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Published in Nonprofits
Downtown Kalamazoo Downtown Kalamazoo COURTESY PHOTO

Philanthropy steps in where ‘broken’ municipal funding system has failed, advocates say

BY Sunday, August 15, 2021 03:20pm

recent $400 million donation to the Kalamazoo Foundation for Excellence has again raised questions about Michigan’s municipal funding model and broader issues around philanthropy paying for basic governmental services.

The anonymous donation announced last month will continue “in perpetuity” the foundation’s mission to fund certain governmental programs like sidewalk infrastructure and public health measures. The fund has also been used to reduce the city’s property tax levy without affecting city services.

Launched four years ago with donations by local billionaires Bill Johnston and Bill Parfet, the philanthropic model was an alternative to instituting a new local income tax that was being considered as the city of Kalamazoo faced structural budget deficits. In effect, philanthropy has stepped in where traditional governmental revenue was falling short. It continues to be a model that philanthropy experts have yet to see replicated at that scale.

“We still feel that the system is broken. You shouldn’t have to have philanthropy step up when they can and fill in the gaps where the state has failed to live up to obligations to support its local units,” said Chris Hackbarth, director of state and federal affairs for the Michigan Municipal League.

He noted more limited efforts by the Quicken Foundation and Dan Gilbert in Detroit and the Mott Foundation in Flint to support policing efforts and other services.

“Foundations and philanthropy have missions that shouldn’t include just basic operations of state government,” Hackbarth said. “They should be helping out those segments of the population they’re focused on, whether it’s reading, poverty or health issues. Instead they find themselves — because our system is so broken — having to step in and help local governments maintain those services.”

Local government advocates like the MML were issued another setback this month when the Michigan Supreme Court ruled in favor of the state over claims that it has underfunded local governments. The court ruled that the state is adequately paying schools under Proposal A from 1994 and that revenue sharing is being shared fairly under the Headlee Amendment of 1978.

Foundation for Excellence Manager Steve Brown agreed that Kalamazoo’s structural budget deficit was “rooted in that state model” of revenue sharing.

“Many, many millions of dollars should have been and continue to be denied to Kalamazoo under that state model,” Brown said.

Combining that with a broader economic downturn more than a decade ago and the city’s limited ability to increase taxes all led to the creation of the Foundation for Excellence, Brown said.

“It’s innovative, and to our knowledge has never been done in this comprehensive way,” he said.

In addition to offsetting a citywide reduction in property taxes, the Foundation for Excellence has supported multiple infrastructure projects, park improvements, small business loans, youth development, and affordable housing developments, to name a few. So far this year, the fund will support $50 million in budgeted “aspirational projects,” Brown said.

Teri Behrens, executive director of Grand Valley State University’s Dorothy A. Johnson Center for Philanthropy, noted a trend in recent decades across all government levels “to reduce taxes and the size of government.”

However, she believes the COVID-19 pandemic has highlighted the “need for effective government.”

“This is one of those constant negotiating processes that goes on in a democratic society: What should be funded by philanthropy and what should be funded by government?” Behrens said. “I think we’re starting to see a shift back toward government taking on more responsibilities they had turned over to the private sector and to philanthropy over the past couple of decades. … But I certainly don’t see philanthropy backing away completely from some of those essential services.”

Donor influence?

Aside from the local government funding debate, the Foundation for Excellence has taken several steps to ensure transparency and public participation in the funding decision-making process. The independent 501(c)(3) nonprofit is governed by a board that includes elected officials and community members that can apply for positions. Brown noted that the nonprofit’s board meetings also comply with the state’s Open Meetings Act.

“We’re quite proud of the way it was structurally designed to operate and (believe) it will stand the test of time,” Brown said.

While she hopes officials release the formal agreement between the city and donors, Behrens said she has only “very modest concerns” about donors seeking to influence how the money is spent. Indeed, broader concerns within philanthropy persist about more traditional contributions over which donors have direct control. 

“A lot of the big issues in philanthropy are around who gets to determine where those resources go. Some argue that donors get the tax benefit from the donation but also get to say where the money gets deployed, giving them unfair influence over what should be community assets,” Behrens said, adding that the Foundation for Excellence is set up to give elected officials decision-making power over the funds.

“They’ve done some things to mitigate what I think are potential real pitfalls,” she said, including rotating board members at the foundation and guiding decision-making with a long-term planning document.

Brown also addressed often heard “cynical” concerns about donor influence: “There’s two sides to this discussion: For the donors, it’s important that municipal government doesn’t squander the resources. The other side is that … the nonprofit has to maintain its integrity.”

Replicable model?

Experts also dispute whether the Foundation for Excellence model is replicable across the country, even in other places with wealthy philanthropists.

For one, Hackbarth is skeptical, noting Michigan’s hundreds of cities and townships and 83 counties.

“You’re creating this bizarre scenario between communities,” Hackbarth said. “One has to go to voters to ask for money. Another is lucky enough to have philanthropy with resources. We don’t want to create this checkerboard. We want to create a situation where all local governments can thrive.”

Brown countered that the Foundation for Excellence can “absolutely” be a model for other cities.

“We want to do something that’s good enough to be a model. We come at this with gratitude for the opportunity and humility with the responsibility to do this right, ask the right questions and fail and succeed in the right ways,” Brown said. “We haven’t seen anyone jump on the opportunity yet, but we know we’re being watched by others that might have similar opportunities.” 

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