Working Together: A Government of Canada/Voluntary Sector Joint Initiative

Working Together: A Government of Canada/Voluntary Sector Joint Initiative - Report of the Joint Tables

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Supplementary Paper C: Advantages of Alternative Funding Methods

Purpose

This appendix and the attached table consider the circumstances in which certain funding methods may be preferable to others. The discussion recognizes that the advantages and disadvantages of particular funding methods are, to a large degree, in the eyes of beholders. Accordingly, the appendix and table present the perspectives of the government, the voluntary sector and the public.

Context

The following discussion is in the context of a four-step approach to addressing the issue of funding for groups that do not meet the common-law definition of charity, namely:

first, determine if some groups are currently excluded from the common-law definition of charity, but which a consensus of Canadians would agree should receive financial assistance of some form
second, to the extent such groups are found, determine whether direct funding or tax assistance would be the best way of funding them;
third, if tax assistance is determined to be the best solution in the circumstances, explore whether there could be administrative means of accommodating these groups; and
finally, if none of the above provide a solution, consider whether legislative changes would be appropriate.

While this paper addresses the second question, albeit at a very general level, and elements related to the first question are discussed in the chapter "Improving the Regulatory Framework," all four issues will require further discussion and analysis.

When Does Public Spending Constitute the Best Use of Public Resources?

Addressed here is the how, but not the why, of public funding. Regarding the "why" of public funding, the economics of public choice suggest several criteria to gauge whether a particular expenditure constitutes the best use of limited public resources. These criteria include:

the cause, organization or project provides a clear and identifiable public benefit (that corresponds to the economist's notion of a "public good");
society needs more of such public good than the private or voluntary sectors would provide in the absence of support (or increased support);
the benefits of spending (or increased spending) for the particular public good exceed the cost; and
the particular expenditure contributes more to social welfare than alternative uses of public resources.

In practice, these criteria are both mediated and informed by the political process.

An Evolving Document

This discussion has benefited from many constructive comments from members of the Regulatory and Capacity Tables. Discussed below are some key concerns and suggestions expressed by commentators.

Spending Definitions

Attempting a neat categorization of expenditure methods reveals many "blurry lines" between the various types of public funding. Depending on the design and operation of a funding program, one type of expenditure may closely resemble another, and the "pros and cons" of that method may also change.

In practice, there is not a strict one-to-one correspondence between funding mechanisms (e.g., grants, contributions, contracts) and the notions of core and non-core funding. For example, most but not all grants are for core funding - Human Resources Development Canada has at least two programs where grants are given for projects.

Contributions and contracts can be distinguished by the fact that the output of the contribution agreement is usually owned by the voluntary organization, whereas the output of a contract is owned by the government.

It has been noted that the term "matching grant" is often used to indicate a one-to-one matching. For clarification, the term "matching grant" refers here to arrangements in which the government matches private or voluntary sector contributions in any proportion.

Support to Voluntary Sector, or Implementation of Government Policies?

Voluntary sector leaders on the Regulatory Table indicated that it is necessary to distinguish between spending that is intended to provide assistance to charities and voluntary organizations, and situations in which the government is providing public services via a voluntary sector intermediary. Examples of the latter include:

project funding for activities in an agreed area of activity, for example, pilot projects to develop innovative approaches to early childhood interventions; and
project funding for non-profit organizations to deliver services previously delivered directly.

Conceptually, the provision of assistance to charities and voluntary sector organizations on the one hand, and the provision of public services via a voluntary sector intermediary on the other, can be seen to lie on a continuum of possible partnership forms. Performing a service and getting paid for it would be at one end of the continuum, whereas receiving unconditional grants or tax assistance would be at the other.

Elasticity and Revenue Costs of Increased Tax Assistance

One area of particular interest to Regulatory Table participants was the elasticity of donations with respect to increased tax assistance. It may be helpful to outline this notion and its relationship to the revenue cost of increased tax assistance.

Technically, the elasticity of donations with respect to tax assistance measures the percentage increase in donations that would be occasioned by a one-percent decrease in the after-tax price of giving. There have been four Canadian studies that reported the following elasticities (a negative sign indicates that a decrease in the after-tax price of giving would increase the level of giving):

Hood, Martin and Osberg (1977):	-0.86
Glenday, Gupta and Pawlak (1986):	0.0 for $1 $30,000 income, -0.15 for higher income
Kitchen and Dalton (1990):	-1.07
Kitchen (1992):	0.0 for religion-related donations -2.29 for other donations

Elasticities greater than (negative) unity imply that a dollar reduction in the cost of giving would result in a more-than proportional change in donations.

Since they consider behaviour "on the margin," and are based on the common-law definition of charity, elasticity estimates are of very limited, if any, use in answering questions related to the behavioural or revenue impacts of providing tax assistance to new classes of organizations.

The fact that only about 50 percent of charitable donation receipts issued by charities are claimed at tax time was put forward by one Table participant as an argument that, compared with other forms of assistance, increasing tax assistance may be cost-effective for the government. This, however, may mean that for many donors, the tax advantages associated with giving are not a factor in their decision to give to charity. For these individuals, the tax-price elasticity of donations would be zero. Of course, since they do not claim, the revenue cost of increased tax assistance would also be zero in these cases.

In practice, the effects of a tax change on revenues and on amounts donated depend critically on the design of the incentive. Key factors influencing the cost-effectiveness (i.e., revenues foregone per dollar of new donations generated) of a tax incentive include:

Some of the increased assistance may in effect provide an additional reward to existing behaviour. If the revenue foregone in this way is high, the cost of encouraging an additional dollar of donations through the tax system can be very high.
Related to the above, tax incentives may induce donors to use more tax-efficient ways of carrying out existing donation intentions. This would raise the overall cost of encouraging new donations through the tax system.

The National Survey of Giving, Volunteering and Participating showed that 37 percent of donors indicated that they would increase their donations if offered a better tax credit. As might be expected, this percentage increased as the size of annual donations increased: 45 percent of donors contributing more than $150 annually reported that they would increase their donations if offered a better tax credit, compared with 30 percent of those who made annual donations of less than $40.

Overall, 41 percent of donors indicated that they or someone else in their household would be claiming a credit for their charitable donations. This percentage also varied with donations, from a high of 80 percent among those whose yearly donations are $150 or more, to a low of 19 percent among those whose yearly donations totalled less than $40.

From a cost-effectiveness perspective, the key question is by how much these respondents would increase their donations for a given increase in tax assistance. This is the question that is explicitly addressed by the elasticity studies, and the evidence from those studies is mixed.

Types of Accountability

"Accountability" can refer to an organization's relationship with donors, government or client groups, and can also refer to its internal structures for efficient and effective management of resources. Here, the term is used in the sense of accountability to donors, government or client groups.

Advantages and Disadvantages of Alternative Funding Mechanisms

The advantages and disadvantages of alternative funding mechanisms, from the perspectives of the government, the voluntary sector and the public, are summarized in the following table. Mechanisms considered are:

tax assistance
matching grant
core funding
contributions
contracts

Type of Assistance:

Tax assistance for donations to registered charities.

Description:

Statutory entitlement to a tax credit, effectively a matching grant to the donor.

Eligibility to issue tax receipts based on common-law (charities) or statutory definition (RCAAAs).

In either case, the courts make final determinations on eligibility.

Examples:

Donor chooses to make a contribution to a particular registered charity. At tax time, donor receives a credit of 17 percent on first $200; 29 percent on remainder (also reduces provincial taxes). For those donations that are claimed, this translates to about 25 percent tax assistance on first $200 of donations, about 50 percent on donations above.

Tax Assistance: Relative advantages and disadvantages from perspective of:

Government

Voluntary Sector

Public

Pros:

Individual choice operates to channel resources to areas of greatest public concern (within definition of charities).
Cost is shared by concerned citizens and governments - fosters engagement.
Visible, if indirect, support for socially important causes.
The fact that donors make up half of the cost may enhance the possibility of indirect net increase to public good, particularly if need for social spending is reduced. However, other forms of assistance to voluntary sector could also result in net gains, particularly if the cost is shared.
Tax assistance is contingent on support for the charity.

Cons:

Canadian empirical studies offer mixed evidence on whether a $1 increase in tax expenditures will lead to more or less than $1 in new money to charities (elasticity issue). In practice, cost effectiveness will depend on design of incentive.
Concern about donors, or a subset of donors, determining the extent of expenditure on particular causes (concern is greatest in cases where the proportion of tax assistance rises beyond 50 percent).
The tendency for the most popular causes to attract a large share of funding may leave important but less popular causes relatively under-resourced.
Accountability structures are only very indirectly tied to results.
No upper limit to individual contributions or the overall cost in foregone taxes.
Richness of assistance fuels pressure for expansion of eligible organizations - pressure to include more organizations from Afairness" perspective.
Uncertainty as to which groups will eventually qualify as a result of court interpretations/interaction with charter.
Relationship to general system creates opportunities for abuse (e.g., problems with valuation of gifts in kind for tax credit purposes).
Increased tax assistance applies to existing, as well as new, donations. To the extent that a large degree of the benefit accrues to existing donations, the cost of encouraging additional donations through the tax system can be very high.

Pros:

Individual choice operates to channel resources to areas of greatest public concern (Amarket test").
Promotes commitment to cause and encourages engagement.
Tax credit helps to reduce the cost of giving, may allow a larger individual contribution.
Acceptance as a registered charity provides a "stamp of approval" for the charity.
Registration needed for access to foundation funding.
Other taxes (e.g., provincial property taxes) may be lower due to gaining charitable status.
Scope for innovation can be attractive to donors.

Cons:

Need to expend resources to encourage donors to give to the particular cause and explain tax advantages.
Organizations with low-income constituency (e.g., anti-poverty groups) or unappealing causes (e.g., addictions treatment, convicts) can be at a disadvantage.
Resources are expended in complying with Revenue Canada rules and regulations.
Many public benefit organizations don't qualify for benefits of tax status.
Dollar value of assistance is negatively affected by tax rate reductions of concern in a tax reduction climate.
In a given year, can be difficult to predict how much private money can be raised.

Pros:

Tax credit helps to reduce the cost of giving, may allow a larger individual contribution to a preferred charity.
Very wide choice of charities to give to.
Revenue Canada regulation provides comfort re: accountability for donor dollars.
Helps promote engagement and civic vitality.
Direct relationship with charity.
More control over who gets resources.
Perception of more efficiency (compared with government).
Ability to influence public expenditure.

Cons:

Potential for donor fatigue.
Some public concern about the accountability of charities for donor and tax dollars (some think wrong charities get support, want more control over who gets tax benefit).
Concerns about how efficiently funds are used.

Type of Assistance:

Matching grant.

Description:

Government matches private sector or public contributions to a particular organization or for a particular purpose, possibly up to a pre-specified cap.

Examples:

Very broad range of possible designs, for example:

Canada Foundation for Innovation, in which proponents must find private sector partners before government will participate.
Canada Education Savings Grant - government provides 20 percent "top up" of contributions, subject to caps.
Government sets up and endows a "quasi-charity" for a specific purpose that may seek/require funding from other sources to meet its objectives, e.g., Canadian Policy Research Network.
"Open ended" matching grant as in U.K. for donations over 250: charity applies to Inland Revenue for a refund of tax at the "basic rate" (straddles the border between matching grants and tax assistance).

Matching Grants: Relative advantages and disadvantages from perspective of:

Government

Voluntary Sector

Public

Pros:

Fosters a sense of shared responsibility.
Willingness to share cost indicates a high level of commitment by the partner, and can reduce government expenditure in an area.
Flexibility to choose which causes to support.
Ability to cap individual and/or overall expenditure under the program.
Depending on design, there can be more scope for accountability than under tax assistance.
Can help support government policy priorities.
Can quickly channel resources to a particular cause.
Cons:
Success of the measure can depend on the popularity of the cause, particularly among potential partners.
Pressure to expand eligible lists, caps, and criteria for assistance.
Matching formula can be susceptible to manipulation by recipient organizations (by a notional earmarking of existing or expected donor funds to the activity being supported).

Pros:

Good scope for innovation.
Can help advance important publicly defined social objectives on a shared-cost basis.
Cons:
Favours organizations with high fundraising capacity.
In the case where government sets up a structure and looks to the private sector for donations, can be perceived as competing with the sector for donations. (However, structures can be imagined in which the sector takes the lead and approaches the government for a matching grant - in which case this can begin to resemble project funding).
Pressure to shape services to the requirements of the program (risk of mission-drift).
Perceived or real layers of bureaucracy.
Need to understand/be aware of differing departmental styles.

Pros:

Some awareness that partnering can help advance important social objectives in a cost-effective manner.
Cons:
Some citizens may prefer more or less expenditure on the particular cause, or by different means.
Some segments of the public may think the "wrong" organizations or causes are receiving funding.
Absence of a direct donor/organization relationship can mean less transparency and commitment (but depends on design).

Type of Assistance:

Core funding.

Description:

The government provides funding, on a discretionary basis, to cover the overhead and general operating expenses of an organization. This could be:

a national, government-wide program with standardized criteria; or
a department-by-department variation.
The funding is usually provided in the form of grants, which are not subject to being accounted for or audited.
Examples:

National Voluntary Health Organizations: government provides some core funding to organizations dedicated to finding causes/cures/providing support for victims and their families, for a particular disease.

Solicitor General: continues to provide core funding to organizations that are important to delivery of its departmental mandate.

Core Funding: Relative advantages and disadvantages from perspective of:

Government

Voluntary Sector

Public

Pros:

Allows innovation and response to emerging issues.
Can help some organizations that would not otherwise be viable to exist and to fulfil an ongoing social need.
Flexibility to choose which organizations to support (implies some extent of discretion and control).
No statutory commitment to ongoing support required (but possible).
Can support public policy priorities.
Comparatively low administrative costs.
Provides a rationale for requiring organizational accountability.
Can be good opportunities to leverage funds (easier for the organization to obtain project funding from non-government sources).
Cons:
Support is meant to ensure the existence and operation of the organization, therefore there is little or no scope for results-based accounting (could be voluntary).
Can build dependency on government funds. (This problem can be mitigated by requiring the organization to have other resources. For example, core funding may be limited to 50 percent of costs.)
Once an organization has been funded, politically difficult to discontinue.
Possibility of funding groups critical of government policy in particular areas.

Pros:

Allows innovation and response to emerging issues.
Can help some organizations that would not otherwise be viable to exist and to fulfil an ongoing social need.
Can help existing organizations meet their overhead or general operations costs, thereby allowing a higher proportion of donations to be used directly for service to clients (attractive to donors).
Promotes capacity building.
May obviate need to expend resources on a fund-raising campaign.
More stable than private philanthropy.
Cons:
Vulnerable to major shifts in government expenditure policy (cutbacks, program review).
Applications process may be complex, funding requirements may differ from department to department (may also apply to other types of funding, but to a lesser extent).
Groups may feel limited in the extent to which they may criticize government policies.
Can be perceived as favouring certain groups.
Not offered by all departments for all parts of sector.

Pros/Cons:

Probably not a high level of awareness of distinctions between core, contribution and contract funding.
Some segments of the public may think the "wrong" organizations are receiving funding.
Little transparency and accountability in choice of which groups receive assistance (unless there is a national program).

Type of Assistance:

Contributions.

Description:

A conditional transfer of funds, for a specific purpose, which is to be accounted for and is subject to audit.

Examples:

Women's Program - assists specific projects related to program objectives.
Programs delivered through voluntary sector organizations, e.g., youth at risk programs delivered through local organizations that work with youth.

Contributions: Relative advantages and disadvantages from perspective of:

Government	Voluntary Sector	Public
Pros: Can be an efficient mechanism for "going where governments cannot go." Scope for program or results-based accountability is higher than for core funding. Can provide support for public policy priorities. Cons: Not a means of providing general support to an organization. Administrative costs higher than for core funding.	Pros: Can be a source of funds to accomplish shared (government/voluntary sector) objectives. Cons: Unstable funding. Concern that the amount of the contribution may not contribute adequately to overhead costs. Attempting to fit criteria can put pressure on the organization's mission (risk of mission-drift). Can be perceived as favouring certain groups.	Pros: Some segments of the public may appreciate the greater level of program or results-based accountability for public funds. Cons: Some may prefer that groups they support should receive more funding, and that groups they oppose should receive less funding.

Type of Assistance:

Contracts.

Definition:

The government contracts for clearly defined services from an organization.

Examples:

Any purchase of services or information from a voluntary sector organization.

Contracts: Relative advantages and disadvantages from perspective of:

Government	Voluntary Sector	Public
Pros: Most appropriate in cases where the government has a specific need for information or services. Voluntary sector may have a comparative advantage or specialized knowledge in some areas. Can be an efficient mechanism for "going where governments cannot go." Scope for program or results-based accountability is highest. Can provide some indirect support for public policy priorities. Flexible - can stop and start according to government needs. Cons: Not a means of providing general support to an organization. Comparatively high administrative costs.	Pros: Can be a source of revenue for organizations (after costs). Cons: Unstable funding. Concern that contract price may not contribute adequately to overhead costs. Attempting to fit criteria can put pressure on the organization's mission (risk of mission-drift). No buy-in from donors/supporters. Can be perceived as favouring certain groups.	Pros: The public may view this quite neutrally (i.e., as part of the normal day-to-day operation of government). Some segments of the public may appreciate the greater level of program or results-based accountability for public funds. Cons: Some may prefer that groups they support should receive more funding, and groups they oppose receive less funding.

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