Will a New Non-Profit Structure Help Philadelphia’s Newspapers Survive?

January 12, 2016, 7:31 PM UTC
Photograph by Hachephotography/Getty Images/Flickr RF

There’s a somewhat cruel joke that says all newspapers are non-profit—it’s just that some are non-profit by choice and others have it forced upon them. In Philadelphia’s case, the man who owns both of the city’s major newspapers and its main news site has chosen to try and blend the for-profit with the non-profit in an unusual structure. But will it work?

On Monday, H.F. “Gerry” Lenfest—the 85-year-old sole owner of the Philadelphia Media Network, which consists of the Philadelphia Daily News, the Philadelphia Inquirer and Philly.com—announced that he has created a new non-profit, and has handed over ownership and control of the newspapers and website to it.

Lenfest built a cable empire in the 1970s and ’80s, and sold it to AT&T in 2000 for $1.2 billion. He and a group of Philadelphia businessmen bought the Philadelphia Media network in 2012 for $55 million, but an ownership dispute followed, and Lenfest ultimately bought out the other partners for $88 million in 2014 to become the sole owner.

The new organization Lenfest has created is called the Institute for Journalism in New Media, and it is essentially a subsidiary of the Philadelphia Foundation, a non-profit created in 1918. Lenfest has pledged $20 million of his own funds to the institute as an endowment, but noted in an interview with Fortune that “we are going to have to go out and raise a lot more than that” to keep the papers going.

Philadelphia’s newspapers have a somewhat torturous history. Owned by Knight-Ridder at one time, they were sold off when McClatchy bought Knight-Ridder, and a group of local businessmen acquired them for $515 million. That venture ultimately went bankrupt in 2009 and was taken over by a group of banks and other lenders for $139 million and then sold to Lenfest’s group in 2012 for just $55 million.

The news about the charitable re-organization of the Philadelphia Media Network sparked some interest in media-industry circles—perhaps in part because mid-size metropolitan newspapers across the country are also trying to find ways of increasing their funding—but also a certain amount of skepticism.

The actual organizational structure that Lenfest and his partners have created is somewhat complex. The for-profit companies that run the two newspapers and the website will now be owned by a “public benefit corporation,” which is a designation companies can choose that makes it clear they have other goals than just making money.

This corporation will be run by a trust, whose directors are the same as the PBC. The Institute, meanwhile, is a limited-liability corporation or LLC, and will be able to receive donations via a tax-exempt affiliate of the Philadelphia Foundation. Its directors include Sarah Bartlett, dean of the graduate School of Journalism at the City University of New York and Steve Coll, dean of the Columbia University Graduate School of Journalism.

Philadelphia Media Network

Although the Institute technically owns the Philadelphia Media Network, Lenfest said the non-profit will not control the business operations of the newspapers and the website. That will continue to be the responsibility of the management team and the Philadelphia Media Network’s board. According to the agreement:

“The editorial function and news coverage of PMN shall at all times remain independent of the institute, and the institute shall not attempt to influence or interfere with the editorial policies or decisions of PMN.”

A Philly.com story about the announcement said that the new entity would be unable to transfer funds to cover the Philadelphia Media Network’s operating expenses or to pay for deficits and losses. Financial grants to the papers and website must be specified in an agreement that sets out the specific journalistic use of the funds.

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The bottom line, Lenfest says, is that the newspapers and website will remain for-profit companies under this new arrangement, but will have greater access to donations and other philanthropic financing methods. While charities can donate to for-profit companies (as the Ford Foundation has to the Washington Post and Los Angeles Times), those donations are not tax deductible. As Philly.com described the benefits of the new structure:

“Benefactors can give money to the institute to be used for specific reporting efforts and journalism projects and undertakings. For instance, a donor could give money to the institute to endow an investigative-reporting team or support coverage of the city schools, the same way givers now endow professors’ chairs at universities and musicians’ seats in orchestras.”

The idea of a for-profit news organization being owned by a non-profit foundation isn’t common, but it’s not unheard of either. The Guardian in Britain is controlled by the Scott Trust, a non-profit that provides funding to the newspaper—funding that comes primarily from the more than $800 million that the Trust got from selling its stake in the Auto Trader group in 2014.

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The Tampa Bay Times in Florida is also owned by a non-profit, the Poynter Institute for Media Studies, which was set up in 1978 by the Poynter family. Lenfest told Fortune that the Poynter setup was the closest thing to the Philadelphia structure, and was driven by the same motivation—to preserve local journalism. “This is the most impactful thing of anything I’ve done in philanthropy,” Lenfest said.

The crucial question for Philadelphia’s newspapers now—and for any other newspaper thinking about a similar arrangement—is where will the future funding for the for-profit company come from? The trust structure may make it easier for the network to get donations and other charitable gifts, but someone still has to come up with that money—as the Tampa Bay Times and Poynter have already reinforced with their own troubles.

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