Illustration and story by Jack Grauer
The details of how the once-great Philadelphia Inquirer has withered to a brown autumn crisp don’t matter. What does matter is that some smart people figured out how to profit from the newspaper’s failure.
With a few exceptions, most U.S. big-name newspapers like the Inquirer are dead or close to it because they’re no longer profitable. They’re no longer profitable because advertisers pulled billions of dollars out of their print advertising budgets in the 2000s, as media scholar John Soloski and others have shown.
An inch of Inquirer ad space sells for about $40, according to Kantar Media’s SRDS media planning platform. The trade journal Hoard’s Dairyman sells an inch of ad space for $260. Hoard’s last month ran a feature entitled “The Secret of Cottage Cheese.” This comparison isn’t meant to insult dairy farmers or cottage cheese.
As usual with problems impacting non-millionaire communities, snake oil salesmen have appeared with proposed remedies. As usual, the fixes don’t work. The salesmen are, however, selling snake oil.
After layoffs, bankruptcies, mysterious plane-crash deaths and ownership squabbles, the wealthy Gerry Lenfest heads the current Inquirer regime. Lenfest’s regime re-wired the Inquirer and rounded up a group of university administrators and local non-profit heads who now own it. This group was first called the Institute for Journalism in New Media. It was later renamed the Lenfest Institute for Journalism.
Lenfest stuffed the Institute inside a non-profit called the Philadelphia Foundation. More specifically, he put it into the Foundation’s Special Assets Fund. Importantly, he also put 20 million of his own dollars into the Institute’s account and then later doubled that sum.
The new Inquirer ownership can and does use the Philadelphia Foundation’s non-profit status to take donations and enable donors to get tax breaks for donating. This kind of tax break is usually reserved only for donations to non-profits themselves.
But none of this money goes to keep the Inquirer running. A Knight Foundation white paper on the topic explains that the “initial gift — the $20 million endowment — would provide, at most, $1.2 million per year.” The endowment, according to the Knight Foundation paper, “pay[s] for the operation of the institute itself… salaries of the institute’s director and any support staff, and other administrative costs.”
The Institute declares itself to the IRS as a “disregarded company.” According to IRS rules, this entitles it to “exemption from federal income tax, federal unemployment tax, and other federal taxes where applicable.”
So the Institute’s board treats itself like a non-profit organization at tax time. Meanwhile, its members and employees collect their own pay from the money the endowment makes just sitting and accruing interest in the bank. This is called “skimming.”
But as a limited liability corporation, the Institute also escapes many disclosure requirements, paperwork and financial restrictions that apply to non-profits. Interest-skimming, for example, is more what you’d think of as a retirement fund’s job than a non-profit’s. Non-profits ideally concern themselves more with helping the public than enriching principals.
Ever heard of “maker spaces” or “innovation labs”? Well, the Institute has described itself as a “test kitchen.” The argument is that figuring how to make a newspaper profitable qualifies as a public service. It incidentally also happens to produce the skim described above in the meantime. Great.
Some Institute personnel declare zero-hour weeks in their positions, according to Form 990 tax filings from the Philadelphia Foundation’s Special Assets Fund. Others declare 20-hour weeks.
So the Institute pays itself to keep the Inquirer alive as a science experiment. The newspaper’s carcass mills around the Institute’s 801 Market Street lab-dungeon like some tragic, amnesiac monster-servant. Institute scientists experiment on it from a legally detached control room and face none of the financial risk their decisions create.
The logic of a “test kitchen” is that you throw away a test cake if it doesn’t taste good. Like decorations on the failed test cake, the people who make the newspaper — i.e. journalists — get tossed. Chefs live to bake another day.
If by some fluke the Institute’s fake plan works and they hit upon some way to get the Inquirer making a billion dollars a second, the board members can go on publishing happily in academic journals about how clever they are, while their endowment skims grow.
But more likely, the paper will go under for the thousandth time. While grazing income off bank money in the monster-servant’s name, the Institute loses nothing when the monster goes from brain-dead to really dead. It does, however, gain another open operating table.
It’s unlikely the Institute can do anything to actually help the Inquirer. Here’s why.
The Institute declared $19 million in donations last year. By May of this year, it had purportedly raised an additional $26.5 million. Most of that came from either the Institute’s board members themselves, or other foundations to which they’re connected.
Sounds like a lot of money, right? The numbers sound great floating in space. But in context, they’re just silly.
Former Inquirer owners owed $318 million in 2009 when they declared bankruptcy.
The Lenfest promotional material meanwhile does what it can to maximize the large-number sticker shock donations can produce to make things sound okay: $20 million, $40 million, etc.
Keep in mind that big-ticket donations don’t repeat each year. They’re a one-shot thing. And the whole sticker-shock trick can work only as long as Institute board members keep transferring their own money in from elsewhere.
Furthermore, even the big-ticket figures couldn’t cover a single year of operating expenses. Philadelphia magazine obtained internal financial statements that showed the Inquirer franchise cost $226 million to run in 2012. Print ads brought in $78 million that year.
This is a big gap to fill with grant funding. To run the Inquirer for one year on foundation funding alone, the Institute would need to raise more than three times the $71 million in foundation funds all non-profit Philly media outlets combined have raised in the past decade, according to Foundation Directory data.
Lenfest has owned the Inquirer for three years now. What scalable model’s been produced?
All the current regime has shown is that the powered elite can have money that makes more money, and that they can set up endowments and fellowships and give and exchange tax-exempt grants with their friends: not groundbreaking stuff.
The Inquirer went from exposing corruption in local government to a tool the aged wealthy use to shimmy around IRS rules. Philly gets a zombie newspaper instead of a dead one, at least for another few years.
Image caption: The historic Philadelphia Inquirer building almost became a casino after the newspaper went bankrupt. Now it’s set to become police headquarters.
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