Monday, April 6, 2009

Predictions for the Year(s) to Come

Every year, around the time of the anniversary of the launching of our web site (April 15, 2002) it has been a tradition for us to reflect on the charitable sector. Looking at the sector as a whole, there are a number of issues that we believe will become increasingly important in the coming year(s). Since we favor top ten lists, I have limited myself to that many. They include:

1. Increased Funding by the Federal Government – This prediction may appear obvious, but the consequences may be less so. Currently, all levels of government (federal, state and local) provide approximately 40% of all funding to charities. Thanks to the economic stimulus package we anticipate this percentage will rise. As a consequence, charities will become more dependent upon what is arguably the least efficient form of funding for them (pays for less than half of a typical charity’s infrastructure costs, while imposing the most onerous reporting requirements).[1]

2. Decreased Funding from Other Sources – Most foundations have seen a major drop in their investments. Most corporations have seen a major drop in their profits. Most individuals have also seen a sizable drop in their net worth. All of this adds up to less money to be given to charities. That is about 20% of all funding to charities (individual, foundation and corporate giving combined). The other 40% (after 20% from private contributions and 40% from government) or so comes from fees for services. This too will suffer as people have less money to buy services (such as tuition, health care, etc.). The only good news here is that individual giving is somewhat recession resistant. In other words, people will give less, but still more than you would expect in bad economic times.[2]

3. Rising Demand for Charities to Provide Information on Their Impact – We estimate that about 10 to 20% of charities are measuring their performance. However, perhaps as few as 2% are not just measuring, but actually showing objectively measurable impact (aka middle to long term outcomes, in our preferred terminology). As money becomes harder to raise, the few who can show their impact will be rewarded and the rest will feel increasing pressure to go down the outcome measurement road. We think this is a VERY good thing to happen!

4. Mergers, Program Closures and Layoffs – Professor Paul Light at NYU has estimated that, due to the economic crisis, approximately 200,000 charities will have to close their doors. We hope that, even though you can’t normally get a Golden Parachute, charity leaders will consider the options of mergers more seriously. Foundations can lend a hand here by funding the costs of mergers. Meanwhile, we have already begun to hear reports around the country of agencies laying off staff, closing programs or closing entirely. We agree with Professor Light that there will be more and probably many more closures. The small silver lining in all of this is that some inefficient charities may go bust or will be acquired by their more efficient peers.[3] However some of the good guys are going to close down too.

5. Scandals As Always, Only More So – The charitable sector is estimated to be around $1.5 trillion in annual revenues. When that kind of money is involved, bad people will inevitably do bad things. The governmental entities that are responsible for policing the sector are understaffed. The regulations available to them are often inadequate anyway. Scandals will continue to bubble up.[4] A bad economy may only increase the reports of scoundrels who line their pockets by perpetrating scams. Since there is not as much revenue to sustain things like Ponzi schemes, more of the scoundrel charities will go bust and hit the front pages. Whereas it is good news that more of these jerks will be found out and charity Board Members may become more vigilant, it is bad news as it further weakens the public’s trust in the charitable sector.

6. Charities Having Problems Filing the New IRS Form 990 – It is estimated that the new IRS form 990, which larger charities must complete on an annual basis, will require 5 times as long to complete. It will entail involving more staff and consultants in completing the form, since the charity will be reporting on entirely new dimensions of their work (governance matters, etc.). We anticipate that many charities will file for the maximum extensions and still get it wrong the first time they fill it out. They will then be required to resubmit the document, causing further delay. As a result, the problem of a lag of time before a charity’s IRS information report becomes publicly available, will only increase. The good news is that this additional information will shed more light into the operations of the larger charities and thereby increase accountability and transparency.

7. A Greater Divide in Opinion Over the Role of Government in the Charitable Sector – As the federal government grows larger and (as noted above in item 1) becomes an even larger funder of certain types of charities, the debate over the role of government in the charitable sector will increase. Since charity staff leadership are predominantly liberal leaning, some of the criticism may be muted (as was the case with the proposed reduction in the charitable tax deduction for the affluent). However, many charity Boards are made up of more conservative individuals. In addition, some participants in the sector (such as those who are managing donor advised funds) have interests and perspectives that are more independent of party affiliation and therefore are likely to increasingly raise the question of what type of role the government should play.[5]

8. Arts, Humanities and Cultural Charities Take A Beating – This category of charities is already starting to implode. We are seeing more reports of bankruptcies, layoffs and cutbacks in this sector than any other. They rely to a great degree on donations from the affluent and from fees for services. When people must chose between them and other types of charities, they often are low man on the totem pole. Hence, they will take a beating.

9. Health Care Charities Remain King of the Hill – We have noted before that approximately 60% of that $1.5 trillion in revenues goes to health care charities. Add to that, the plans for universal health care and over $600 billion in the stimulus package for this purpose and you can see how they are king of the funding hill!

10. Religious Charities Remain Strong – Religious charities get the largest share of private contributions (over $100 billion of the $306 billion total in 2007). As noted in item 2, individual giving is recession resistant. Furthermore, as I have noted elsewhere, I believe in the hierarchy of giving, people prioritize religious charities (especially houses of worship) first. Therefore, I believe they will endure best in these challenging times.[6]

[1] A Horrible Idea From the Obama Administration. The second paragraph of my reaction in item 2 focuses on government funding and its problems.
[2] Is Giving Recession Proof?
[3] Good News in a Bad Economy
[4] Tales of the Dark Side and Ten Ebenezer Charities
[5]
They Don’t Know What We Got
[6] Is There A Hierarchy of Giving?

6 comments:

Heather Carpenter said...

hmmm interesting Gary Groban presented a paper about his predictions of the future of the nonprofit sector at a nonprofit academic conference last Nov. I blogged about it here: http://nonprofitleadership601.blogspot.com/2008/11/predicting-future-of-nonprofit-sector.html

Ken Berger said...

Heather,

I guess five years from now we can see how I did!

steelhorseprophet said...

Hey Ken,

It appears to me from monitoring recent articles that the stormy seas of the global economy coupled with the current US administration's plan to create more government oversight spell troubled times for the charitable sector.

I agree with you that this will have the side benefits of:

1. Causing less efficient organizations to either become more efficient or cease to exist

2. Creating de-facto oversight and accountability among the Big Charities by government and the public sector.

My concern is how these changes will affect the many, many so-called "Local Charities" that do extremely good works and do them very efficiently.

I will use as an example a charity our family supports by the name of Safehouse Outreach in Atlanta, GA which provides many, varied services to the Greater Atlanta Areas needy population of homeless, unwed mothers, inner city troubled youth, substance abuse victims and more. In the past, upwards of 85-90% of their income was funneled directly to the the commuity programs, with very little overhead.

Michael W. Blades

Ken Berger said...

Steelhorseprophet,

I share your concerns that innovative and mission driven charities that are small may not endure these hard times. However, if the charity is largely reliant on individual donors it may have a better chance to survive since these donations are recession resistant.

There is also no harm in looking for strategic partnerships or even a merger with a similar local organization. Small is beautiful, but mid-size is better from a survival standpoint!

Jodi Schoenbrun Carter said...

Couldn't agree more with most of the predictions. Especially number 8.

Had to link this to my blog - and really encouraged people to start paying more attention to what their 990 says about their organization.

http://www.off-stage-right.com/2009/04/charity-navigators-10-predictions-for.html

Ken Berger said...

Jodi,

I read your blog piece on this. I agree with you, that for many nonprofits, they will see little benefit from the changes in federal spending. I also agree that there is likely to be more pressure on nonprofits. Specifically to follow the government's lead on what services should be provided and to whom or what (i.e. environmental issues, etc.).