The Nonprofit Sector’s Policy Challenges in the Year Ahead

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The national elections are less than a month away. But regardless of who occupies the White House and Congress come January, the big issues for the nonprofit sector will be looming, requiring nonprofits to speak out, to mobilize, and to make sure that their broad range of diverse voices are not drowned out by a small coterie of large organizations that claim that they speak for the entire sector. This writer was to have made the case that follows at this week’s Illinois Nonprofit Conference, but a United Airlines plane with mechanical problems didn’t stick to the plan. However, due to the magic of Twitter, we can see what National Council of Nonprofits President and CEO Tim Delaney and CForward President Robert Egger had to say, in short form.

Based on the tweets we’ve seen, Delaney told those in attendance: that nonprofits to stop demonizing government and speak up in support of our government partners; that the $56.4 billion in impending sequestration cuts will deeply impact domestic spending and the programs that nonprofits use to serve their communities and constituents; that government doesn’t see nonprofits as employers or businesses, but as volunteers; and that nonprofits must speak up and agitate on public policy issues, including budget issues. As for Egger, our Twitter-based take is that he said: that nonprofits have to put aside their “petty differences” and stand together; that public discourse ignores the nonprofit sector; that social enterprise can “liberate” nonprofits; that nonprofits should free themselves from the government grant cycle; that the hybrid organization is the future; and that nonprofits should be aggressive not just politically, but as capitalists.

Both Egger and Delaney deliver inspirational stemwinders, and this author regrets that he was unable to offer in-person reactions to their ideas on the nonprofit sector’s future policy challenges. While our travel may be restricted by airlines, however, our thoughts are not, so here is our take on the nonprofit policy agenda looking ahead to the lame duck session of Congress after November 6th and the White House and 113th Congress’ work in 2013.

The Nonprofit Sector’s Visibility

Delaney and Egger are both completely on point about how invisible the nonprofit sector is in many public policy debates. We’ve written about the nonprofit sector missing in action in the presidential and vice presidential debates, in which you wouldn’t know that there’s a nonprofit sector—a charitable sector—in the U.S. despite its employing as many as 15 million people, according to the Agency for Healthcare Research and Quality; Independent Sector uses a figure of 13.5 million nonprofit employees. Regardless of the estimate, that’s millions of workers not visible on the national scene, as we noted some time ago when the National Council of Nonprofits pointed out to the Obama White House that its proposed program of health insurance incentives for small businesses entirely omitted the category of small employers that happen to be nonprofit.

Add the 60.25 million people who volunteer with or through organizations—that is, more than a quarter of the U.S. population aged 16 or over—and it is hard to imagine how the nation’s public policy leaders consistently fail to speak to the needs, programs, and sustainability of the nation’s nonprofit sector. A reasonable substitute for “nonprofit” in political debates might be poverty, since it is the nonprofit sector that is on the front lines of addressing the needs of the 46.2 million people living on incomes of less than 100 percent of the federal poverty level ($23,050 for a family of four) and the additional 30 million people with household incomes between 100 and 150 percent of the poverty level, but most candidates aren’t discussing poverty, either.

Political visibility for the nonprofit sector doesn’t mean getting politicians to mouth “I (heart) nonprofits” or to tout how much they’ve reduced their effective tax rate by making charitable donations. Rather, what do the nation’s leaders have to say to the nonprofit sector concerning the policies and priorities that mean something to the role of nonprofits in tending to the needs of the communities they serve and represent? Are politicians afraid to talk about nonprofits serving the poor and working class for fear that they might be labeled as pro-union or as socialists?

Although this discussion is largely absent on the national stage, let’s temper the concept of nonprofit invisibility somewhat and acknowledge that, particularly through many state associations, nonprofits have made a policy mark and been visible on state-level policy debates. In New York State, for example, Comptroller Thomas P. DiNapoli issued a report on the seriously negative impacts delayed state contracts and late payments cause for nonprofit service providers, featuring language that virtually sounds like it was written by a nonprofit state association. In Connecticut, there is now an assumption that the state will always have a cabinet-level nonprofit liaison, with Gov. Dannel Molloy appointing Terry Edelstein to the position this past August.

But to some extent, the states are at the mercy of some federal budget and policy issues, as many state programs depend on federal pass-through funds and larger federal policies. The relative absence of nonprofit discussion at the national level regarding major policy issues unfortunately trickles down through the federal system to the states and localities.

The Impact of Budget Sequestration

Delaney is right on target with his assessment of the impending impact of sequestration, the massive, almost across-the-board budget cuts that will automatically take effect in January unless Congress does something. Maybe Congress will get its act together in the post-election lame duck session, but who can tell? Some Democratic lawmakers, such as Maryland’s Chris Van Hollen and Virginia’s Gerry Connolly are trying to get their congressional peers to reconvene in time to adjust sequestration to include not just spending cuts, but revenue raisers, but the question remains: since some cuts are unavoidable, what will be cut?

While there are some service providers speaking out about the impacts of domestic spending cuts, most sequestration opponents are marching to the drumbeat of protecting the Pentagon from sequestration. Nonprofits cannot fight the impact of sequestration on domestic programs without calling the situation as it is and stating that if there are any cuts to be made, they should be on the military side of the ledger, given that the U.S. military spends more than the five times its counterpart in China and ten times more than the Russian military. U.S. defense spending is roughly the same as the next 14 largest military spending countries combined.

Delaney calls on nonprofits to speak the truth. That has to mean not only putting a “human face” on sequestration. And that entails not only pointing to the impact of domestic cuts on the communities served by nonprofits, as Delaney suggests, but talking clearly about what really ought to be cut—the nation’s military spending—in order to reestablish the right priorities for government.

The Need for Comprehensive Tax Reform

At the same time as the nonprofit sector takes on the impact of budget cuts, it has to gear up for full-fledged participation in the all but inevitable challenge of comprehensive tax reform. The nation’s tax structure is a mess. Working class people pay taxes at rates much higher than most of the wealthy. Where do both presidential candidates agree on taxes? They agree on reducing corporate tax rates, as if corporations leave the U.S. for other countries simply because of corporate tax rates and not because the IRS gives corporations a tax break for the taxes they pay in foreign countries, a perverse incentive for companies to move out of the U.S.—which explains how General Electric, with $10.5 billion in pre-tax profits, had an effective tax rate in the U.S. of negative 45.3 percent.

Comprehensive tax reform has to come, and the nonprofit sector has to broaden its area of tax concern beyond the charitable deduction (and, as prioritized by some leadership organizations, the IRA charitable rollover and perhaps the non-itemizer tax deduction). The fate of the nonprofit sector is not tied to whether the charitable deduction, along with other personal income tax deductions, is to be capped at 28 percent or maintained at a higher level (be it 33, 35 or even 39 percent). The mix of tax deductions, tax credits, tax incentives, and individual and corporate tax rates has to be on the table for a complete overhaul, or else the entire Rube Goldberg contraption that is the American tax system will continue to be bollixed up in a mix that disadvantages working families, allows various categories of the super wealthy to escape at low rates, and leaves the nation unable to pay for its combination of domestic and military needs.

Is the nonprofit sector prepared to jump into the tax reform debate in a way that is broader than simply a laser-like focus on the charitable deduction? Or will it take a sectoral protectionist position on tax reform, unquestionably responsive to moneyed interests and steering clear of broader societal issues that don’t carry an obvious “nonprofit” label?

The Rise of Hybrid Organizations and Social Enterprise

In public policy, the nonprofit sector faces a major credibility challenge, articulated by Egger’s statements about hybrids organizations, profits, and social enterprise. Remember Ralph Smith of the Annie E. Casey Foundation’s concept of foundations becoming “sector agnostic?” He told NPQ, “Many of us believe that foundation philanthropy is at its best when its resources are directed toward pursuing, finding, testing, demonstrating, and promoting solutions for the most pervasive and urgent social problems. In other words, foundation philanthropy is in the solutions business and can succeed only if and to the extent it is willing to pursue solutions wherever it finds them, regardless of whether they are in the public, private, or social sector. As a consequence, the assumed exclusive relationship between foundations and nonprofits has become much less so. Foundations are going to support and invest with a much wider range of partners than in the past.”

Egger is right to suggest that there is a pulse and movement toward hybrid organizations becoming more common and more influential in the future. The pace of states enacting legislation for low profit limited liability corporations (L3Cs) and B corporations is increasing, particularly as governments take symbolic actions to suggest that they are doing something to jumpstart lagging economies. Without impugning nonprofits, we can say very clearly that Egger, Smith, and others are advocating a social change future that relegates public charities to a category of presumed ineffectiveness.

To us, Egger is on the wrong track on this one, and it is a track filled with danger for nonprofits. Both at the state level and at the federal level (with the “social innovation” emphasis within the president’s nonprofit programs at the flagship Corporation for National and Community Service), policy makers are seeing the code word of social enterprise—for-profit social enterprise—as a replacement for a presumably less effective nonprofit sector.

However, no one has clearly suggested why a B corporation is any more socially effective than a corporation that doesn’t pay its dues to the B Lab but is nonetheless committed to community improvement. No one has clearly suggested what, other than market branding, an L3C does that is different than any other limited liability corporation, especially since the main object of the L3C movement—access for foundation program related investments—has not emerged despite the vigorous promotion of L3Cs by the Council on Foundations. In the potential shift from nonprofit venues to hybrid venues for social action, no one has answered how transparency and accountability would be achieved. There’s nothing wrong with profit in the nonprofit sector (remember, it is the distribution and use of profit that is the key question about nonprofit income generation), but to elevate the notion of for-profit business forms with nonprofit social mission language presents a dangerous future for the charitable sector.

The Nonprofit Relationship with Government and Government Funding

Even more dangerous is the notion, which we spy in the subtext of Egger’s Twitter-reported comments, of freeing nonprofits from the government grants cycle. One-third of nonprofit revenues come from government grants and contracts. When it comes to nonprofits serving the poor and disadvantaged, that proportion is undoubtedly much higher. Having been a senior government official, this writer can tell you the public policymaker’s response to Egger’s notion of a future of hybrid organizations that eschew the government grants cycle. It will be a loud “huzzah” as policymakers quickly move to thinking of ways to reprogram their moneys away from the constituencies and needs addressed by nonprofits. The signal would be read by those trying to navigate strangling budgetary problems as a “get out of jail free” card.

Delaney calls for working with government as a partner. That means, in part, welcoming government grants. Fix them? Yes! Deal with delayed payments? Yes! Stop agencies from delaying contracts and assuming that nonprofits will absorb the uncompensated service costs? Yes! But tell government that nonprofits don’t need as much government money as before, that there’s a new form of nonprofit—the social enterprise, profit-making hybrid—that can alleviate government of some of its funding pressures? No way.

The ability of some nonprofits to generate earned income and the access of some nonprofits to foundation and charitable support are extras, embellishments, resources for developing new initiatives and for doing some things that government can’t and shouldn’t—like the advocacy work of both Delaney’s and Egger’s nonprofits. That in no way means getting nonprofits out of the government grants cycle. The government cycle ought to operate better—and should be adequately funded for the right purposes. The nonprofit sector needs a better functioning government with improved payments, overhead allocations, and contracting procedures, but none of the above should be taken as an opening for letting government off the hook.

Heck, that’s the debate occurring between Romney and Obama: how much government and for what purposes? Nonprofits have to be present in that debate—as nonprofits, not as for-profit hybrids positioning themselves as different and better than nonprofits—and should weigh in on what government should do.

The New Operating Environment

Delaney raises another concern that is part and parcel of this: the odd notion of all too many governmental actors that nonprofits are largely voluntary organizations, staffed and energized by volunteers. In the strange mélange of nonprofit programs offered by the federal government’s Corporation for National and Community Service, government has somehow melded social enterprise with volunteerism. It has done so via programs such as Promise Neighborhoods and the Social Innovation Fund, which prioritize and incentivize an emphasis on volunteerism, softening the need of programs for government capitalization as nonprofits bring volunteers to the table.

Nonprofits are now expected to come to the table with resources to pledge. This goes beyond the frequent government notion that underfunded nonprofits will somehow pay out of their own coffers to deliver services even when they are shortchanged by government. Now, to play the game, nonprofits have to come to the table with big money to even be considered for federal programs. The matching requirements of the Social Innovation Fund were a bellwether change in federal programs, one which doubled down on organizations that could scale up and that have access to six- and seven-figure sums of private dollars to pledge. Small nonprofits now regularly complain that they can’t get a seat at the table without having big bucks—or big bucks foundations—to ante up. At the government casino, the $5 and $10 chip blackjack tables are no longer accessible to nonprofits. They have to play with chips of larger value or they don’t get to play at all.

So as we survey the mix of nonprofit policy challenges in the year ahead and beyond, we see the threat of nonprofits being replaced by nonprofit-sounding for-profits. We see nonprofits pressed to rely on volunteer labor (or sub-living-wage stipended volunteerism) instead of adequately compensated professional staff. We see nonprofits required to be of a scale to bring large dollars to federal programs or else they can’t adequately compete. Now combine all of this with the sector’s relative invisibility in the major national policy debates occurring right now and the threat of billions of dollars of federal budget reductions. The nonprofit sector has its work cut out for itself.

  • David E. Henninger

    I agree with Rich Cohen’s comments about the idea that somehow social enterprise is a new way to further surpress the whole scope of why we have a nonprofit sector in this country. The heart and soul of our sector comes out of a tradition of advocacy, commitment to social justice, and playing the role of society’s alter ego when it comes to creating a more equitable playing field for everyone long before the majority of voters are even aware of a given injustice.

    There are some wonderful nonprofits that utilize the ideas of social enterprise to further their mission, but the ongoing need to have government and private sector partnerships in place are just as critical as coming up with social enterprise business models in carrying out most of the critical missions in our social service delivery system. Just as “distance learning” has been a successful tool in educational circles social enterprise can be an excellent adjunct for some nonprofits to consider in their quiver of arrows.

    I agree too that the will of nonprofits to stand up and push back regarding our economic, social and political impact on the whole of this country is critical to our future. All too often I hear the comments about not wanting to offend government/public policy forums for fear that we will be cut off even more in the grant funding game flies in the face of the roots of our sector heritage.

  • robert egger

    WOW….I don’t know which is more shocking to me, Rick… that you are writing about an event that you admittedly missed, or that you are attempting to “spy in the subtext of Egger’s Twitter-reported comments” a call by me to “tell government that nonprofits don’t need as much government money as before, that there’s a new form of nonprofit—the social enterprise, profit-making hybrid—that can alleviate government of some of its funding pressures?”

    Seriously, Rick….I admire you…I dig your keen eye and unflinching call outs…but suggesting subtext, based on tweets made during two different keynote addresses at the Donors Forum gatherings is sloppy reporting (at best) and as silly as Bush suggesting that he could look into Putin’s soul.

    For you readers wondering about this…go to #501CT (the hashtag for the event), or look at my twitter feed @RobertEgger and tell me where you can find me calling for an end to government funding or that social enterprise can (or should) replace nonprofits!

    Dear Lord, Dude….I’ve worked for 24 years in the basement of a shelter trying to insure people are fed, trained, employed and paid….do you think for a second I don’t know the role government MUST play if we are to avoid slipping back into the dark ages?!?!

    I tell you what…I’m in NYC in two weeks, speaking about the same topic at the Human Service Coalitions gathering at Baruch College. Hop on a train, listen to my ideas….THEN write about what you actually hear me say.

  • Laurel O’Sullivan, Vice President of Public Policy, Donors Forum

    Thanks, Rick, for your thoughts. We are sorry that the weather prevented you from joining us. As the association for both nonprofits and philanthropy in Illinois, Donors Forum (at whose Policy Institute and Conference Robert Egger spoke) believes the challenge facing our sector isn’t a Manichean, ‘either/or,’ choice: either traditional nonprofits deliver value and services to our communities OR hybrid organizations deliver them. We know there is more than enough need to go around to deliver the most good, and what faces us is a ‘both/and’ proposition. Both types of organizations, driven by their passion for their missions and a belief that we all connect to something outside of ourselves to improve the quality of life for our fellow man (and woman, and child), have a place within our sector to meet society’s myriad needs.

    While it is tempting to fight one another for diminishing resources, we think we should pay attention to Robert Egger’s larger point: differences between nonprofits must be set aside to see that our missions are met in the most valuable, impactful ways; that our elected officials recognize the scope and breadth of our nonprofit community; and that there is a functioning partnership between the public sector and nonprofits (both hybrid and not) that will serve the public good in a sustainable way. And while we missed having Rick at our Institute, we look forward to this continuing, and energetic, conversation.

  • Holly

    As a Policy Associate for B Lab, a nonprofit that educates people about benefit corporation (described as “B” Corporations by the author) legislation, and works to support mission driven entrepreneurs and investors, I would like to clarify a few points regarding you October 18th article on the challenges facing nonprofits.

    The first point of clarification is regarding your comment that benefit corporations do not do more good than traditional corporations. Traditional corporations are prevented from considering issues other than profit, such as society and the environment if such considerations lower profits. Benefit Corporations are a completely voluntary free market approach that gives directors the freedom to expand their corporate mission to include additional concerns that go beyond solely the maximization of profit. Benefit corporation legislation allows a company and their shareholders to commit to a mission and hold the company accountable while giving social impact investors the clarity and transparency they need to find mission driven companies in a confusing marketplace. Benefit corporations allow C Corps and S Corps to go beyond window dressing regarding their impact on society and the environment and allows them to implement actions such as buying local, paying fair wages and giving higher amounts than average to charities. In fact, rudimentary studies suggest that mission driven companies, such as benefit corporations, donate 10 times more money to nonprofit organizations than the average company.

    Second, to clarify a point of confusion in the article, B Lab, a non-profit itself, is only one of many other third party standards, approximately 12, that benefit corporations can choose to assess their annual qualitative activities. B Lab certifies mostly non-benefit corporations. To clarify, Certified B Corporation is a certification conferred by the nonprofit B Lab. Benefit corporations are the legal entity administered by the state and do not need to be certified or audited by a third party. Additionally, any company is welcome to use B Lab’s B Impact Assessment for free to improve their company’s impact on society and the environment.

    Third, your article suggests that anything not related to profit should be the purview of the nonprofit. However, this point of view only encourages companies to act irresponsibly. It also ignores the fact that equity investors are looking to invest in companies that make money while at the same time do not harm society and the environment. Benefit corporations do not interfere with nonprofits, because they attract equity investments and not philanthropic dollars sought by nonprofits. In fact, the benefit corporation structure is a great model for nonprofit hybrids where an organization has both for-profit and nonprofit components. The for-profit can be structured in a way that attracts equity investment and guarantees all, or a sizable portion of the profits, go to the nonprofit while legally protecting the for-profit arm from shareholder lawsuits. This cannot be done under a traditional corporate structure.

    In conclusion, benefit corporations do not do the work of or replace nonprofits. They are simply for-profit companies that want legal protections to consider society and the environment without fear of a shareholder lawsuit. Benefit corporations can help nonprofits through their tremendous philanthropic giving and through the availability of a new an additional form giving them more methods to sustain their overall mission.

    It is my hope that more nonprofits will look to benefit corporations, as many have already done, as a way to collaborate and improve the world we all share.