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Making nonprofits merge: A free market approach

Funding for nonprofits is so tight right now that it's fueling a tense conversation about mergers and collaboration in Charlotte. There's no rule of thumb for the number of nonprofits a community should have per capita, but School Board member Trent Merchant views the 90 or so agencies that get money from the United Way as proof there are too many in Charlotte. "We're not that big of a region," says Merchant. "It makes me wonder how efficient are those organizations if they're all out asking for the same dollar from the same people." Merchant and hundreds of others submitted their suggestions to improve Charlotte's nonprofit sector through a media collaboration called Charlotte Mission Possible. Today WFAE's Julie Rose takes a look at one recurring theme that suggests Charlotte's nonprofit sector should take a lesson from the free market system. Most of the time, nonprofit mergers in Charlotte happen only because one of the nonprofits is in a death spiral. Back in 2003, a local nonprofit called The Relatives could see itself headed down that path. The Relatives is a temporary shelter for youth in crisis, and executive director Brennon Graham says it's thriving today largely because it merged with another nonprofit six years ago. Today they're known collectively as Alexander Youth Network. They claim the merger is saving them some 200-thousand dollars a year on administrative costs like HR and accounting. But Graham says merging wasn't easy. "It was a struggle for us to really figure out how to make this work, where we have two entities that have a name in the community and we're bringing those two cultures together," says Graham. It was really a merger out of necessity. But County officials and the United Way are trying to get nonprofits to merge even when it's not do or die. And that's where free market theory principals come in. Here's the idea: When a market is working right, there are people who want something and others who are willing to provide it for a price. The sellers compete for attention and some go out of business. Others thrive. And many in the middle merge or are swallowed up by bigger fish. The whole dance ultimately leads to a sweet spot where the price is right and there is just the right number of companies selling the stuff buyers want. One magic word makes it all work, "which is, profitability," says Craig Depken. He's a professor of economics at UNC-Charlotte, and for the next few minutes, our guide to how market theory might work in the nonprofit world. But we've already hit a snag: "Well, the nonprofit world loses that very valuable incentive, which is the profit motive," says Depken. Companies merge to make more profits. Nonprofits have a higher calling and typically merge only to keep the dream alive. Imagine two gas stations on opposite corners of the same intersection: "So I'm the owner of one gas station and I go next door and say 'Hey, I want to buy you out,'" says Depken. And that person says 'You'll never buy me out.' 'Why not?' 'Well all I've ever wanted to do is run a gas station. That's it. You can't pay me enough.' Okay, well then we won't merge - no matter how much profit we can earn more." So that's what it's like trying to make a merger in the nonprofit sector. A lot of them can't imagine how they could possibly merge with another nonprofit that has a totally different mission or philosophy, and since they don't have a profit motive to merge, they just don't. To get around that, the people who control the money - say the United Way or Mecklenburg County - could just demand a merger. "I mean, if you're paying someone to mow your lawn, you get to tell them to some extent how to do it, or what to do, what not to do," notes Depken. "And that person could say 'I'm not going to mow your lawn anymore,' and you'd have to go find someone else." The United Way of Central Carolinas is actually trying something like this, but a bit less heavy-handed. It's asking agencies to seriously consider merging with others in the same line of work before seeking a grant. Now there is another approach. Suppose they picked a big issue - homelessness, say - and said "Here's 10 million dollars to whoever can reduce Charlotte's homeless population by 20 percent in three years." That's a problem way too big for one nonprofit to tackle, so they'd have to come together. Trent Merchant is a CMS school board member and he thinks this approach is worth exploring. It's pretty popular right now with some big national foundations. Probably the most famous is the Xprize. "We're challenging private teams from around the world to design and build robotic explorers and race them to the surface of the moon," says XPrize founder Peter Diamandis. The first team to the moon gets 30-million bucks. So what about an Xprize to end homelessness in Mecklenburg County? From a free market perspective, Depken says that's a great idea. "Except for these third parties out there who if this enterprise fails is going to be homeless or go hungry or have low quality medical care," says Depken. "And so starting out with these very broad objectives - like you were saying, I just I want to reduce homelessness by 20 percent - probably many ways to go about that. And many ways that might be objectionable for some people. Right, we may say, 'Well, that's not really what we intended. We didn't intend you to put 100 people in one house.'" Okay, so the County would probably have to be a bit more specific about what it wanted. But mergers would be more likely. It also means a lot of nonprofits used to getting money from the County could end up getting nothing. That would really rock the boat, although, it doesn't terrify Bill Anderson. He's the executive director of Communities in Schools: "I have no problem with that at all," says Anderson. "Because I know we'd do well in that environment. We have solutions. I have data that proves that we actually make a difference. So I actually would welcome that." But - and this is a big but - Communities in Schools is focused on keeping kids from dropping out. So what if that doesn't fit into any of the big solutions the County decides to fund? "If that were to happen where they said we want you to stop homelessness, we really don't know how to do that," says Anderson. "So for me to pretend that we do, I personally think that's suicide. Nonprofit organizations, in my opinion make some big mistakes when they start chasing money and not chasing their mission." And economist Craig Depken says that kind of money-chasing would be a real risk if the county were to offer up just a few mega-grants rather than dozens of small ones. But here's the ironic twist. Let's say we succeed at getting all our homeless services to merge. Now they're saving hundreds of thousands of dollars by having just one executive director, one secretary, one accountant and so on. They're saving on rent and utilities, too, because they've combined all their shelter beds in one building. And then - heaven forbid - the place burns down. Or, the executive director commits fraud. Now we have a problem that's all-too-familiar in the financial world at the moment: We have a nonprofit that's too big to fail. So we have to bail it out with tax dollars or somehow unravel the mergers until they duplicate each other just enough to create a safety net. All the while, the people we were so intent on helping more efficiently are stuck out in the cold.