with $50 million in cash.

OK, so they rename the non-profit the "Smith Family Foundation for Art and Architecture Preservation".  That sounds laudable, right?  They get a lot of prestige from friends and the press for donating $50 million to "charity."

Making some perhaps over-optimistic assumptions about investment returns, let's assume that this new Foundation invests its $50 million (which they now call their endowment) and gets $4 million a year in income.  Here is how this money might get spent:

• We need managers of the Foundation -- hey, let's hire the kids.  We will pay them each an executive salary of $750,000 a year
• We probably need someone who can do actual work, so we will hire an office manager for $60,000 a year
• We need an office, something whose prestige matches that of our new Foundation. We rent 5,000 square feet at $30 per square foot for $150,000 a year.
• We will need supplies, utilities, etc.  Throw in $50,000 a year
• We need at least two board meeting a year with mom and dad and the executive team.  No reason that this can't be at a nice resort with a spa.  Call it $150,000 a year.
• The executives need to visit sites with art or architecture preservation needs.  Where is that?  It could be anywhere, from Florence to Siam Reap.  Eight trips per year at perhaps $50,000 each is $400,000 a year.
• We will need a PR agency to make sure the world knows the good works we are doing, call it $100,000 a year
• We will need to do various tax and legal filings, perhaps $40,000

That leaves $800,000 we can actually donate to other agencies or projects that support our mission.  Good for us!  Make sure the PR agent gets all the details, because after all this is a charity.

I will assure you that, though the IRS scrutinizes some of this stuff more, this is an entirely representative example.  I went to school with kids who have exactly these sort of lives as executives of the family foundation.

Since its origin, this model was expanded and the primary seed of these new non-profits is not generational wealth but money from the government.   When I worked more closely with the government running recreation areas, I was frequently frustrated that government employees almost fetishized non-profits, preferring if possible to allocate all outside contracts and partnerships to them if it was at all possible.  I am not an expert on the history of this mythology, but I can assure you it exists -- whether Federal, state or local, government agencies almost always believe that non-profits are the best partners as they are safe from the taint of profit motive and thus pure in their intentions.

Sometimes that was true.  I remember the government awarding a few campground management contracts to non-profits staffed with volunteers.  The problem was -- and I think anyone who has been part of a non-profit can attest to this -- that as the initial passion fades, it is really hard for such volunteer organizations to provide services 24-7-365.  Most all of these failed.

But then a more clever actor entered the picture in my little business niche.  These were folks who wanted an edge winning contracts, so they built what would in every other respect just have been a business like mine but organized it as a non-profit.  They then won contracts from agencies that were far more comfortable working with a "non-profit" than with a for-profit like my company.  I remember objecting to the agency and saying that the president of that non-profit paid himself more than I made a year in profit, but I got nowhere.  The perceived superiority of non-profits was an idee fixe in the government's mind that I could not overcome.

All of this came back to me as the DOGE effort dug out questionable non-profits on the government take and even more so as frauds in many states like MN and CA have demonstrated that the halo effect around non-profits still exists in government, and can be powerful enough to hide fraud and political money laundering.

Note:  I am still  much weaker than I expected following a post-operative infection, subsequent surgery to clean it out, and weeks of having my body host microbiological warfare on a grand scale.  So I am trying to catch up on a few easy subjects I have intended to write about for a while.