Show Me the Funding: Where is the Nonprofit Funding Going?

 “Show Me The Funding” Abstract

This paper covers the many financial threats to the third sector and offers explanations for the decline in nonprofit funding, including budgetary cutbacks, decreasing charitable donations, and economic crisis. Solutions to these problems, such as mergers and belt tightening, are explored. Examples of specific cases of nonprofits in jeopardy are provided. Fundamental statistics on fundraising are provided in some cases.

Show Me the Funding:

Where is the Nonprofit Funding is Going?

One of the biggest challenges facing nonprofit organizations today is funding. An increase in the number of nonprofit organizations, changes in governmental funding and decreases in private donations coupled with an increase in “donor-directed money” (Davis, 13 September 2004) and a rise in overhead costs, are resulting in nonprofit organizations struggling to make ends meet. Other factors in their funding decline include scrutiny from the public and government, and declines in foundation and charitable giving. With the ever growing importance in our society of third sector organizations, it leads one to wonder: what is happening to nonprofit funding and what is the solution? Some recent research shows that mergers, budget tightening and basic acceptance of new changes in giving may be part of the answer.

A problem that can arise in nonprofits that may affect public giving is the occurrence of presenting negative images. This does not refer to an individual organization’s image, rather that of the entire sector which can all be harmed, if only temporarily, by one organization’s carelessness. It seems that the public has a difficult time separating nonprofit organizations and would rather lump them together in one big group; so when one nonprofit organizations gets pegged for a wrongdoing, such as a discrepancy in spending or some other type of scandalous activity, the public turns their eyes to all other organizations. With this distrust, less public funding becomes available overall. This threat is becoming augmented, according to David Siebert, administrative vice president at The Alford Group, a nonprofit consulting firm in Seattle, due to the increase in “federal scrutiny of nonprofits, an ongoing IRS investigation of charities’ governance practices” (Tice, October 1, 2004). Recent investigations of the salaries and possible unrecorded compensation, such as gifts and perks not accounted for of top executives in some nonprofits (Schwinn, 2004), may contribute to negativity on the sector’s image.

Though it appears that overall funding is on the decline, many groups are reporting menial increases in funding as compared to previous years. A survey in 2003 by the Association of the Fundraising Professionals found that 60% of U.S and 75% of Canadian charities had an increase or unchanged level of funding in 2002 as compared to the previous year, though the U.S average sat at just 1.4% and the Canadian charities increased at 8% (Wolverton, 2003). Explanations for low increases in charitable giving included at the time, but was not limited to, the impending war on Iraq or a decrease in new donorship and rising competition for dwindling funds.

Cuts in government budgets, including both state and county, are being implemented and are also having a profound impact on nonprofits. In response to its $4.5 billion deficit, the Minnesota Legislature enacted a new budget in 2003 which is taking money out of the bank books of the nonprofits due primarily to the Legislature’s decision to not raise taxes (Scheck, 8 November 2004).

As an increased amount of funds are being used to fix budget deficits in the government and states’ budgets and unemployment is reaching staggering heights, we will likely see an increase in the loss of programs and services provided by the nonprofit sector. This funding loss has many worried due to the increase in services needed during layoffs and government cutbacks (Lewis, February 9, 2003). This loss of jobs by people in the third sector who often times make little money, will potentially be a great strain on the economy. Many people who were working in this industry will now have to rely on programs that no longer have enough staff or funding to carry on their duties. It seems to be a double-edged sword.

Because of state budget cutbacks, nonprofits in Minnesota have been forced to lay off employees. Lutheran Social Services has laid off 58 employees, forcing them to close programs such as a safe house in St. Paul; the Minnesota Council of Nonprofits has laid off 468 people. Services such as those in the chemical dependency and mental health services are also feeling the cuts (Scheck 8 November 2004).

Another leak in the nonprofit funding faucet is caused by a decrease in donations by individual in the form of charitable giving, which is effected by many factors including the health of the economy. Recent studies show that one of the difficulties in fundraising lies in the public’s apprehension regarding the stability of the economy, according to David Siebert of the Alford Group (Tice, October 1, 2004). Audrey R. Alvarado, with the National Council of Nonprofits, states “…uncertainty in the economy and high unemployment rates do not put people in a giving mood” (Lewis, 2003). With the high unemployment rates, the “ballooning state-budget deficits” (Lewis, February 9, 2003) and the war in Iraq, many nonprofits will be worrying about the availability of funding for the next couple of years.

Due to this year’s election, some democrat based charities saw money that donors had earmarked for them in previous years was now being given to politically directed organizations. As one donor reported to the Coral Reef Alliance, “My first priority this year is to elect anyone other than Bush”. Unfortunately while democrat based organizations are feeling the cut, republican groups are feeling little to no change, and in some cases donations have increased (Schwinn 2004).

A growing trend towards donor-directed money or designated gift giving in which donations are allocated for specific programs or organizations, is having a profound effect on the pocketbooks of some organizations in the third sector. According to the Andrea Muirragui Davis in a 2004 article for the Indianapolis Business Journal, this problem is nothing new and it has affected the third sector, all over the country for years. It seems that Davis is not the only one who thinks so. In Washington State “nonprofit experts believe that too many [organizations] are chasing too few available dollars” (Tice, October 1, 2004).

For United Way in Central Indiana, the influx of designated gift giving has been growing dramatically, sometimes causing a fluxion between 20 to 50 percent. In 2003, 20% of their 36.6 million in funding had to be set aside for specific agencies because of designated gift giving, which means less funding for operating costs (Davis, September 13, 2004). With less funding for operations, new budget tightening tactics have to be made or an increase in fundraising practices has to be instilled.

Foundation giving has also been on a downslide as the stock market continues to deteriorate. Research has shown that the value of grants declined in 2002 by some 20.9% as “assets of 9 of the top 10 largest foundations […showed a …] combined loss of $10.3 billion (Wolverton, March 6, 2003). Key service areas, health and human services, are getting hit the hardest by the drain in foundation giving. As foundation assets begin to disperse, they tend to react in much the same way as a nonprofit organization does by instilling “cost-cutting measures [such as] staff reductions, hiring freezes, travel moratoriums” and a decrease in granting (Wolverton, 6 March 2003).

Another enemy of the nonprofit sector is increase in overhead costs, costs such as increases in utilities and benefits. One recent problem is the raising price of employee benefits such as health care costs. According to Rachel Emma Silverman, health care costs are one attraction for job seekers in the nonprofit sector, as it is widely known that the nonprofit sector does not pay well (October 6, 2004).

There seem to be some solutions to the funding problems for nonprofits. When organizations face budget cuts due to loss or lack of sufficient funding, they have to develop strategies to ease them through the squeeze. Often times this includes an elimination of services and programs that do not exactly meet their mission goals, a cut in staffing, or a decrease in employee wages and benefits.

Many organizations appear to be implementing the aforementioned procedure; a group out of Washington called OMB Watch who monitors spending by the government reports that earning by employees in the chartable sector was at a 6 year low in 2003, coupled with a decrease in worker compensation (Jensen, 2004). Sometimes drastic measures have to be taken and the organization is forced to close or merge with another existing organization, which can also result in job losses.

According to an October 1^st article in the Pudget Sound Business Journal, there has been an increase in mergers due to funding losses; for example, in November of 2004, the YWCA of Seattle-King County took over operations of the Seattle Emergency Housing Service due to decreased funding through the King County United Way and a lack of government funding. Of course, a merger does not guarantee success in keeping things together. Sometimes taking on the debts of two groups can have an adverse effect, resulting in the closure of the organization. Take, for example, the closing of the Trust for Jewish Philanthropy, founded in 2000 by the merger of three organizations, the United Jewish Appeal; the Council of Jewish Federations and the United Israel Appeal. Officials state that a key reason was due to budget constraints (Lipman, January 23, 2003).

Though donor directed giving seems initially like a raw deal to nonprofit organizations, they should be accepting this type of gift giving. According to the director of field operations for the Washington D.C. - based National Committee for Responsive Philanthropy, Kevin Ronnie, this type of giving is great because “choice creates a much bigger marketplace for philanthropy…without options, some people walk away from giving” (Davis, September 13, 2004). The downside to donor directed giving is if there are not enough people who feel compelled to give to a certain program, then that program’s existence is in jeopardy.

One way to ease the impact of diminished funding is to seek out new opportunities by increasing fundraising. There are some fundamental problems with this tactic, which include increased time spent seeking the funds which will increase financial output when having to pay someone for the extra time or having to hire a new person to complete the task. So, though an option, increased fundraising may not be at the top on the list.

A final solution to the funding crisis seems to be to hold on for clearer skies. There are reports that donations will soon be on the rise for some organizations, now that the elections are over. A survey by the Chronicle of Philanthropy reports that corporations may be headed towards an increase in donations, due in part to the hypothetical [my emphasis] improvement of the economy (Wilhelm, August 5, 2004).

With state and government spending headed in the toilet and as tightening of the belt for middle class families across the country is becoming the norm, nonprofit organizations are going to have to be increasingly creative in all aspects of their fundraising and budgeting. While the whole situation seems to be darkened with doom and gloom, hopefully the third sector crisis is headed towards an upswing. Time will tell what the future holds for nonprofits; if unemployment regulates itself and the war in Iraq concludes, then there may be a glimmer of hope. In the meantime, nonprofit organizations should explore all opportunities and learn to be more resourceful by exploring new avenues of funding and budgeting options.

---- Works Cited ----

Davis, A. M. “Designated Gift-Giving Frustrates United Way”. Indianapolis Business Journal. 25. A1. 13 September 2004. 8 November 2004.

Jensen, B. “Hiring Stalls at Nonprofit Groups, Study Finds”. The Chronicle of Philanthropy. 16 Issue 22. 2004. 8 November 2004.

Lewis, Nicole. “Clouds on the Horizon.” The Chronicle of Philanthropy. 1 Issue 8. 6 February 2003. 8 November 2004. .

Lipman, Harvey. “Key Jewish Group Shuts Unit, Citing ‘Budgetary Constraints’”. The Chronicle of Philanthropy. 15 Issue 17. 23 January 2003. 16 November 2004.

Scheck, T. “Nonprofits Struggling with State and County Budget Cuts”. Minnesota Public Radio News Online. 5 October 2003. 8 November 2004.

Schwinn, E. “Charities’ Election Defections”. The Chronicle of Philanthropy. 16 Issue19. 2004. 8 November 2004.

- - - . “Big Nonprofit Salaries Face Government Scrutiny”. The Chronicle of Philanthropy. 16 Issue 18. 2004. 8 November 2004.

Silverman, R.E. “Health Care Costs Are Taking Toll On Nonprofits”. The Wall Street Journal. D.13. 6 October 2004. 8 November 2004.

Tice, C. “Merger Spree”. Pudget Sound Business Journal. 25 Issue 22; 1. 1 October 2004. 8 November 2004.

Wilhelm, Ian. “Big Business Doing More for Charity”. The Chronicle of Philanthropy. 16 Issue 20. 5 August 2004. 16 November 2004.

Wolverton, B. “No More Wiggle Room”. The Chronicle of Philanthropy. 15 Issue 10. 6 March 2003. 8 November 2004.

- - - . (2003, April 3). “Talk of War, Economic Woes Heard at Annual Meeting of Fund Raisers”. The Chronicle of Philanthropy. 15 Issue 12. 3 April 2004. 8 November 2004.