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20 Hartford Business Journal • January 18, 2016 www.HartfordBusiness.com EDITORIAL Criminal-justice reforms make economic sense G ov. Dannel P. Malloy had a front-row seat to President Barack Obama's final State of the Union address last week, a perch he earned for enacting many poli- cies viewed favorably by the liberal commander in chief. Whether it's increasing the minimum wage or pushing tighter gun-control laws, Malloy has been on the frontlines of many policy initiatives that have put him on the national stage as one of the country's leading progressive politicians. While some of Malloy's agenda has stoked partisan divide, one initiative that should be supported and shepherded along carefully but diligently is his criminal-justice reforms, which aim to create a "second-chance society" by sending fewer non-violent offenders to prison and better reintegrating ex-cons into society. These reform efforts are not just about social justice. It's also an economic issue. Connecticut taxpayers spend approximately $56,375 annually (including fringe ben- efits) to house, feed and care for each of the approximately 15,580 inmates in the state. The state budget allocates hundreds of millions of dollars each year to fund the Department of Corrections, an expenditure that must be trimmed if Connecticut wants to successfully confront a fiscal crisis that two rounds of tax hikes and countless bud- get cuts haven't been able to fix. There's an opportunity for real savings, as the recent closure of the Niantic Annex prison at the York Correctional Institution shows. Mothballing that facility, which took effect Jan. 9, will save taxpayers about $7.9 million per year, according to Malloy's office. Those, of course, are only direct expenditures on the criminal-justice system. What's harder to define, but potentially more costly to the state both socially and economically, is the effect imprisonment has on our citizens. About 63 percent of individuals who land in prison and are released are re-arrested for a new offense within three years (56 percent are eventually returned to prison). Those who do stay out of jail often run into economic hardship because employers are hesitant to embrace ex-cons, contributing to Connecticut's largest in the nation wealth gap and increased spending on social services programs. To be clear, we aren't advocating for a loosening of criminal laws that allow murder- ers, rapists and other violent offenders to roam the streets freely. A delicate balance must be struck between giving people a second chance and keeping residents safe. So far, Malloy appears to have found that sweet spot through reasonable measures that focus on providing treatment to low-level drug offenders, rather than locking them up and throwing away the key. In December, for example, Malloy announced plans to use one of the state's existing 18 prisons to house inmates between the ages of 18 and 25, to provide them focused treatments and education that hopefully keeps them out of jail when they get older. Other reforms reduce penalties for low-level drug possession charges and establish an expedited parole process for nonviolent, no-victim offenses. Employers can play a role in this process by giving ex-offenders a chance at earning honest pay, however we believe businesses have the right to hire whoever they want. One way the state can make low-level ex-offenders more attractive is by offering a tax credit to employers who hire them. Some of that is already in play. Money, for example, has been allocated for job-based adult education and employment training for ex-offenders in the Hartford area, which will lead to actual subsidized employment. If this initiative proves successful it should be expanded, because society benefits much more from men and women working in or at a machine shop, construction site, or office setting rather than sitting in a jail cell. n RULE OF LAW For-profit charity offers new way to combat poverty By John Horak C onnecticut is blessed with many chari- table foundations, the principal activi- ties of which are to make grants to sup- port various charitable objectives. They can be specific — such as a grant to fund research or to pay for childhood vaccinations — or (my topic) grants to oper- ating nonprofits con- ducting activities and programs designed to ameliorate the myr- iad "social justice" problems that plague parts of the state. Poverty is, generally speaking, the nucleus around which prob- lems orbit. On Dec. 15 of last year, the Connecticut Council for Philanthropy (CCP) issued its 2015 "Giving in Connecticut" report, which asks poignant questions about foundation grant makers. Here are a few: With $4.66 billion invested by individuals and founda- tions in our communities … have we made a dif- ference? Why do we feel comfortable funding the same organizations when no impact has been seen? Why is life not better for children and fami- lies in Connecticut? On Dec. 1, 2015, Facebook founder Mark Zuckerberg turned the phil- anthropic world on its ear when he announced that he would "donate" 99 percent of his Facebook shares to "charity." However, his $45 billion com - mitment did not cre- ate a stir so much for its size (as sig- nificant as it is), but because he committed his wealth to a newly formed limited liability company (LLC), and not to an IRS-approved, tax-exempt foundation of the type discussed in CCP's report. In other words, he pledged his money to the type of legal entity that the owner of a local dry cleaner might use to organize his business. Zuckerberg's move is both a rejection of the traditional philanthropic foundation model, and a $45 billion bet that better results for children, families and communities can be achieved by a for-profit business entity operat- ing with their interests in mind. A step this bold by someone of his stature presents an interest- ing question: Is the traditional grant-making approach to these issues subject to the type of creative disruption that Amazon has hoisted upon retailers or Uber upon the taxi industry? There are legal and philosophical reasons to believe this is the case. First, the tax law (which affords deduct- ible donations and exempt income) severely restricts what foundations can do — limiting the types of investments and grants they can make and prohibiting a controlling interest in a business enterprise. These are a form of cement shoes into which Zuckerberg does not want to place his entrepreneurial feet. LLCs have no burdens of this type, and can be managed as creatively as necessary to pursue Zuckerberg's goals — they can make a grant to a charity, own and operate a business, and make whatever investments will bring the best results. If their property and income is taxable, well, they pay the tax. Second, the IRS has issued rulings that pave the way for using LLCs in a variety of creative settings. Singularly or in tandem with other LLCs or other types of nonprofit organizations they can be assembled, like Lego blocks, into new creative structures — something I am sure Zuckerberg's lawyers have told him. For example, a donor can make a tax-deductible contribution to a LLC that is 100 percent owned by an operating nonprofit; and, similarly, the nonprofits could co-own a LLC with for-profit investors from which both the nonprofit and private interests will derive financial benefit — such as a new or existing business, health- care facilities, or investment real estate. There is IRS guidance, which would support giving employees an incentive equity interest in a LLC owned by a nonprofit. Third, from a philosophical perspective Zuckerberg's decision appears to be a funda- mental shift in thinking about how available resources should be used to address social issues. Contrast these two stories about efforts to revive Michigan's cities. First, in the Jan. 4 issue of the New Yorker, the story "What Money Can Buy" discusses the Ford Foundation's goal of conquering inequality. It said "grant makers know that many of their ideas will not work, and that even those which do will only go so far." The Dec. 28 Wall Street Jour - nal included a piece about downtrodden Pontiac, Mich., which seems to be lifting itself from a bottom thanks to entrepreneurs and developers returning to, and investing in, the city. LLCs are a perfect vehicle to undertake what appears to be happening in Pontiac. A few years ago I was retained by a Con- necticut grant-funded nonprofit with a mission of combatting poverty. It did this by teaching people about available public benefits and help- ing them apply for them. I walked away from the project thinking that the organization was really a poverty perpetuation agency, as I had thought that a better way to fight poverty would be to invest in, or help create wealth and job-creating enterprises — which seems to be what Zuckerberg has in mind. Finally, for some time now the term "social entrepreneurship" has been bandied about as a means of combining for-profit operations with traditional nonprofit goals — though the term is ill defined and has generated more motion than traction. Having said that, Zuck- erberg has, at least, made a big move in this direction and established LLCs as the entity of choice for those venturing onto this turf. Connecticut's philanthropic foundations and social entrepreneurs should take note. n John M. Horak has practiced law at Reid and Riege P.C. in Hartford since 1980. HARTFORDBUSINESS.COM POLL Should CT have spent $145 million or more to keep GE? ● Yes ● No To vote, go online to HartfordBusiness.com. Last week's poll results: Should the state provide financial support to Hartford's baseball stadium? 14.1% Yes 85.9% No John Horak OPINION & COMMENTARY ▶ ▶ Is the traditional grant- making approach ... subject to the type of creative disruption that Amazon has hoisted upon retailers or Uber upon the taxi industry?