Ryan Rodrick Beiler / Shutterstock.com
There have long been debates about the federal budget as a “moral” document that simultaneously reflects and molds our nation’s priorities. The discussion of morality in the federal budget disintegrates as competing definitions come to the fore: whether it is better or worse in moral terms to have a long term deficit, or whether observers think that specific budget lines comport to their personal or family views of morality. In this Cohen Report, following last week’s review of President Obama’s budget proposal for Fiscal Year 2014, there are no high-minded statements of morality. Rather, we ask what the budget says on a number of variables, often overlooked, critical to building the capacity and productivity of the nonprofit sector.
While nonprofit leadership organizations, for reasons that are increasingly difficult to understand, attempt to galvanize the nonprofit sector to laser-focus its attention around potential modifications to the charitable deduction, this analysis asks what government and society plan to do with, and for, bellwether budget items for nonprofits that address the needs of poor people. It’s that simple.
This analysis is based on the conception of nonprofits as something other than temporary gap-fillers mitigating some of the dysfunctional elements of the private markets. To the contrary, nonprofits reflect values deep in American society about organizations motivated by something other than profit-maximization and multi-million-dollar CEO salaries. Nonprofits deliver what the private markets on their own simply won’t and don’t, and in some cases they partner with private investors to put private capital into productive, socially significant uses. What does the Administration’s proposed FY2014 budget say to Americans about President Obama’s (or President-Obama-plus-his-executive-team’s) vision of what government should do and provide to nonprofits?
Rural Dangling in the Wind
If you were Secretary Tom Vilsack, it must have been tremendously disappointing to listen to President Obama’s State of the Union address this year. The President never mentioned the long-delayed farm bill and failed to even say the word, “agriculture.” Rep. Collin Peterson (D-MN) said that agriculture was “obviously not on their radar screen.” It shows in elements of the President’s rural development budget. Overall, the Department’s discretionary funding is roughly the same as FY 2012, but the strategy is in part taking grant programs and converting them to loans—for example, in water and wastewater treatment—and converting loan programs to loan guarantees, typified by the strategy for rural housing development.
At face value, the rural development budget is slated for $2.28 billion, slightly above the level approved for Fiscal Year 2012. But that minor increase doesn’t undo the 25 percent cut in the rural development mission area since FY2010 or the one-third cut since 2003. Even with the conversion of some programs from grants to loans or loan guarantees, the proposed budget cuts water and waste disposal grants by 23 percent (down $92.5 million) and Section 502 single-family housing direct loans by 80 percent (at $360 million, down $540 million from FY2013, down an astounding $759 million since FY2011).
In other rural development areas, the Agriculture budget takes it on the chin as well. Direct loans for rural community facilities plunge by $700 million when compared to the FY2013 Continuing Resolution, guaranteed loans for community facilities get zeroed out, and economic development initiative grants are eliminated entirely. These are the rural programs that have had nonprofits playing critically important design and implementation roles. Nonprofit development organizations in rural areas have been nothing short of heroic in their attempts to make things happen despite plunging federal resources and unfortunately limited support from private foundations. While Senator Max Baucus (D-MT) may have attracted deserved opprobrium for his collaboration on the Bush tax cuts and his inexplicable vote against minimal gun control background checks, Baucus was a critical Senate voice for rural America in the federal budget and in philanthropy. His recent announcement that he is leaving the Senate simply underscores the budget’s tepid support for rural development.
Retreat from Nonprofit Capacity Building
For rural and urban development nonprofits, one of the nation’s most important resources has been capacity-building money. In the FY2012 budget for HUD, there was $40 million tucked away as capacity-building, $5 million of that sum dedicated to rural housing capacity building, roughly continued at those levels in the FY2013 continuing resolution. For FY2014, the capacity building line —the Section 4 program—is set at only $20 million. Why the cut? It’s hard to say. The Section 4 capacity-building grants and regrants go to nonprofit community development corporations (CDCs) and nonprofit community housing development organizations (CHDOs), with a required match of no less than 3:1, but in practice generate matching dollars at more like 10:1. In the HUD budget justification, HUD cites independent evaluations of Section 4 attesting to a “dramatic increase” in the capacities of CDCs and CHDOs to implement HUD program and other federal programs. So why cut capacity-building by roughly half?
Section 4 capacity building funds go through three national intermediaries: the Local Initiatives Support Corporation, Enterprise Community Partners, and Habitat for Humanity International. Twenty million dollars divided among these three doesn’t compare to the $19.7 million that Enterprise got, the $22.2 million to LISC, and $7.5 million for Habitat in FY2011, or the $25.3 million for Enterprise, $19.3 million for LISC, and just short of $5 million for Habitat in FY2010. Given the required and actual leverage, this program exclusively targeted to nonprofits seems to be a good deal for the nonprofit sector and for HUD, but it gets sliced in half in FY2014 nonetheless. It is important to note that the capacity-building cut is identified in the Obama budget as reducing both Section 4 and rural housing capacity building by half. Add in the $50 million cut from the HOME Investment Partnerships program, a housing development effort that is significantly run through CDCs or CHDOs with opportunities for using a portion of the funds for CHDO operating support and technical assistance, and the capacity-building cut is actually deeper than it first appears.
Capacity-building for nonprofits isn’t made up for in the budget of the Corporation for National and Community Service. Aside from the continuation of AmeriCorps slots, the specific capacity-building lines in the CNCS budget are $49 million more for the Social Innovation Fund (static funding compared to previous years, except for the addition of a new $4 million pilot program to improve SIF grantee access to federal and state administrative data) and $10 million for the George H.W. Bush Volunteer Generation Fund to build capacity for groups to work with volunteers. It would be hard to consider the SIF money capacity-building for nonprofits. By its own definition, the Corporation describes SIF funding as “selecting experienced grantmakers with strong track records of success in expanding the impact of high-performing organizations in improving the lives of people in low-income communities.” It is a scaling-up program for high performing nonprofits, not a capacity-building resource for the vast bulk of community-based nonprofits doing the bread and butter work of service delivery for populations in need.
Actually, the specific capacity-building component of the CNCS budget overall (which the CNCS budget justification explains is focused on two issues: “1) implementation of CNCS’s performance measures; and 2) grantee compliance with statutory, regulatory, and financial requirements,” hardly stunning definitions of building the capacity of nonprofits) was proposed by the Corporation itself for a cut from its relatively tiny $2.008 million annualized level in the 2013 Continuing Resolution to a puny $600,000 for FY2014. While previous TA from the Corporation involved program grants averaging $26,000, the new $600,000 appears dedicated to supporting the consolidation of various online training and TA platforms into a new “National Service Knowledge Network,” featuring an online learning center for AmeriCorps grantees. In our estimation, this looks like money that goes to content and IT consultants, not to nonprofits.
One dimension of the administration’s shortcomings in understanding capacity-building is its apparent confusion of capacity-building and training and technical assistance, often abbreviated in budget documents as “TTA.” The latter, whether through online platforms or workshops or one-to-one consulting gigs, is typically a matter of funding consultants to provide technical information to recipient organizations. Capacity-building as delivered through the Section 4 program, in contrast, provides groups with working capital that they can use to bolster their financials, show organizational strength and heft, and deal with public and private sector investors with some credibility. Without providing grant money for groups, but simply substituting consultant training and advice, the nation is creating smart but broke organizations that won’t have the financial wherewithal to effectively leverage HOME and CDBG dollars, much less other federal programs.
It looks like a small piece of the budget, a $40 million line cut to $20 million. As critics of the sequester have suggested, it might be too little to be noticeable. That is, except for the fact that cutting Section 4 capacity-building funds accompanies devastating cuts in the HOME program, leaving it less than half the size it was at its peak, and in the Community Development Block Grant program, where the formula grant portion of the appropriation is targeted for $2.798 billion—almost $200 million below the enacted FY2012 level, and over a billion less than the $3.99 billion in FY2010.
It is all part of a pattern. Programs that build the capacity of nonprofits to carry the load in the provision of housing and services to low-income households in urban and rural communities get whacked, and the remaining funds are hardly likely to be targeted to nonprofits deprived of working capital and other elements of capacity, not consultant TTA. Just ask the mayors of the CDBG entitlement jurisdictions as they ponder the shrinking CDBG numbers. Do you think that they are going to cut CDBG-funded city government and nonprofit functions proportionally? Or, facing local budget constraints, will they pull back funding out of nonprofit programs? Will they take advantage of the opportunity to use some HOME funds for capacity-building in the form of CHDO operating support, or will they pull that back too? And if HOME gets cut any deeper than it already has been in the Obama budget, will the tiny allocations left for many HOME entitlement communities simply convince HUD to shelve the program as not worth the effort to administer to the 650 participating jurisdictions?
The War on Poverty Dangling
The proposed cut to the Community Services Block Grant program is a pretty obvious frontal assault on a crucial component of America’s nonprofit tradition, history, and capacity. CSBG has long been a core component of the funding of community action agencies, which are mostly nonprofit entities that were created to carry out the Johnson-era War on Poverty. As dispassionate observers of community action history know, the notion that the War on Poverty failed is nonsense. It was underfunded from the start, and made more so by the competing financial demands of a major U.S. war in Indochina. Additionally, it faced virulent opposition from mayors around the country who militated for the creation of “Model Cities” programs that were, unlike community action agencies, much more under control the control of City Hall and not subject to the low-income community governance that characterized CAAs.
Since 1982, the lowest appropriation for the CSBG program was in its first year, $315 million for the major funding source for the nation’s roughly 1,000 CAAs. Its high-water mark was set in FY2009 and FY2010 when the program received $700 million, despite efforts of the Obama Administration to make CSBG a poster-child for the administration’s willingness to eviscerate programs that it ostensibly supported. For Fiscal Year 2013, the Administration proposed slashing CSBG to $350 million, but Congress, led by the Senate, actually increased the CSBG allocation from $677 million in FY2012 to $682 million in FY2013. Somehow missing the hint of continuing Congressional support for community action agencies dedicated, unlike any others, to the poor and very poor, the Obama budget returns to its proposed allocation of $350 million for CSBG in FY2014—and if we recall its prior statements, it might well open up access to CSBG dollars to groups other than CAAs.
The CSBG cut is deeper than it appears. In this part of the Health and Human Services budget, CSBG is linked to two other programs that actually got zeroed out—HHS’s rural community facilities program and its community economic development grants:
Community Services Block Grant
Community Economic Development (CED)
Job Opportunities for Low-Income Individuals (JOLI)
Rural Community Facilities
Fortunately, in the past, Congress has bucked the Obama Administration on its CSBG budget reductions. Why, when even the White House appears to be giving short shrift to community action agencies? Because CAAs have a distinctive function dedicated in service of the poor and very poor like no other category of nonprofit entities. Even though they all differ based on local services, they offer the ability to respond to the multiple, interconnected needs of poor people in their communities. CSBG money, as described by the Congressional Research Service, supports services such as “emergency assistance, home weatherization, activities for youth and senior citizens, transportation, income management and credit counseling, domestic violence crisis assistance, parenting education, food pantries, and emergency shelters…[as well as] information and referral to other community services, such as job training and vocational education.” CSBG is the flexible capital that community action agencies use to craft community-specific responses to local poverty. CSBG is the source of capital for their capacity. The proposed cut does nothing short of rendering the War on Poverty next to impotent.
Legal Services Funding not Reversing the Tide
Another product of the War on Poverty was the concept of legal services for poor people in need of civil legal assistance. To its credit, the Obama budget proposes a $430 million allocation for the Legal Services Corporation, well below the $486 million that LSC had requested, but over $90 million more than the Corporation got in its last official budget in FY2012 or its FY2013 Continuing Resolution amount. If LSC were to get that level of funding, that still is less than half, measured in constant dollars, than its appropriations in 1980 and 1981.
Due to the 3.8 percent cut LSC got in 2011 and the devastating 13.9 percent cut it suffered in FY2012, Legal Services has cut 1,000 staff and closed 30 offices across the nation. The President’s FY2014 proposal is actually $28 million more than the White House recommended for LSC during the FY2013 negotiations over the Continuing Resolution and a reversal of the downward slide since Obama took office. Why the reversal in the Obama Administration’s support for funding LSC? Remember that the 134 Legal Services Corporation offices provide civil legal assistance to low-income people. Despite the purported economic recovery in this nation, the population eligible for LSC services is growing, massively. In 2011, LSC offices closed nearly 900,000 cases covering a range of issues that are hardly likely to decline, given continuing pressures on low-income people due to unemployment and underemployment, housing foreclosures and rental evictions, and issues related to access to healthcare services:
Type of Case
We can only guess at the Administration’s rationale, but it seems to us that a strong justification for an increased LSC budget could be found, not just in the nation’s continuing unemployment and poverty numbers, but in the 2014 full implementation of the Affordable Care Act and the likely passage this year of comprehensive immigration reform. Seven out of ten cases regarding healthcare addressed by LSC offices involved Medicaid, which is the primary mechanism the Obama Administration is expanding and using—with limited success, in some states—to provide health insurance coverage for people earning up to 138 percent of the poverty line. Starting in 2014, we would guess the problems of low-income people trying to get doctors and hospitals to accept Medicaid, especially in states that have rejected the ACA’s call for expanded coverage, will skyrocket. Four out of ten “individual rights” cases in 2011 concerned immigration and naturalization. With immigration reform likely to take millions of undocumented immigrants out of the shadows and onto a long path toward permanent residency and citizenship, the caseload in this area is likely to explode. Given just those two issues alone, it is surprising that the Administration is offering LSC so little. Legal Services offices are a crucial nonprofit bulwark in the War on Poverty. The hard-working lawyers in those offices will find the FY2014 budget proposal far less than the support they need to handle the ongoing and future onslaught of cases that will land on their desks.
Equity in the Tax Code and the Budget
As everyone knew, the President revived his proposal for capping the deductibility of charitable deductions at 28 percent. Though rejected by Congress four times before, it is there again. It is not, however, an assault threatening to end the charitable deduction overall. Rather, it is a cap on a number of itemized deductions for the top three percent of families, returning the deductibility to the level of the last year of the Reagan Administration. According to the budget proposal, it would apply to “all itemized deductions [Note: including deductions for mortgage interest and state and local tax payments in addition to the charitable deduction]; foreign excluded income; tax-exempt interest; employer sponsored health insurance; retirement contributions; and selected above-the-line deductions.” As this review and last week’s Cohen Report demonstration, there is much more in President Obama’s proposed budget than the charitable deduction provision, but it is all but guaranteed that the nonprofit sector’s current focus on sector-wide message discipline will lead most nonprofits to focus on the deduction and not on the direct appropriations.
Regardless of one’s assessment of the impact of the charitable deduction proposal, the statement that the budget proposal implies is that the top three percent of families by income should be expected to maintain their charitable giving if they get a deduction of 28 cents instead of 35 cents or 39.6 cents for every dollar they give to charity. Moreover, charitable giving choices are the choices of individuals. While taxpayers may be incentivized by the deduction to make donations, the specific charities they support and the specific issues they prioritize are determined more or less privately by individual donors. As a means of addressing social needs, charitable gifts, as valuable as they are, stand in contrast to the public, collective decision making around funding priorities and targets as reflected in the democratic process of determining the contents of federal discretionary spending in the context of a federal budget.
In a modification of its previous positions, the President proposed to enact something akin to the “Buffett Rule,” a requirement that millionaires pay no less than 30 percent of their income in taxes. In this formulation of the rule, it is “30 percent of income—after charitable contributions—in taxes.” In both the 28-percent deductibility cap and the Buffett Rule, the President’s budget in no way threatens to undo the charitable deduction. Advocates’ calls for preserving the charitable deduction, as though it were on a list of program rescissions, misrepresent what the President recommends. Whether one thinks that the deduction for top taxpayers should be 28 percent, 39 percent, or something even higher, the President’s budget does not eliminate the nation’s incentive for charitable giving, which has existed in the Tax Code since 1917. His proposal is a statement of tax fairness, challenging the notion that under current tax law, “a millionaire who contributes to charity or deducts a dollar of mortgage interest enjoys a deduction that is more than twice as generous as that for a middle-class family.” Debate the specifics of the cap, but don’t overlook, much less misread, the value statement that explains what the President was trying to achieve in this proposal.
In reality, tinkering with the charitable deduction pales when compared to the effect of closing other loopholes in the tax code that benefit millionaires and billionaires. The Buffett Rule—officially called the Fair Share Tax—is one step, though it doesn’t even fully affect taxpayers with incomes of $1 million. Rather, it is meant to be phased in, so that it isn’t fully applicable until a $2 million income threshold. The budget does offer a modification of the treatment of estate taxes, suggesting an increase in the estate tax from 40 percent, as was established in the fiscal cliff legislation, to 45 percent, but establishing a very generous exclusion of estates below $3.5 million. The budget’s other significant Tax Code change for top taxpayers has the President bumping up against major campaign contributors from hedge funds who were eager to have their income from partnership interests treated as long term capital gains, but the President’s budget does what people on the street knew to be fair, that partnership income (“carried interest”) should be treated and taxed as ordinary income and even subject to self-employment taxes.
Notwithstanding the tightening of some tax loopholes, wealthy people will do just fine. In fact, they have been doing so throughout the recovery. As the NPQ Newswire reported, “Between 2009 and 2011, the wealthiest 7 percent got wealthier by a big 28 percent and the rest of us got poorer by 4 percent… The aggregate 8 million households in that top 7 percent saw their wealth rise by an estimated $5.6 trillion, while the 111 million households in the bottom group had their aggregate wealth fall by an estimated $600 billion.” Perhaps the elimination of the deduction for the contribution of conservation easements on golf courses might pinch some wealthy people on the cost of their club memberships and green fees, but there is little in the President’s budget to put a crimp in the lifestyles of the rich and famous.
Messaging for Nonprofits
The value statement in the budget that we are looking for in this budget is not a moral one, but a sectoral one. There has long been a huge demonstrated value, understood by most Americans, of the role of the nonprofit sector in promoting a just society that cares for the people who are left by the wayside in the private market. Nonprofits are the primary and best mechanisms for intermediating between communities in need and government resources that might help them. It is a demonstrated, evaluated role. In the language of the Obama Administration, it is clearly “evidence-based.” The performance of CDCs and CHDOs participating in the Section 4 program, extensively evaluated by outside monitors and by the federal government itself, has demonstrated the critical role of nonprofits and the importance of nonprofit capacity-building.
It is a disconcerting value statement in the Obama budget that both nonprofits and nonprofit capacity-building are weakened, rather than strengthened, in a number of key program areas. The Administration’s fact sheet on what the budget does for nonprofits highlights investments in “innovative nonprofits,” though emphasizing the Social Innovation Fund’s efforts to scale up strong very strong nonprofits that are already on the radar screens of SIF program regrantmaking partners. It touts the new “Race to the Top” focus on improving college and university affordability (without necessarily having these institutions simply spend from their endowments at rates higher than the less-than-five-percent they currently do), it pitches volunteerism, and it suggests an expanded version of the generally unproven model of social impact bonds or, in the FY2014 budget’s parlance, “pay for success.”
The result may not have been intended, but despite the language of innovation, scale, partnerships, and leverage, the budget does much that seems to weaken the nonprofit delivery system that has been working to address community needs for decades without the hoopla and promotion of social innovators and social entrepreneurs. It is hard to look at the cuts and slashes in Section 4, HOME, CDBG, CSBG, and Legal Services, to name a few, without coming to the conclusion that whatever the budget intended to achieve for nonprofits, specific programs and lines undo those prospects.
If the nonprofit sector has a voice that extends beyond the charitable deduction controversy, it should be heard speaking in volume to the White House and Congress calling for direct outlays that build the capacity of the nonprofit sector to sit at the table with government and business. That isn’t simply a matter of government picking a few winners for scaling up, but helping to build broader nonprofit capacity by strengthening the programs that give nonprofits the capital wherewithal to function with credibility.
Consider this a call to arms of sorts. Nonprofits need to be marching the halls of Congress, not to get members to defend the charitable deduction, which is in no danger of going under, but to sign on to defend programs that address the needs of people and communities that would not be assisted without the service delivery functions of nonprofits. To do that, the budget needs to build the capacity of nonprofits, not bleed them of capital and resources.—Rick Cohen