In its recent report, Bracing for a Downturn: Nonprofits, Charitable Deduction Worries, and How Foundations Can Help, the Center for Effective Philanthropy (CEP) uncovers nonprofit and foundation leaders’ thoughts about the potential impact of new tax legislation on the nonprofit sector.
The predictions that reduced charitable giving (by as much as $20 billion of the approximately $400 billion in annual donations from individuals) and less tax revenue could lead to fewer government contracts for nonprofit services are understandably scary to the nonprofit sector and the funders that invest in it. This single tax law could potentially be a one-two punch to the revenue streams of nonprofit organizations.
While that potential is concerning, I actually found much opportunity in CEP’s report.
First, it’s important to note that about 15-20 percent of all of the money flowing to the nonprofit sector comes from individuals, whereas less than 3 percent comes from foundations (and about a third comes from government). So foundations (which have a relatively small piece of the nonprofit funding pie) simply would not be able to counteract a downturn in individual or government revenue. For example, a portion of nonprofit leaders in CEP’s report suggest foundations provide more unrestricted support in the wake of this tax law change. If more unrestricted foundation funding became a reality it would certainly be a positive change for the sector, but it would have a much smaller impact than several other opportunities I see.
In my opinion, the true opportunities uncovered by CEP’s report lie in nonprofit and foundation leaders working together in three particular ways.
Building More Sustainable Nonprofit Financial Models
As a consultant to nonprofit organizations, I see on a daily basis that financial sustainability is a ubiquitous challenge in the nonprofit sector. Nonprofit leaders are rarely afforded the luxury of investing in the training, planning, and talent that will grow their financial models. Perhaps the changes to the tax law will provide the impetus that the sector needs to finally start adequately investing in building effective and sustainable financial models. Indeed, in CEP’s research, 39 percent of foundation leaders were interested in investing in nonprofit fundraising and financial capacity building, and many nonprofit leaders cited that kind of support as necessary. If the foundation community at large followed that lead and made the capacity-building investments required to build more sustainable financial models for their nonprofit grantees, it could grow the sustainability of the sector.
Growing Foundation Advocacy for Nonprofits and the Nonprofit Sector
Most interesting in CEP’s report was the fact that 36 percent of nonprofit leaders see an opportunity for foundation leaders to broadly endorse the value of nonprofits and the importance of their work, while 0 percent of foundation leaders cited this opportunity. I would argue that this discrepancy might stem, in part, from the fact that foundation leaders don’t recognize how valuable their position of influence could be to the nonprofits they support. Foundation leaders are by definition in positions of power and influence, running in circles with others who often also have power and influence in their communities. Because of this position, foundation leaders have the opportunity to speak up — in a way that nonprofit leaders cannot — about how our society must support the nonprofit sector and the tremendous value it provides.
Creating More Networked Nonprofits
Building on this opportunity for foundation leaders to be more vocal and public about their support of nonprofits, I think there is another opportunity, but one not surfaced in CEP’s research. I believe there is tremendous opportunity for foundation leaders to use their positions of influence to work strategically to help build the networks of nonprofits. I can’t tell you how many times I have witnessed nonprofits with a great mission, but limited access to key influencers. Such access could increase these organizations’ ability to achieve their missions. In fact, research shows that networked nonprofits “achieve their missions far more efficiently, effectively, and sustainably than they could have by working alone.” Foundation leaders can use their privileged positions to connect their grantees to people and organizations that can help move their mission forward. In a time of uncertainty, these networks could be critical in ensuring nonprofits are able to continue their vital work.
Call me an optimist (you wouldn’t be the first!), but I see tremendous opportunity in what many see as a blow to the nonprofit sector. Perhaps a shock like this — the potential of a dramatic decrease in certain nonprofit revenue streams — is just what the nonprofit sector and the foundations that fund it need in order to significantly alter business as usual. Perhaps this will be the catalyst to a more financially-savvy, sustainable, networked, and valued nonprofit sector.
Nell Edgington is president of Social Velocity, a management consulting firm that helps nonprofits chart a strategic direction, achieve financial sustainability, and become more confident leaders. She also writes the Social Velocity blog. Follower her on Twitter at @nedgington.
Bracing for a Downturn: Nonprofits, Charitable Deduction Worries, and How Foundations Can Help is available for free download here.