A new report from the National Council of Nonprofits, titled Nonprofit Impact Matters: How America’s Charitable Nonprofits Strengthen Communities and Improve Lives, examines the state of the nonprofit sector. As NPQ has noted many times, the sector has expanded rapidly since the middle of the 20th century. Indeed, a little over a year ago, citing data from an article by Colin Burke in Nonprofit and Voluntary Sector Quarterly, we observed that the sector has grown from 0.9 percent of gross domestic product (GDP) in 1945 to 5.4 percent by 2015.
That’s extraordinary—even if a good portion of that growth reflects the ballooning of the nonprofit hospital sector. Part of the reason for the growth in nonprofits, we suggested, had to do with the shifting of government responsibilities onto nonprofits, a shift that, we noted, has often allowed Democrats to “claim victory for preserving social programs while Republicans could claim victory for limiting the role of government.”
But that’s not the only driver of growth. Independent of government action, as market failures abound, nonprofits increasingly step in. For example, responding to the rapid demise of the commercial market for local newspapers, our own field of nonprofit journalism has grown at an astonishing pace; “nonprofit newsrooms have been launching at a pace of more than one a month in the US for almost 12 years,” according to a recent report. The same report points out that the total number of nonprofit outlets in the field has more than tripled over the past decade.
Nonprofits are also increasingly found in other unexpected places, such as the grocery industry, and to preserve local cultural institutions, such as video stores. We are even seeing nonprofits making headway in the pharmaceutical industry. All told, the Council of Nonprofits report indicates that the number of nonprofits nationwide has increased by 819,000 to 1.425 million since the start of the century—a not-too-shabby increase of 75 percent. Not so long ago, Jennifer Hinton, writing in NPQ, even dared to imagine a world in which nonprofits become the dominant form of business, an idea that has also been raised in NPQ by Douglas Rushkoff.
Alas, not all growth is the same. And, indeed, increased sector size does not necessarily mean greater sector strength. If nonprofits take on more social responsibility—and the government contract dollars provided to nonprofits fail to adequately support the added services nonprofits are charged with delivering…well, you can see where this might cause a strain on the system.
The new Council of Nonprofits report touches on both sides of the dynamic—that is, both the growth in the size of the sector and the growing difficulty many nonprofits have in meeting their (ever-increasing) responsibilities.
In terms of size, the report, drawing on Internal Revenue Service data from 2016, outlines some very impressive numbers. The number of nonprofit employees is now 12.3 million and nonprofits have a total payroll of $826 billion. The number of people who serve on boards or otherwise volunteer for nonprofits is 64 million. In short, roughly one in four Americans over the age of 18 volunteers in some way to support at least one nonprofit.
Of course, not all nonprofits are alike, either in size or values. For example, of the nation’s 1.425 million nonprofits, only 6,423 are hospitals—less than one half of one percent of all nonprofit establishments. However, those same 6,423 hospitals employ at least a third of all nonprofit employees. We know from a study published earlier this year by Johns Hopkins University, which drew on the same data set, that seven in ten employees of nonprofits work either in the health or education sectors. Nonprofit hospitals and universities alone are close to half of all nonprofit employment. This means that the nation’s 13,000 nonprofit hospitals and universities have nearly as many employees and as much revenue as the remaining 1.4 million-plus nonprofits combined.
Does this matter? In some ways, perhaps not. Minimally, one thing that all nonprofits share is an ownership structure that legally mandates that any generated surplus must be reinvested within the sector. This is significant. One does not have to believe that Ivy League colleges and large nonprofit health systems are exemplars of virtue and democracy to recognize that having a growing percentage of the economy that cannot be bought or sold is an important development. This is why anchor institutions can be important players in local development, even if the potential to use their economic power to benefit local communities is often not realized.
For its part, the National Council of Nonprofits labels nonprofits “economic engines” that not only create 12.3 million jobs directly, but “also create work opportunities for millions of individuals above and beyond the millions they employ directly,” spend nearly a trillion dollars in goods and services, spur additional economic activity through the services they provide, and help to attract additional employers.
But in other ways, the differences between such massive eds and meds and the rest of the sector are highly meaningful. One can see this by taking even a slight glance at similar divergences within the for-profit sector. For example, both the local corner store and Amazon are clearly for-profit businesses, but their impact on local communities and economies is quite different.
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So, similarly, it would be good to know whether—and to what degree—data from large eds and meds obscure trends that might be more visible if these nonprofit behemoths were cast aside, at least occasionally, for the purpose for more nuanced analysis.
For example, one report finding is that nearly half of all nonprofit income is earned (another 32 percent is from government contracts, five percent from miscellaneous sources, and the rest donations from a range of sources, including both individual donors and foundations). But the report itself acknowledges that a “huge chunk” of earned revenue “goes to nonprofit hospitals (think insurance payments for heart surgery or delivering a baby) and higher education (tuition, room and board).” What does the picture look like when this “huge chunk” is removed?
NPQ has often pointed out that different types of nonprofits have vastly different business models, just as is the case with different types of for-profit businesses. As Kathleen Reardon, CEO of the New Hampshire Center for Nonprofits, remarked not long ago, “there’s no one typical nonprofit in how it is funded.” For its part, the National Council of Nonprofits agrees that, “There is no standard revenue mix, no one-size-fits-all formula.” What this year’s report fails to do, however, is to explain how the revenue mix varies depending on industry.
Deeper understanding of these nuances is important, because a lot of expectations are placed on the nonprofit sector. Indeed, the Council of Nonprofits’ report names the following as sector-wide traits:
- Nonprofits are building blocks of democracy.
- Nonprofits are where Americans come together to solve problems.
- Nonprofits are laboratories of leadership.
- Nonprofits are promoters of civic engagement.
There is certainly some truth behind each of the above claims. At NPQ itself, we envision “a world in which we live in an active democracy whose values are fully grounded in human rights, economic and social justice, racial equity, and thriving communities. Our mission is to foster an active, engaged, and sometimes disruptive civil sector.” But if nonprofits are growing like gangbusters and are building blocks of democracy, then shouldn’t democracy in the US be deepening rather than fraying?
The Council of Nonprofits’ report does identify what it considers four leading sector challenges. These are: 1) many nonprofits strain to meet increasing public needs; 2) policy proposals at all levels of government threaten the work of all nonprofits; 3) worrisome trends have been developing regarding charitable giving; and 4) there is a continued lack of diversity, equity and inclusion.
Regarding the first point, the report cites data that finds that as of 2017, human needs were estimated to be higher in three quarters of the states than a decade before, despite significant sector and economic growth. The main policy development highlighted in the report is the 2017 tax bill, which, by raising the standard deduction, reduced the tax incentive for middle class donors to give; this, as the Council of Nonprofits’ report notes, adds to a pre-existing tendency of declining giving among small and medium donors. The report has relatively little to say on diversity, equity and inclusion, but the Council’s website itself does identify many useful resources. The report concludes with a call for advocacy—pointedly noting that while all nonprofits are legally entitled to engage in some lobbying activity, less than three percent actually do so.
The report, the first of this kind from the National Council of Nonprofits, will hopefully not be its last. Perhaps later versions will disaggregate data to provide a clearer picture of the diversity of the nonprofit sector. One report weakness beyond limited disaggregation, however, is the assumption of a commonality of interest among all nonprofits. For example, the report squarely opposes payments in lieu of taxes (PILOTs), because it views these as quasi-taxation of large nonprofits (mostly universities and hospitals), and the Council opposes all such taxes. But the revenue that PILOTs raise often supports the very human needs that the same report indicates are being funded inadequately.
It seems, minimally, that the benefits that nonprofits receive (e.g., exemption from local property taxes) should bear some relationship to achieving the lofty goals, like being “building blocks of democracy,” that the Council of Nonprofits ascribes to them. So, for example, if a nonprofit university admits more students whose parents are in the top one percent than students whose parents are among the bottom 60 percent of income earners—as is the case at 38 prominent institutions, including five Ivy League schools—do we think that is building a more democratic society? And, if not, what should the sector be doing about that?
Earlier this year, Ruth McCambridge wrote in NPQ that a core value of the nonprofit sector involves taking “responsibility for the shared means of collective well-being—the commons. Some of that responsibility lies with government, of course, but too often government fails at the job of protecting or even noticing the margins or the requirements of a fair, just, and free society in future generations; for that, we have the civil sector in which to organize ourselves.”
Advocacy is indeed required. But so too is accountability. As the sector grows, it should not surprise us that abuses are also more common. As McCambridge points out, while the “assumption that nonprofits work to benefit the public” may be strongly held, “with enough carelessness over a long enough period of time,” that trust could be put at risk. The point, in short, is not just to defend the nonprofit sector—critical though that is—but to ensure that we have a nonprofit sector that is worth defending.
