In my last post, I highlighted the current status of Arizona's philanthropic sector, based on a research report released by Arizona Grantmakers Forum in January 2011. The report was based on 2008 tax data for both institutions and individuals. While the markets have rebounded somewhat since 2008 and thus individual and foundation assets have grown, it's unlikely that Arizona's relative position compared with other states has changed.

It seems clear that Arizona's philanthropic sector is underdeveloped relative to most other parts of the country. In addition, our low rankings on many social sector indicators suggest that some of the challenges we face are more severe than what other states deal with. Given the recent substantial cutbacks in state government support for many nonprofits, I believe the sector needs to get very creative about expanding revenue sources.

One area with great potential for increasing nonprofit revenues resides with greater contributions from individual donors. While the challenge of inspiring greater generosity is real, the potential positive impacts for our state's nonprofit sector are substantial. Consider for a moment what the impact might be for Arizona nonprofits if the 37% of Arizona residents who filed itemized tax returns in 2008 had been a bit more generous. If they had increased their contributions to the U.S. average of $4,343, total charitable contributions generated would have increased by $580 million. And if these same tax filers had aspired to contribute at the average level of itemizers in the top 10 most generous states, Arizona charitable contributions would have increased by $2.35 billion.

For those suggesting that cost of living and state and local tax burdens are likely to impact charitable giving, it may be important to note that, according to the Tax Foundation, Arizona ranked 33 in terms of state and local tax burden. Only two of the ten most generous states (Utah and Arkansas) had higher state and local tax burdens than Arizona. States which have higher averages of charitable giving also tend to have a lower cost-of-living. Arizona ranked 35th in terms of cost-of-living, but Arizona's cost of living was also higher than any of the top 10 most generous states.

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Research by Ross Gittell at the University of New Hampshire suggests that the main factors influencing household giving include personal income, capital gains, religious group affiliation, age, volunteerism, and educational attainment. It would be interesting to see how Arizona compares on all these factors. While the potential to increase individual charitable giving in Arizona is significant, it is likely that more research will be required to determine how best to accomplish this.

Another option would be for foundations and nonprofits to allocate more of their assets to Mission Related Investments (MRI's). Currently the bulk of these assets are invested in conventional instruments like stocks and bonds which offer market-rate returns. However, across the country more foundations and nonprofits are considering the merits of applying the full power of their endowments to bear on their missions by aligning their investments with their strategic objectives. For example, organizations might choose to invest a portion of their assets in low-income designated credit unions or community investment banks. Or they might choose to provide no or low-interest loans to nonprofits striving to expand their impact. In Arizona in 2008, the total assets of approximately 15,000 nonprofits totaled over $24 billion and foundation assets totaled nearly $6 billion. Imagine the potential impact if only a small portion of these assets were invested in mission-related programs.

A third would be to encourage the state government to explore the use of Social Impact Bonds or Pay-for-Performance Bonds to raise additional investment capital for nonprofits that can prove impact. Governments would issue bonds to investors interested in supporting social change but also in receiving some return on their investment. Bond proceeds would provide a pool of capital that would be used to support pay-for-performance based programs delivered by pre-qualified service providers.

Foundations might be especially interested in these investments, giving them an opportunity to use more of their total assets to support their mission (MRI's). Consider the potential impact if even 10% of Arizona's $6 billion in foundation assets was made available to high-performing nonprofits rather than being invested in conventional financial instruments. In addition, some private investors interested in both a financial and social return on their investments might allocate some of their assets to support this effort. The state of Minnesota recently passed a State Government Bill that contains a provision for a $20 million pilot for human capital performance bonds, and other states like Massachusetts are also considering this idea.

I've suggested a few ways to increase revenues for the nonprofit sector. I'm sure there are other ideas, so if you have a few of your own, share them in the comments. I look forward to reading your ideas.

Ms. Theisen has served as President & CEO of the Arizona Grantmakers Forum (AGF) since its inception in 2000. AGF is an organization dedicated to providing networking, educational, and collaborative opportunities for Arizona's private, community, and corporate foundations and giving programs.

Sources:
^ [1] Charitable Giving: Factors Influencing Giving in U.S. States, 2006
^ [2] To learn more, click here.
^ [3] To read more about this concept, check out this website.

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