A Note of Gratitude and a Word of Warning from Nonprofits

Thank you, funders. During the worst of the pandemic in 2020-2021, you pumped out an extra $29.3 billion to support the work of charitable nonprofits. To get money out quickly, many of you tried new processes that proved so successful you continue using them today, according to the Center for Effective Philanthropy’s latest report, State of Nonprofits in 2023: What Funders Need to Know. That report also identifies staffing issues as being “the top challenge facing nonprofit leaders.”

The following article celebrates funders using simplified approaches, explains how the severe shortage of nonprofit employees threatens the public’s wellbeing, and calls attention to a barrage of external forces pounding away at nonprofits, rapidly eroding their financial condition.

Heroes and Angels

Those of you who gave general operating support during the COVID-19 emergency gained hero status among nonprofits. By trusting nonprofit leaders who are closest to the problems, you gave them the freedom to focus on solutions that could drive the greatest impact. Based on my firsthand experiences, general operating support completely transforms the funder-grantee relationship. When funders respect nonprofits and trust we know what we’re doing, it’s no longer a transactional obligation to comply with someone else’s rigid checklist, but a feeling of freedom to do our absolute best in delivering the most meaningful impact.

Meanwhile, some of you earned angel wings by jettisoning traditional resource-depleting grant applications and reporting regimes and replacing them with streamlined applications, multiyear funding commitments, and simplified reporting mechanisms. CEP’s research shows that many of you have retained these improved practices: “In the past year, more than half of the nonprofit leaders surveyed experienced easier application processes and reduced reporting requirements from at least some of their foundation funders” (emphasis added).

Curious what that looks like? Here are concrete examples of reduced requirements from two of our funders this year, each involving large multiyear grants:

• Applications: “Feel free to use a general support proposal you’ve sent to another funder in the last 3-4 months.”
• Reporting: “I am more than happy to schedule a 45-minute conversation in lieu of completing this written report. Also, happy to have you all submit a report you’ve used for another funder that is supporting general operating for NCN.”

CEP’s report focuses on the good news that 52 percent of nonprofit leaders surveyed said that last year they experienced reduced reporting requirements from “some” or “most/all” of their funders. But what about the other 48 percent who reported no changes and may still be enduring over-complicated reporting demands? And even among the 52 percent, there has been slippage, with some funders sliding back to their old ways. Now seems a suitable time to broaden and deepen the improved practices throughout the funding community.

As we at the National Council of Nonprofits consistently point out to governments, their overly burdensome grantmaking and reporting regimes are contributing to the nationwide nonprofit workforce shortage. CEP’s report confirms similar pains with foundations, warning, “Leaders described a range of contributors to burnout, including funder practices that continue to challenge organizations.” The consequence, one leader observed, is that “people… leave the sector — that brain drain hurts our communities.”

Nonprofit Workforce Issues Threaten the Public’s Wellbeing

The CEP report’s second finding is also spot on: “Issues related to staff — including burnout, filling staff positions, and retaining staff — are the top challenge facing nonprofit leaders,” with about half reporting that “staff-related issues were the biggest challenge facing their organization.”

That finding is consistent with two nationwide surveys we’ve conducted at the National Council of Nonprofits. The first, in fall 2021, confirmed the severity of nonprofit workforce shortages and exposed adverse consequences to the public. See Nonprofit Workforce Shortages: A Crisis That Affects Everyone.

Fewer employees mean reduced capacity. When nonprofits can’t secure the workforce needed to provide vital services, people suffer. Data from our surveys and others show that along with increased demands for services, there are longer waiting lists, reduced services, and sometimes elimination of services. When any of those happen, the ripple effects cannot be ignored: communities lose access to food, shelter, mental health care, and other vital services on which people depend.

In April 2023, our networks conducted a second nationwide survey. We’re still analyzing responses from more than 1,600 nonprofit leaders in all 50 states and DC, but it’s safe — and sad — to say that the workforce shortage crisis continues. We’ll be releasing our full analysis soon, but here’s a sneak peek:

• Three out of four nonprofits responding (74.6 percent) reported job vacancies this year.
• A third of the respondents (33.8 percent) reported struggling to fill 20 percent or more of their jobs.
• Vacancies in program and service delivery jobs accounted for three out of four (74.0 percent) of responses. These jobs typically are the staff positions that have the greatest connection with and impact on communities. No staff, no programs.

When asked to identify the major factors affecting their ability to recruit and retain employees, almost three out of four respondents (72.2 percent) said salary competition, two thirds (66.3 percent) indicated budget constraints/insufficient funds, and more than half (50.2 percent) reported stress and burnout.

Frontline nonprofits responding to our survey shared keen observations, including:

• “We are unable to compete with the likes of Walmart, Target, and Starbucks. Our jobs are working with abused and neglected children, it’s hard work. Who wouldn’t want to make more money with less stress?”
• “We need funders to relax on their expectations around salaries. Our case managers need to be paid more to make a living wage but … funders … don’t think case managers should be making so much.”
• “One-year grants affect hiring because job candidates do not want to work for an organization with ’insecure funding.’”

This next detail is admittedly anecdotal, but it’s also profound. Since launching our new website on March 1, our “Dissolving a Nonprofit Corporation” page has been one of the most popular, receiving more than 20,000 pageviews in just four months. In short, nonprofit leaders, employees,  and board members are feeling the stress. Big time.

The State of Nonprofits in 2023 is Far Scarier When Looking at the Full Array of Data

Finally, I find I must push back on CEP’s third finding that nonprofits are doing fine financially: “our data [whether respondents believed their projected budgets for 2022 and 2023 would be balanced, deficits, or surpluses] suggest that nonprofits’ financial performance has been — and is — relatively strong.”

I don’t doubt the data CEP collected from 284 nonprofits with an average of 36 staff members and average budget of $6,707,671 (see Methodology). But that’s not reality for most nonprofits; 97 percent of America’s nonprofits have budgets less than $5 million and 92 percent have budgets under $1 million.

Moreover, assessing the state of nonprofits in 2023 requires consideration of multiple external, objective factors, including this sampling of data points:

1. Nonprofits face increasing workloads due to the public seeking more services

• In 2022, about 70 percent of nonprofits responding to a Federal Reserve survey reported increases in demand for their services, with 43 percent noting a significant increase.
• Earlier this year, the national public health emergency declaration terminated, ending pandemic relief for tens of millions of people. Consequently, the loss of financial supports mean people will need even more services as SNAP benefits have been reduced (affecting 30 million people), Medicaid eligibility changed (cancelling health care insurance for as many as 15 million people), and child care support ends this September, “wiping out 3.2 million slots and $9 billion in annual parent earnings.”

2. Nonprofits face increasing financial pressures: higher costs

• Inflation ate away 13.96 percent of buying power the last two years (7 percent in 2021 and a further 6.5 percent in 2022), but very few foundation grants increased to cover those higher costs. As a CEP survey respondent underscored, “philanthropic dollars are not keeping pace with inflationary pressures.”
• Audit costs have shot up significantly due to shortages of accountants.

3. Nonprofits face increasing financial pressures: deceasing revenues

• Private: Charitable giving by corporations, foundations, individuals, and bequests to support the work of nonprofits dropped 10.5 percent in 2022 when adjusted for inflation, according to Giving USA’s new report. Giving by individuals fell by an astonishing rate of 13.4 percent last year after factoring in inflation.
• Public: In addition to termination of federal pandemic relief, the spending caps set in the recent debt ceiling bill portend reduced federal spending in a few months, which sets the pace for draconian cuts by state and local governments to programs that hire charitable organizations to provide direct services.

CEP’s report draws attention to the power of trust-based philanthropy. As a beneficiary of foundations moving from narrow project grants to general operating support and shifting from time-eating grant application and reporting regimes to more relaxed requirements, I firmly attest to the transformative nature of these improved practices, which proved to be lifesavers during the worst of COVID.

Alone, these improved practices will not fix the nonprofit workforce shortage crisis or erase any of the multitude of external factors challenging the sector. But most assuredly, without them the higher-than-normal attrition of burned-out nonprofit leaders will turn into a mass exodus, making it even harder for nonprofits to skillfully adapt to rapidly changing circumstances.

Tim Delaney is president & CEO of the National Council of Nonprofits, a position he has held for 15 years. Previously, he was a partner at a multistate law firm, state Solicitor General, and founder of a nonprofit promoting ethical leadership. Find him on LinkedIn.