Nonprofit, Low-Profit and Cooperative Models

The nonprofit model has garnered significant attention for its potential to de-emphasize profit-making and to produce quality news. Advocates for nonprofit news suggest that 501(c)(3) newsrooms (named for the part of the tax code that exempts these organizations from some federal taxes) could reorient around the idea of journalism as a public service. By taking the pressure off the bottom line, these nonprofit organizations may be able to invest more fully in newsgathering. While this idea has enjoyed renewed attention in the current debate about the future of news, nonprofit news outlets have existed for quite some time.

One of the most celebrated models is the St. Petersburg Times, which is actually a for-profit newspaper owned and operated by the nonprofit Poynter Institute. The Poynter Institute owns the shares of the Times Publishing Company, which in turn owns the St. Petersburg Times, Congressional Quarterly and several smaller publishing ventures. The paper covers all of its own operating expenses, pays taxes on its profits, and even returns a dividend to the Poynter Institute. Another prominent example is The Guardian in England, which is owned by the Scott Trust. Similar nonprofit models — or for-profit ventures owned by nonprofits — exist in various forms elsewhere, including the Christian Science Monitor; the Manchester, N.H., Union Leader; The Day in New London, Conn.; the Delaware State News; and Alabama's Anniston Star. Other longstanding examples of nonprofit news organizations include Harper's Magazine, The Washington Monthly, Ms. Magazine and Mother Jones.

These successful models notwithstanding, the obvious challenge is transitioning commercial newspapers into nonprofit organizations. Promising first steps already have been made toward tweaking existing laws to encourage such new ownership structures. In March 2009, Maryland Sen. Ben Cardin introduced the Newspaper Revitalization Act. This bill proposes changes to the Internal Revenue Code to allow newspapers to operate as section 501(c)(3) organizations with "educational purposes." Under this bill, newspapers that meet certain criteria could qualify as nonprofit, tax-exempt organizations (somewhat similar to public broadcasters), which in turn would permit them to receive foundation funding and benefit from charitable giving. Having this tax-exempt status would, in theory, encourage charitable donations to newspapers by allowing for tax deductions.

To qualify for tax-exempt status, newspapers would have to publish "local, national, and international news stories of interest to the general public," and serve an educational purpose. Newspapers would still be able to run advertising as long as ad space does not exceed educational content. As Senator Cardin explains in a Washington Post op-ed, although newspapers would not be permitted to make political endorsements under this law, they would be permitted to "freely report on all issues, including political campaigns," and to "editorialize and take positions on issues affecting their communities." The bill would also make advertising and subscription revenues tax-exempt, and contributions to support coverage or operations would be tax-deductible. Senator Cardin's op-ed is perhaps too hopeful that "citizens or foundations in communities across the nation would be willing to step in and preserve their local papers." But Senator Cardin is absolutely correct in stating plainly what is at stake: "Newspapers provide a vital service. It is in the interest of our nation and good governance that we ensure their survival."

Good intentions aside, one question about Cardin's bill is how many newspapers would actually go for this model. The veteran industry analyst Robert Picard has noted that the impact of the bill, implemented in its present form, may be limited. Picard suggests that the bill would appeal to very few dailies and that most neighborhood and community papers will have difficulties complying with its content and advertising requirements. He also notes that "even with tax exempt status, the costs of creation, publishing, distribution of a newspaper probably cannot be covered by many publishers with a 50 percent ad limit, unless they are especially effective at raising charitable contributions over time."

Another general concern about nonprofit newspapers is their inability to endorse candidates. On one hand, this has not been a major area of concern for nonprofit news organizations — they simply advocate for issues without specifically endorsing a candidate — but candidate endorsements are a longstanding tradition at newspapers. On the other hand, nonprofit status could make newspapers vulnerable to critics. It is not difficult to imagine corporations, politicians or political groups that have been offended by a paper's coverage going after that paper by challenging its nonprofit status on political grounds (i.e., complaining to the IRS that the paper is too conservative or liberal or is engaged in some kind of political agenda). In his Washington Post article, Senator Cardin acknowledges some of these limitations, but he argues that benefits such as tax-exempt advertising and subscription revenues and contributions from individuals and foundations might outweigh the restrictions, at least for some papers. "Converting to nonprofit status may not be the optimal choice for some newspapers," Cardin writes, "but this legislation would provide an alternative business model that could help many newspapers keep operating."

Although by no means a panacea to newspapers' woes, Senator Cardin's bill is important because it recognizes many of the fundamental problems facing journalism and carves out an important role for federal policy in responding to the crisis. By introducing this bill, Senator Cardin began an important conversation about the federal government's interest in supporting journalism. However, the bill, which mandates that nonprofit newspapers produce local, national and international reporting, seems to exclude a range of important community and regional newspapers that produce vital reporting but do not focus on international affairs. Additionally, the bill privileges traditional, print-based newspapers over newer online newsrooms, blogs and other forms of Internet journalism. For Senator Cardin's bill to be a truly forward-looking solution to the journalism crisis, it would need to be amended to account for diverse and emerging models of journalism.

One of Sen. Cardin's harshest critics, Slate columnist Jack Shafer, equates the bill to "assisted care," and notes: "If you like NPR and PBS, which are always complaining about being underfinanced, you'd love weakling newspapers cobbling their budgets together from philanthropic donations, foundation grants, membership drives, and (who can't see this coming?) government subsidies." Many detractors worry that the 501(c)3 model presents too many First Amendment concerns and might not even stand if challenged in court. Other concerns focus on the possibility of newsrooms currying favor with their benefactors rather than focusing on the interests of their readers (though one could argue that the commercial press is already doing this). Furthermore, a news organization dependent on charity has obvious vulnerabilities, especially during a time when philanthropies are taking a financial hit. Indeed, these models do not completely insulate newspapers from market and advertising forces. The St.Petersburg Times has been conducting its own round of buyouts and cost-cutting, and is seeking to sell Congressional Quarterly.

Nonetheless, the history of nonprofit news outlets in America and abroad would suggest that some of these concerns are either overblown or easily addressed with the right structures and firewalls. In the end, one of the most important outcomes of these high-profile discussions of nonprofit ownership options may be a shift in public attitudes toward thinking of news media as public trusts that provide crucial public services necessary for a democratic society, instead of merely commodities to be bought and sold on the market.

One compelling alternative to running newspapers as nonprofits is the low-profit limited liability corporation, or L3C. The L3C is a type of limited liability company (LLC), a time-tested, for-profit business model that is organized and operated primarily to serve a charitable purpose, with profit a secondary concern. Although the L3C model has not yet been applied to newspapers, it could be an important new tool for saving not just newspapers, but all newsrooms.

Bill Mitchell of the Poynter Institute explains that L3Cs address "a fundamental conflict of publicly traded news companies: the obligation to increase shareholder value while spending what it takes to provide communities with the journalism needed to inform civic life." Indeed, the L3C promises advantages from both the nonprofit and for-profit worlds. "The L3C is different from a typical nonprofit because it can earn a return, but the social purpose must trump the financial purpose," explains Sally Duros, a former Chicago Sun-Times reporter, writing for The Huffington Post. "The idea of the newspaper L3C is to bring back those journalistic contributions like neighborhood reporting, music reviews and book sections and make them part of the community service. And ads are part of the mix, too."

As a type of LLC, L3Cs are set up to allow for a tiered investment structure in which different types of investment carry different levels of risk and potential return. Thus, the L3C can be organized to allow for a higher return to profit-seeking investors (e.g., institutional investors), and for a lower return to socially motivated investors or "venture philanthropists," whose concept of "return on investment" might include the accomplishment of socially worthwhile ends. Because investors in the L3C need not invest identically, the model is also attractive to private foundations, which are required to pay out at least 5 percent of their wealth annually for charitable purposes. While foundations typically structure these payments as grants, they also may structure them as "program-related investments" (PRIs) that are made by the foundation to advance its charitable purposes. By law, foundations are allowed to make PRIs in for-profit businesses that have a social benefit. In an L3C, PRIs would make up the "junior tier" of investment – the capital at most risk in the venture – providing the L3C with the financial wherewithal to attract substantial additional capital from other investors.

In April 2008, Vermont became the first state to pass legislation formally establishing L3Cs as an official legal structure. Around 60 businesses have organized under the structure thus far in the state. In recent months, Michigan, Wyoming, Utah, North Dakota and the Crow Tribe in Montana have passed L3C laws, and laws in many other states are pending. The creator of the L3C idea, Robert Lang, is working with State Sen. Jim Jacumin in North Carolina on L3Cs that would buy up factories and renovate them with environmental improvements and other efficiencies. The L3C would then lease the factories to struggling furniture manufacturers at a low rate, helping preserve local jobs and support the local economy. The L3C model has also been proposed as a possible option for biotech firms working on public health issues, carbon trading, housing for low-income and aging populations, and broadband deployment. There's currently no federal statute for L3Cs, but Mitchell suggests that "just as many companies around the country incorporate in Delaware, you can register a Vermont L3C almost as easily from Burlington, Iowa, as Burlington, Vt."

However, Lang argues that federal legislation "is essential" for L3Cs to apply broadly to newspapers because "historically, the IRS has not accepted newspapers as nonprofits." In the 110th Congress, Lang worked with the Council on Foundations to promote the federal "Program-Related Promotion Act of 2008." The draft federal legislation establishes a process by which a business — for example, an L3C newspaper — could receive advance IRS approval for below-market foundation investments in the business to qualify as program-related investments. IRS approval would make the business more attractive to foundations as a potential recipient for limited charitable dollars because the foundations would know in advance that their investments in the business would count toward fulfilling their annual payout requirement. The Council on Foundations has made the federal legislation a formal part of its platform for 2009 and is again working with Lang to promote L3Cs at the federal level. At this time, a bill has not yet been introduced in Congress. "L3Cs are an interesting mix of for-profit and nonprofit," says Bernie Lunzer, president of the Newspaper Guild. "This is not a bailout. This is a tool, but you'd still have to have financing and succeed on your own merits."

Whereas proponents of the L3C model see advantages in spreading risk over many nonprofit organizations, businesses and community groups, some observers wonder if L3Cs are best-suited as a short-term strategy while the industry is in flux instead of as a long-term business model. Others suggest that the L3C model has a lot of potential, but that there may need to be accompanying efforts to create incentives for the transition to the new model. Even for private, family-owned newspapers, the prospect of relinquishing control over much of the paper's value and, in some cases, of a family dynasty, can be a deterrent. One possibility, according to Lang, is for owners to split the organization and convert the printing facilities into a separate printing company that provides services under contract, since the L3C model makes owning the actual presses no longer necessary. Lang says, "This is the old industrial model which has held many papers back from being flexible enough to adapt to the information age."

Any proposal for transferring ownership to a nonprofit or low-profit organization may draw strong opposition from creditors, bondholders and investors who helped finance previous deals. In addition, moving into this arrangement may reduce the paper's potential returns and overall marketability. However, given the dire economic future facing newspapers, this last factor may be less of a concern. Sweeteners in the form of significant capital-gains relief, debt forgiveness and other tax breaks could help make the transition to L3C ownership a viable option.

Among those most dedicated to preserving local media institutions — and among those hardest hit by the current downturn — are working journalists themselves. In this light, the interest in employee-owned newspapers is gaining traction in the United States. Without the pressure to satisfy shareholders' desire for higher returns, employee ownership may result in a higher premium being placed on sustaining jobs, preserving high-quality content, and service to the local community. A number of U.S. papers have been worker-owned at some point in their history. A current example is the Omaha World-Herald, the largest daily in Nebraska, which has been employee-owned since 1979. Internationally, employee-owned models include prominent magazines like Der Spiegel in Germany and newspapers like Le Monde in France.

In an attempt to counter the vicious cycle of Wall Street's high quarterly demands on media companies, which often lead to severe cost-cutting and the loss of jobs, the Newspaper Guild attempted to buy a number of Knight-Ridder papers and establish a major chain of union-owned and controlled newspapers when the chain was put up for sale in 2005. Even though those attempts were ultimately unsuccessful, the Newspaper Guild continues to explore models for worker ownership, which might become more feasible if tax and bankruptcy laws were reformed in ways that encourage buyouts of failing papers by parties more likely to serve the interests of local communities (a proposal discussed below).

Another model that provides for partial worker ownership, though it remains controversial, is known as the Employee Stock Ownership Plan. ESOPs can allow for substantial tax benefits, profit-sharing and increased retirement funds for employees. As with employee ownership in general, such arrangements may give workers a greater sense of involvement with news production and the operations of a news organization. But in practice, ESOPs can shift the costs of bad business decisions onto the shoulders of employees. This was the case with Sam Zell's acquisition of the Tribune Co., in which he financed much of the debt from purchasing the Tribune papers by borrowing against employees' pension plans.

Another alternative may be cooperatively owned news organizations. Longstanding models for cooperatively owned businesses include credit unions and farm distribution and processing co-ops. However, the popularity of newer models like grocery store co-ops has introduced the idea of cooperative ownership to a broader population. Co-ops are democratically controlled by their member/owners, and surplus revenues are returned to those members. Like the L3C model discussed above, the co-op structure shifts the mission of the organization away from profit-making toward providing quality goods or services to its members. Four out of 10 Americans are already members of co-ops.

In the media business, perhaps the best-known example of this model is the Associated Press. The AP is owned by 1,500 U.S. daily newspapers, which in turn elect a board of directors that governs the cooperative. With more than 4,000 employees working in more than 240 worldwide bureaus in nearly 100 countries, the AP is funded primarily by news outlets paying for its news content. Another significant cooperative newsroom is Indymedia, which grew out of the global justice movement to create a worldwide network of volunteer community newsrooms (known as Independent Media Centers, or IMCs). Although many of these organizations struggled to sustain themselves on volunteer efforts (some never moving beyond a kind of community proto-blog), a number of notable U.S. IMCs continue to thrive, even regularly producing local newspapers. Nonetheless, there is little evidence thus far that such models could significantly fill the widening gaps left by the collapse of commercial journalism. And even cooperatively run newspapers are struggling in today's economic climate.

Although many of these models, with the exception of the AP, have yet to be established on a wide scale, worker-owned and cooperatively governed media hold promise. Specifically, they may be structured to better avoid the predatory behavior that contributed to newspapers' current predicament. In general, these alternative ownership structures can separate news production from commercial pressures. Combined with a low-profit or nonprofit status, these alternatives to absentee commercial ownership may offer a way to provide quality journalism to diverse local communities. Such alternatives are increasingly attractive as many local papers struggle, and communities across the country rally around saving them.