Even the most well-managed and adequately supported NFPs face challenges in the current post-recession era.
Throughout American history, not-for-profit organizations (NFPs) have added considerable value to our quality of life. Just try to imagine Peoria without its hospitals, the American Red Cross, the Human Service Center or Lakeview Museum, or without the pioneering efforts of institutions like the John C. Proctor Endowment Home or IPMR.
But in today’s post-recession era, financial challenges to NFPs are many, and the future is problematic for all but the finest among them. A financially well-managed NFP will have engaged governance, realistic budgeting and sound fiscal controls. The adequacy of its financial support will be dependent upon implementation of a persuasive “case” to prospective donors. But there is also a role for public policies that get resources into the hands of NFPs. This article describes the primary sources of revenue for NFPs and identifies a pending public policy that would stimulate the voluntary use of private resources and give taxpayers an additional reason to be donors.
Fickle Funding
All revenue sources have become highly variable. They include: operating income (e.g. fees for service); returns on investment; grant proceeds (from primarily governmental and foundation sources); and private donations. Each of these sources has been dramatically affected in recent years. Operating income has declined as NFP customers are impacted by recessionary forces. The demand for service is still there and, in some instances (e.g. food banks), has increased substantially as a result of the economy. But the ability to pay has declined.
Meanwhile, investment income has been adversely impacted by the significant decline in interest rates. NFPs tend to be conservative investors, often relying on low-risk investments that are now providing unusually low returns. Of course, many NFPs do not have portfolios, but for those that do, this source of funding has diminished. Grants from governmental and foundation sources have also declined for the same reasons. Governments are struggling to find cash and foundations have less to distribute.
Private donations have also declined. The recession caused Americans to reduce donations to charity by 10.6 percent in 2007 and by nearly another 14 percent in 2008. While some charitable giving has been restored (an increase of 3.8 percent in 2010) as the economy has slowly improved, giving levels remain below the amounts established in earlier years.
The Third Sector
Public policy has a role to play in the financial success of NFPs because these organizations represent a substantial portion of our economy; they are arguably more efficient than other sectors of the economy, and experience shows that Americans respond favorably to financial incentives. NFPs have an established position in the U.S. economy, ranking as the “third sector” behind profit-making ventures and government.
The Urban Institute reports that the nonprofit sector has grown steadily in the United States, both in size and financial impact, for more than a decade. Between 2001 and 2011, the number of NFPs increased 25 percent from 1.25 million to 1.57 million, with a growth rate surpassing that of both the business and government sectors. In 2010, not-forprofits contributed products and services that added $779 billion to the nation’s gross domestic product, representing 5.4 percent of total GDP. Nonprofits are also a major employer, accounting for nine percent of the economy’s wages and over 10 percent of jobs in 2009.
Like most commercial activity, NFP growth is attributable to increases in both supply and demand. But, unlike most commercial activity, there is an unusual convergence in these forces. Demand comes in many categories: people who seek an education, spiritual support, healthcare, artistic expression, etc. Supply is complementary, and includes people who want to educate others, heal their spirits, heal their bodies, engage their souls, and beyond. A peculiar serendipity exists in these “mission-driven” enterprises. Unlike government and for-profit sectors, NFPs leverage volunteer support and passion. Some may view NFPs as an alternative way to deliver a valuable social service without imposing an unpopular tax, forming an unwieldy bureaucracy, or having to earn a return on investment for an investor. NFPs often get the job done better, faster and cheaper.
In the Public Interest
Since 1917, U.S. tax policy has rewarded taxpayers for making charitable contributions. In effect, the federal government has foregone tax revenue by allowing deductions for charity. As a nation, we have determined it is in the public interest that people support missiondriven not-for-profit organizations.
In 2006, we took this policy a bit further. An amendment of the tax code likely spared many NFPs during the recession that hit a few months later. The adjustment allowed taxpayers, age 70½ and above, to withdraw funds from their IRAs without tax or penalty, for the purpose of making contributions to charity. The withdrawals were significant, and the impact on NFPs and their services was substantial. Although the policy was extended twice, it expired in December 2011.
The budget and tax debates in Congress during this session (and in this election year) will likely include further consideration of the IRA charitable deduction. Indeed, bills have been introduced in both the U.S. House and the Senate that would not only extend the deduction but expand it. The proposed legislation has bipartisan support and is being called the “Public Good IRA Rollover Act.” It provides, among other things, that the previous deductible limit of $100,000 per year be eliminated, allowing unlimited deductions, and IRA owners as young as 59½ will be allowed to use their IRA accounts for these taxbenefited contributions.
Collective Support
Most would agree that the NFP sector offers considerable value to our lives. Some would argue that the voluntary redistribution of wealth accomplished by charitable giving is a laudable goal unto its own. Others find value in funding the dreams and aspirations of those of us who seek to improve the lives of others. Still others are moved by stimulating volunteerism, community development, artistic expression and more. A recovering economy, efficient financial management and supportive public policy developments offer assurance that these things will continue to happen.iBi
