Nonprofits and the Economy: Still on the Edge

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Editors’ Note: In the Summer 2003 issue we published a story entitled “The Nonprofit Sector’s Downward Slope: How Steep and How Long?” by Jon Pratt. Lest you believe that the news of an “economic upturn” is likely to upgrade your budget in the near future, we offer this update.

Ayear ago we reported on the triple whammy of recession-induced unemployment and social need; state and federal government cutbacks; and declining foundation giving. A year later we probably haven’t really felt the bottom in terms of the overall economic loss to the sector. Although the economy seems to be recovering, nonprofit budgets continue to suffer from ongoing state budget crises. In spite of recovering assets, many foundations have no plan to increase their giving, leaving nonprofits, once again, “between a rock and a hard place.”

Not surprisingly, hard times have pushed nonprofits to further pursue adaptive and entrepreneurial strategies. “American Nonprofits have become highly entrepreneurial organizations, responding actively and often creatively to new fiscal pressures,” says Lester M. Salamon of Johns Hopkins University Center for Civil Society Studies.1 According to a survey conducted as part of the Center’s Listening Post Project, “Nearly 90 percent of the surveyed organizations reported some degree of fiscal stress over the past year, and more than half described that stress as ‘severe.’ Yet the vast majority of these agencies managed to boost their income, and nearly two-thirds reported increased activity in response to growing demand.” In spite of this “good” news confirming our sector’s adaptability, the study also found that nonprofits faced many significant obstacles, not the least of which was “to pay more attention to survival than to the special qualities that make them distinctive, such as serving those least able to pay.”

So, we made it through the recession—and even managed in some cases to increase our budgets. Are happy days here again for nonprofits?

Long story short, there is at least one major chasm we haven’t seen the bottom of in the form of public sector budget cuts and restructuring. Federal and state monies account for 31% of overall nonprofit revenues (or 21% excluding health care).2
State and federal funding for social programs and services have already been ratcheted down to balance budgets. Funds for mental health, day care, youth employment, and other essential services have been seriously reduced or eliminated to offset deficits and tax cuts, to balance state budgets, and to support increased military spending and increased domestic security costs. On top of these powerful drains on available money, we have the costs incurred through unfunded federal mandates (e.g., No Child Left Behind), and we see increased demand for social services as welfare benefits are reduced.3 However, in the current atmosphere where tax cuts for high-net-worth individuals are being portrayed as a heroic pursuit of the American way, investment in essential services for all but the very wealthy, as well as general spending on social issues will continue to lag considerably behind any general recovery. (Historically, the U.S. has seen a lag between the overall economy and the nonprofit economy, which would suggest that nonprofit fortunes should rebound in a year. See the article in the Summer 2003 issue of the Nonprofit Quarterly for a chart on the lag between the economy and nonprofits). This means that in the near-term, much of the nonprofit sector will continue to be under-funded and overwhelmed.

In spite of 2.8% spending growth in the states, state budgets will continue to face severe pressure in areas that affect nonprofits. According to the Center on Budget and Policy Priorities, a 2.8% increase is not sufficient to support ongoing state services, and many state budgets will require further cuts or increased taxes. The buffers available for previous rounds of budget cuts have now been eliminated. The dramatic cuts required in most states in 2003 were tempered by the use of one-time measures, such as rainy day funds, which have shrunk from 10% in 2003 to about 3% of state budgets on-hand in 2004. With reserves running low, such resources are not likely to provide any near-term relief. Federal fiscal aid will also expire at the end of 2004, leaving the budget gaps for 2005 estimated at $40 billion, with few places to turn.4
On top of this, the federal deficit has ballooned to nearly $500 billion for 2004, leaving little hope for further federal assistance in the already tightly stretched states and communities that depend on state funding, and in the many nonprofits that carry out their programs.

And while the above numbers are significant in and of themselves, it will get worse for the aging baby-boom cohort that will draw heavily on social security, medicare, and other social services in the coming 10-15 years.5 The loss of core nonprofit capacity in this context is a giant step in the wrong direction, to say the least.
Nonprofits have responded to these cuts by cutting staff, finding sources of earned income, and increasing attention paid to advocacy. The Johns Hopkins study found that 56% of the organizations surveyed reported “implementing or expanding advocacy activities at the local, state, or national level,” and 20% reported increasing their advocacy efforts on behalf of clients or their field.6

Additionally, some collective efforts have been launched around the country to document and protest the impact of the cuts. These include efforts led by state nonprofit associations in Minnesota, Michigan, and Maryland;7 and budget-accountability projects such as those by the Center for Public Policy Priorities in Austin, TX, which is documenting the stories from those nonprofits affected by cuts; and the San Francisco controllers office, which is documenting the effects of health and human services cuts.8 Although increased advocacy activity seems to be a reasonable response, the impacts are not yet evident and may, like the nonprofit economic cycle, take two years to be felt.

The mildly positive news on economic recovery, plus a rebound in stock markets has lifted the hopes of many nonprofits and foundations alike that philanthropic giving will bounce back. In fact, the Giving USA 20049 report showed a steady rate of overall giving (with an inflation-adjusted growth of just 0.5%).

Bucking the trend, giving by foundations in 2003 dropped 4.7% (about $670 million) from the 2002 levels (inflation adjusted).10 (Interestingly, in the Johns Hopkins study, the nonprofits that were asked to choose the two most effective approaches in dealing with funding cuts did not include philanthropic funding among the top 10 strategies.) Although a rise in foundation assets has been expected as asset values have recovered, this will not quickly translate into higher payouts. According to a recent survey of foundations, although assets grew (the Standard and Poors Index gained 26% in 2003; the median growth of those surveyed was 9%), most foundations don’t expect to increase their giving, with some noting that assets had not recovered to previous levels. The survey, conducted by the Chronicle of Philanthropy, noted only 46 of 141 funds surveyed expected to increase their giving, while about half planned to keep giving at previous 2003 levels.11

Partially offsetting the drop in foundation giving was individual giving, which contrary to what was expected actually increased by a modest 0.2%, but a significant $4.7 billion, continuing a strong trend from previous years. Bequests increased more than 10% over 2002, contributing another $2.45 billion to offset the drop in foundation giving.12

The immediate impact of some of these changes in giving has been significant for some parts of the nonprofit field. Notably, human services, which receives 7.8% of overall charitable giving, funding dropped by almost 11% from 2001 to 2002, and continued to drop, though not as dramatically, from 2002 to 2003. Health-related giving, which accounts for 8.7% of giving, fell by 3.8% from 2001 to 2002, but recovered by growing 8% from 2002 to 2003. Meanwhile, the largest recipient area of giving, religion, which accounted for almost 36% (about $86 billion) of giving in 2003, continued to show strong growth at a rate of 2%, as it did in the previous year.13

In the longer term, it is unclear whether the changes in charitable giving indicate a short-term adjustment to economic conditions or a longer-term structural change that sees foundations taking a diminishing role in relation to individual donors and bequests. But this is an area to watch, especially in the context of new developments, such as those that connect people to each other and to their causes, locally and via the Internet.

While the immediate economic environment in which nonprofits do their work is not as dire as it was a year ago, the sector is far from where it was just a few years ago and is possibly undergoing a new structural change in patterns of income and giving. If this continues, this shift will bring mixed results for the mission-oriented work that nonprofits exist to accomplish. Considering the state-level cuts noted above, the situation for health and human services areas will continue to be volatile. At their best, nonprofits will use this adversity to tap into individuals in their communities, become re-validated in their missions, and more actively advocate for the well-being of their communities and the sector.

1. Johns Hopkins news release, January 20, 2004. See Lester M. Salamon and Richard O’Sullivan, “Stressed but Coping: Nonprofit Organizations and the Current Fiscal Crisis,” Johns Hopkins University Center for Civil Society Studies Institute for Policy Studies, Listening Post Project, Communique No. 2, January 19, 2004.
2. The New Nonprofit Almanac & Desk Reference (2002), published by Independent Sector and the Urban Institute, p.94. This data reflects the situation in 1997. As of this writing, this is the latest generally available public data on nonprofits, underscoring the urgent need for more government attention to reporting on the nonprofit sector.
3. See “Federal Policies Harming State Budgets: New Report Gives State-by-State Data on Cost of Federal Policies,” Center for Budget and Policy Priorities, This release is based on an extensive study by CBPP entitled “Passing Down the Deficit: Federal Policies Contribute to the Severity of the State Fiscal Crisis,” by Iris J. Lav and Andrew Brecher. Available at:
4. See “States Face Continuing Fiscal Problems: Evidence From Recent Reports,” Center on Budget and Policy Priorities, May 12, 2004. http://www.cbpp .org/5-12-04sfp2.htm.
5. See Sam Zuckerman, “The President’s 2005 Budget: Economists Fear Boomers Will Outstrip This Deficit,” San Francisco Chronicle, February 3, 2004.
6. Salamon/O’Sullivan, “Stressed but Coping.”
7. Michigan: Minnesota: /doc/marchlayoffreport.pdf. Maryland: http://www.mdnonprofit .org/budget_cuts.htm.
8. Center for Public Policy Priorities: San Francisco Controller’s office Web site documenting the effects of budget cuts on nonprofits and social services:
9. Giving USA 2004 is a publication of Giving USA Foundation, researched and written by the Center on Philanthropy at Indiana University.
10. Note that percentages cited in Giving USA data are inflation-adjusted, while actual dollar amounts are not inflation adjusted.
11. See Stephen G. Greene and Ian Wilhelm, “Foundation Assets Recover,” Chronicle of Philanthropy, March 4, 2004. Http://
12. Giving USA 2004. Note: the dollar amounts here and below are in nominal dollars calculated from the Giving USA percentages and current giving levels.
13. Giving USA 2004.