PA 410
Economics for Public Administration
Case #2
PRICING AND FUNDRAISING AT THE
CHILDREN’S MENTAL HEALTH NETWORK
The Children’s Mental Health Network, Inc. (CMHN) is a new nonprofit organization. It is
dedicated to providing affordable mental health screenings to children in a three-state, highly urbanized region. Its four founders and Directors began the organization after many years as
social workers, during which time they saw that children with treatable emotional problems were
left without any intervention, leading to much larger problems down the line.
Like all nonprofits, CMHN faces a complicated set of objectives. First, the organization was
formed for the express purpose of screening as manykids as possible. Second, it has to stay
afloat. Third, being brand new, it would be good to build up a small endowment for special
projects and lean times. All this is an especially difficult balancing act because while you (policy
analyst) understand that NPOs can and do go out of business when costs chronically exceed
revenues, the Directors don’t all understand that all private organizations face this constraint—
even charities.
CMHN, like most nonprofits, has three major sources of income.
• Earned income. CMHN plans to charge some nominal fee for service—they know from past
experience that when a charity gives its services away free, people tend to value the service at
zero. Earned income depends on the demand for the services, of course. Similar services have
faced the following demand:
P $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0
Q 0 250 500 1000 2000 3500 5000 7000 11000 15000 20000
• Private donations from foundations, individuals, and corporations. Donation levels rise with
fundraising expenditures, but at a decreasing rate. The expected relationship is contained in
the table below.
Fundraising
expenditures $0 $2,000 $4,000 $6,000 $8,000
Amounts of
$10,000 and
above
Expected
donations $0 $10,000 $17,000 $21,500 $23,500 $24,000
• Grants from the state. The state funds private nonprofit mental health efforts. The grants are
small and not competitive (if you jump through the hoops, you’ll get the money), but the
application process is long and painful. A basic operating grant is worth $7,500, but takes
$600 in personnel hours to prepare. A “jumbo” grant, worth $11,000, takes about $1,000 in
personnel time to write. Because the state wants to “spread the wealth,” each non-profit
organization can only get one grant (either basic or jumbo) per year.
CMHN’s direct costs for performing services are straightforward. Overhead, which is fixed, is
$10,000. It costs about $5 to screen each individual child, meaning that 250 children cost $1250,
and so on. Notice that, like most social service charities, CMHN can’t make ends meet at any
level of service just on earned income. They must rely on donations and/or grants. Obviously,
2
CMHN can raise neither donations nor grants unless it actually screens kids, so it will definitely
have negative net earned income.
Another aspect to cost is less transparent. It is clear that government grants tend to displace, or
“crowd out” private donations to social service agencies. Studies suggest that CMHN will face a
loss of about 15 cents in private donations for eachdollar gained in state grants. For example,
assuming that CMHN raises both public and private funds, a $7,500 basic state grant will crowd
out $1,125 in donations.
CMHN’s four Directors want you to advise them on their operating strategy. Unfortunately, they
can’t decide on the organization’s objectives.The following descriptions sum up the four
different points of view.
1. Esther is a worrier. Given the fact that the economy is alright at the moment, she advocates
maximizing profits from all sources this year, and socking away the difference between total
revenues and total costs in an endowment fund.
2. Carlos lives in the moment. He advocates maximizing the number of kids screened, even if
that means there’s practically nothing left for endowment. He doesn’t care where the money
comes from.
3. Sylvia is an anti-corporatist, and is uncomfortable accepting private sector donations. Her
vote is to maximize the number of screenings, while not accepting private donations.
4. Joaquin is suspicious about the government role—he thinks it makes organizations soft and
too beholden to government. He would just as soon rely entirely on private contributions.
While not adverse to saving a little, he too is mostly interested in maximizing the number of
screenings.
All 4 Directors agree that the organization must not run a deficit.
Your job is to present four alternative strategies,each of which aligns most closely with the
desires of each Director. Explain the strategies objectively. Write a 2-3 page (total) memo
explaining each strategy. In addition, explore ways in which the 4 strategies might be at least
partially reconciled. Discuss any other issues you deem relevant to the case.
Include the following information:
1. The approximate number of kids screened.
2. The price charged to the clients.
3. Total costs and their breakdown.
4. Total revenues and their breakdown.
5. Money left over to roll into endowment.
You may use a graph or two to explain your economic reasoning (and you must rely on economic
reasoning), but the success of your memo depends most on your logical, clear explanation of each
option.
To keep things simple, only consider prices in integer dollar amounts. As in real life, costs and
revenues under different strategies won’t match up to the penny. Sometimes you have a few
dollars left over, even if you’renot expressly trying to save. That’s OK, think flexibly and present
plans that are as close to each Director’s wishes as possible.