Fall 2002

In this issue:
Dealing With a Budget Deficit: Cutting Cost
IRS Publishes Final Sponsorship Regulations
Making the Most of E-mail

“Dealing With a Budget Deficit: Cutting Costs”
In this continuing series of articles, we offer guidance on addressing budget deficits. This issue focuses on cost-cutting techniques.

First Steps
Any expense that accounts for more than 5 percent of the budget should be regularly scrutinized to determine if the related activity can be accomplished more efficiently. According to Perry Ludy, author of Profit Building: Cutting Costs Without Cutting People, the best approach may be to assemble a profit-building team. The team should include employees from all levels of the organization. Employees who don’t have a vested interest in a certain area and are unaware of the area’s "sacred cows," are best positioned to give a candid, independent assessment of costs.

The team engages in brainstorming sessions, but not in the usual sense. Rather than being asked to devise solutions, team members are asked to come up with questions regarding existing processes, i.e., why the organization does things in certain ways. Using this unintimidating approach, rank-and-file employees often point out waste that higher-level staff may not be aware of.

Areas to Cut Costs
In his book, Ludy lists more than 100 ideas for improving profits. Some areas to examine when looking for cost-cutting opportunities include:

• Facilities. Explore alternative uses for existing facilities, including subleasing excess space and renting meeting space.

• Member retention. Winning new members costs far more than retaining existing members, so effective member retention strategies should be developed.

• Payroll administration. Outsourcing to a professional payroll firm can save staff time, reduce costs, and increase efficiency. Implementing direct deposit produces additional savings.

• Salary administration. Nonprofits should develop, and strictly comply with, salary ranges for every position, regardless of an employee’s tenure. Regular salary reviews should be conducted, with raises tied to performance or limited to, for example, cost-of-living increases, with additional compensation coming from performance-based bonuses.

• Printing. A significant chunk of many nonprofits’ budgets, printing is susceptible to dramatic cuts. Replace printed brochures that quickly become out-of-date with CDs or other, more cost-efficient electronic media, or implement just-in-time printing. Reexamine paper and color-related costs. Barely perceptible changes can rack up substantial cost savings. Consider seeking sponsors or vendors to fund certain publications.

“IRS Publishes Final Sponsorship Regulations”
After more than a decade of debate, the IRS has issued its final regulations on the tax treatment of corporate sponsorship payments, specifically addressing whether such payments constitute unrelated business taxable income (UBTI). The regulations retain language on exclusive provider arrangements that was opposed by nonprofit advocates, while amending the disregarded benefit standard.

The Taxpayer Relief Act of 1997 provides that "qualified sponsorship payments" aren’t subject to unrelated business income tax (UBIT). Qualified payments are defined as those "made by a person engaged in a trade or business with respect to which there is no arrangement or expectation that such person will receive any substantial return benefit other than the use or acknowledgement of the name or logo . . . of the person’s trade or business."

The IRS proposed regulations in 2000 that confirmed that qualified sponsorship payments weren’t taxable. The 2000 regs also defined "substantial return benefit" as "any benefit other than (1) a use or acknowledgement of the payor’s name or logo in connection with the [nonprofit’s] activities, or (2) certain goods or services that have an insubstantial value under existing IRS guidelines." Benefits such as free tickets and receptions for donors would be insubstantial only if their fair market value was no more than the lesser of 2 percent of the payment or $74. (The limit later increased to $79.)

The 2000 regs also provided that sole sponsorship rights aren’t necessarily a substantial return benefit, unless given in conjunction with exclusive provider rights.

Final Regulations
The final regulations clarify several areas that had been the subject of commentary and questions:

Substantial return benefits defined. The final regs apply the same definition as the 2000 regs and withhold Section 513(i)’s safe harbor protection when the payor receives substantial return benefits. But the $79 ceiling is eliminated; the 2 percent level

for disregarded benefits remains, to the consternation of several commentators, who suggested an increase to 10 percent or 15 percent.

Acknowledgement versus advertising. The final regs define advertising as any message or material that promotes or markets any trade or business or any service, facility, or product of a sponsor. This includes any message with qualitative or comparative language, price information, or other indicia of savings or value; an endorsement; or an inducement to buy, sell, or use a company, service, facility, or product. Advertising does not include activities conducted by the sponsor on its own.

Acceptable acknowledgements listed include use of a logo or slogan; a list of a sponsor’s locations, phone numbers, and Web site addresses; value-neutral descriptions of products or services; and listings of a sponsor’s products and services.

Note that a single message with both advertising and acknowledgement is treated solely as advertising.

Web links.The final regulations provide welcome guidance on the impact of links to a corporate sponsor’s Web site on a nonprofit organization’s site. Examples in the regulations indicate that the mere presence of a link to a sponsor’s site constitutes an acknowledgement. But if the sponsor’s site contains an endorsement of the sponsor’s product by the organization (and the endorsement was approved by the organization), then the link constitutes advertising.

Mixed payments. The final regulations also confirm that if a portion of a payment would be a qualified sponsorship payment if made separately, then that portion and the remaining portion may be treated as separate payments.

Exclusive provider arrangements and sole sponsorship. Under the final regs, an exclusive provider arrangement doesn’t exist unless the organization agrees to limit sale, use, or distribution of competing products in connection with the sponsor’s payment. If the nature of the product necessitates the use of a single provider or if a competitive bidding process requires acceptance of the lowest bid, an exclusive provider arrangement doesn’t arise unless the organization specifically agrees to limit distribution.

The problem for nonprofits, of course, is that most companies expect this type of exclusive treatment when they give an organization a significant sum of money. But such an arrangement isn’t automatically subject to UBIT. Some contracts might not meet

the criteria for inclusion in UBTI set forth in other IRC sections.

Effective Dates
The final regs apply to corporate sponsorship payments solicited or received after December 31, 1997.

“Making the Most of E-mail”
Most nonprofit organizations now have an Internet presence, typically in the form of a Web site, but few are taking full advantage of e-mail as a marketing and fundraising tool. In many ways, though, an organization’s e-mail strategy is far more important than its Web site.

E-mail as the Cornerstone
As more members, donors, and sponsors become comfortable on the information highway, nonprofits will find e-mail crucial to effective and cost-efficient marketing and fundraising. The benefits associated with using e-mail are numerous, including:

• E-mail allows one-on-one (or seemingly one-on-one) interaction with the targeted individual.

• In general, the number of e-mail messages people read far exceeds the number of Web sites they visit.

• E-mail messages convey a sense of urgency.

• E-mail campaigns are dramatically cheaper than direct mail.

Despite these advantages, a survey conducted by Gilbert Research indicates than nonprofits have failed to integrate e-mail into their communications strategies. Gilbert surveyed 900 nonprofit organizations, with a median size between 1,000 and 2,500 stakeholders (and a range of zero to more than five million stakeholders). Several notable findings resulted:

• 44 percent have e-mail addresses for less than 20 percent of their supporters

• 64 percent don’t collect e-mail addresses on their Web sites

• 75 percent can’t survey their stakeholders online

• 78 percent don’t have an e-mail strategy

Collecting E-mail Addresses
Prior to launching an e-mail strategy, most nonprofit organizations need to make a concerted effort to collect stakeholders’ e-mail addresses. Several approaches may be effective, depending on the specific organization’s circumstances:

• Use your Web site to collect e-mail addresses from visitors, preferably giving them a method of offering their addresses on the very first page of the site

• Offer subscriptions to e-newsletters, updates, and alerts

• Solicit e-mail addresses on all response cards, forms, and correspondence

• Use your Web site to allow online donations, dues payments, and program registration

• Collect e-mail addresses as part of a Web survey

• Offer lifetime e-mail addresses as a member benefit (e.g., yourname@organizationname.org)

• Conduct telephone or postal reply card campaigns to collect e-mail addresses.

Many nonprofits are also interested in gathering the addresses of individuals with no current links to their organizations. This practice, however, carries some risks.

A recent survey completed by The Chronicle of Philanthropy reported that only nine of 197 large charities questioned use e-mail addresses rented from list brokers.

Some customers of list brokers have been disappointed in the response rates. They’ve experienced some hostility from recipients, who may regard the messages they’ve received as spam. In a worst-case scenario, recipients of unsolicited messages may react by refusing to support organizations that engage in "cold-call" e-mailing. Nonprofits should also consider issues related to online privacy, ethical questions, and just simple effectiveness.

One alternative that’s been proposed is the use of so-called chaperoned e-mail lists. Michael Gilbert of the Gilbert Center suggests that nonprofits seek a chaperoned introduction to the individuals on a rented list by its owner, which presumably already has a relationship with them. For example, the company that owns the e-mail list would send a message to list members on behalf of the nonprofit. The message might encourage the recipients to subscribe to the nonprofit’s e-newsletter or visit its Web site.

No One Likes Spam
The Mail Abuse Prevention System defines spam as "[a]n electronic message [where] (1) the recipient’s personal identity and context are irrelevant because the message is equally applicable to many other potential recipients; and (2) the recipient has not verifiably granted deliberate, explicit, and still-revocable permission for it to be sent; and (3) the transmission and reception of the message appears to the recipient to give a disproportionate benefit to the sender."

In addition to potential legal ramifications, spam may decrease the overall likelihood that people will opt in to nonprofit lists, may hurt response to online calls to action, and may generate damaging publicity or negative associations for the organization.

Be Smart With E-mail
Organizations that implement e-mail strategies must be certain to offer recipients an unsubscribe option in every message they send. They should develop a formal privacy policy, post it online, and adhere to it carefully. Finally, nonprofits should resist the temptation to flood their recipients’ e-mail-boxes, which risks alienating them for the long term.

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