Last month, the Los Angeles 2020 Commission released a sobering assessment of a city in decline – anemic job growth, crushing pension obligations and reductions in social services. While stating that Los Angeles has the capacity to be a “thriving center of philanthropy,” the commission concludes that our community has failed to meet its “charitable potential.”
The question left unanswered by the commission is more complex: Whether the massive growth of publicly funded social services (and the increasing tax bill to pay for them) tends to “crowd out” charitable donations rather than empowering the non-profit private sector.
Our community is, in fact, deeply charitable. In 2012, total charitable giving ranked second in the country, at $6.7 billion, according to the Chronicle of Philanthropy. As a percentage of income given, Los Angeles ranks slightly above the national average, at about 5 percent.
But the charitable impulse wanes when government is seen as the provider of first resort to assist the needy, a point illustrated by the decline in giving as President Lyndon Johnson’s Great Society programs took hold. This trend abruptly reversed after 1996, the year Congress passed its overhaul of welfare programs.
There is also a wealth of evidence that there is a negative correlation between higher taxation and charitable giving. While extra disposable income is a main driver for increased donations, a bigger tax bill also impacts the public perception of whose job it is to provide social services. This, in turn, diminishes the critical role of non-profits – to engage citizens and act as the glue that binds a strong civil society. Instead, the public increasingly views itself as passive and frustrated consumers of inadequate social services.
The answer isn’t to cut social services to the bone in the hope that charity will fill the gap. The relevant question is whether public funding of private non-profit organizations can enable the more efficient delivery of critical social services and stimulate private giving.
Collaboration between governments and private non-profits generates multiplier effects: funds go further, produce better results and signal that an organization is worthy of charitable support. Matching grants have this impact, as do public investments that reduce a charity’s marginal cost of providing services – where charities are more efficient in delivering social services, private donations increase.
Public-private collaboration does not mean bankrolling a non-profit’s budget. The trick is to find the sweet spot where government grants stimulate, rather than discourage, private giving.
Economists have found that seed money from the government “crowds in” private giving, meaning that collaborative funding goes further than private or public funding on its own. And collaboration isn’t limited to giving money, since governments and organizations can share other resources to spread social value with less expenditure.
In Los Angeles, for example, the city has partnered with Homeboy Industries, a non-profit that runs the largest gang intervention program in Los Angeles County. Since 2008, the city has spent more than $600,000 on shirts and uniforms from Homeboy’s printing shop; in 2011, it awarded Homeboy a contract to open a diner in City Hall. This cooperation validates Homeboy’s good works, and builds demand and exposure for the non-profit’s social programs. Meanwhile, Homeboy has evolved into a de facto re-entry program for the county, as about 85 percent of the 12,000 former gang members Homeboy helps counsel and train annually are on probation or parole.
Not all attempts at collaboration have been this successful. Charter schools have had to fight, in and out of court, for access to classrooms and facilities. In the county, a competitive bid process for community providers of substance abuse programs for eligible probationers languished for over a year after funds were allocated. According to testimony before the Little Hoover Commission, organizations equipped to meet these needs have been waiting for the county to issue a “request for proposal.” Such bureaucratic inertia is difficult to accept.
If done right, public partnership with non-profits is not just more cost-effective, it can also be more effective. Private organizations have much lower overhead than government programs; less bureaucracy means greater responsiveness. Non-profits cannot rely on automatic sources of funding – donations have to be justified by measurable results. The disciplining effects of the marketplace do not apply to our vast network of city-run social services agencies.
The charter school movement is a good example. The Alliance for College-Ready Public Schools is a private organization that administers 22 L.A. charter schools. Despite receiving less public money per pupil than other public schools, the alliance reports a 2012 graduation rate of 94 percent compared with 67 percent school districtwide.
The alternative? In Detroit, more than 130 individuals committed more than $330 million to rescue the Detroit Institute of Arts and to help resolve the underfunding of that city’s pension systems. We cannot wait until a similar disaster looms before finding ways to stimulate the philanthropic potential which the 2020 Commission believes is lacking in our city.
David A. Schwarz is a partner at Irell & Manella.