The Scope of 501(c)(3) Supporting Organizations – Urban Institute

Published on: by Gene Takagi Category:SUPPORTING ORGANIZATIONS

The nonpartisan Urban Institute prepared a research report on "The Scope and Activities of 501(c)(3) Supporting Organizations" dated May 31, 2005.  The following are excerpts from the report:

SUMMARY OF FINDINGS

Supporting organizations provide a broad array of services, including grants and other financial benefits, to the organizations they support.  This study found that nearly 92 percent of the large supporting organizations with no apparent grants in our sample did, in fact, provide significant financial services and benefits to their supported organizations.  Complex business and legal reasons similar to those found in the for-profit world appear to lie behind the activities of most of these organizations.

OVERVIEW

  • [N]early 11 percent of all 501(c)(3) public charities – more than 30,000 in all – identified themselves as either supporting organizations on either their IRS Form 1023 … or on their most recent annual IRS Form 990s.  These organizations account only 7.5 percent of public charity revenues but a significantly larger percentage of public charities’ total assets (16.8%) and net assets (17.6%).
  • Over 60 percent of supporting organizations are relatively small with less than $1,000,000 in assets.  They generate only 6.5 percent of total revenues and control less than two percent of the total and net assets of supporting organizations.  …  At the other end of the spectrum, organizations with more than $100 million in total assets – the two largest categories – account for only 1.4 percent of the organizations but receive almost 46 percent of revenues and control 62.6 percent of the total assets and 57.6 percent of the net assets.

ANALYSIS OF THE LARGEST SUPPORTING ORGANIZATIONS

  • There is a misconception that supporting organizations are solely grantmaking organizations that raise contributions from the general public or other sources and then make grants to their designated supported organizations.  An examination of the IRS Forms 990 for the largest supporting organizations … shows that 25 percent reported no grants on their Forms 990 – or at least not in the locations that most people would expect.  This statistic has been compared to private foundation payout rates to suggest that the supporting organizations are failing to provide justifiable levels of support to their supported organizations.
  • There is some concern that supporting organizations are established at the behest of donors primarily to sidestep private foundation payout requirements.  However, there are also more benign structural and operational explanations.  Supporting organizations can be used to help shield the assets of the supported organization from liability.  Sometimes a nonprofit hospital may establish a separate fundraising support organization that conducts capital campaigns or manages endowments.  This permits major donors to exercise leadership at a board level in determining investment policies and fundraising strategies while keeping the leadership of the operating hospital separate.  This arrangement seems like a reasonable approach to taking advantage of the strengths of major donors while minimizing their lack of expertise in, say, hospital management.

THE MANY ACTIVITIES OF SUPPORTING ORGANIZATIONS

  • Leading the list of specific operating activities is the pooling and managing of investments and endowments for supported organizations.  Seventy-two percent of the supporting organizations provided this service to their supported organizations.  From a management perspective, there are likely to be efficiencies in pooling investment assets and managing them centrally when the assets from more than one supported organization are pooled together.
  • Another major activity is real estate.  Nearly 42 percent of the organizations held real estate for one or more supported organizations.  More than one-quarter (28%) provided rental property management or facilities management services for their supported organizations.  Thirty percent provided in-kind support by giving their supported organizations exclusive use of property or facilities at little or no charge.

ESTIMATING "PAYOUT"

  • Comparing [supporting] organizations to private foundations leads us to assume that the best supporting organizations are the ones that have the highest payouts.  However, if the "endowment/investment manager" model is used as a frame of reference, then the best supporting organization may be the one that keeps its expenses and distributions to a minimum.  Instead success is measured by the extent to which its net assets can be increased to the level where it provides a reasonable cushion against a downturn in the economy or a platform for expansion.

Click here for the full report.