Center for Non-Profits: Chronic Under-Funding of Non-Profits An Unacceptable Risk

April 13, 2016

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The Center for Non-Profits has just released its New Jersey Non-Profits 2016: Trends and Outlook report, highlighting the findings from our 2016 annual non-profit survey.

2016AnnualSurveyRptCover_1700x2200The full report lays out in detail the ups and downs experienced by non-profits during the previous year, and their outlook for 2016.

Here are the major highlights, based on the 311 New Jersey non-profit respondents from late January/early February 2016:

  • Nearly three-quarters of responding organizations reported that demand for services had increased during the past year.
  • Nearly four-fifths expected demand to continue rising in 2016.
  • Only two-fifths reported receiving more total funding in 2015 than in 2014, but nearly two-thirds reported that their expenses had increased during the same period.
  • Over one-third (35%) reported that expenses exceeded support and revenue during their most recently completed fiscal year; the proportion was even higher (44%) among larger organizations, those with annual budgets of $1.5 million or more.
  • Seventy percent expected their total expenses to increase in 2016, but fewer than half (47%) expected total 2016 funding to increase.

If you’ve seen our previous surveys or if you work regularly with non-profits, these findings may sound like variations of a familiar theme. You may even think that they’re better than during the worst of the recession – and that’s true. But if you care about the well-being of the non-profit community and non-profits’ ability to provide vital programs and services, these numbers should generate deep concern.

Why? Because the findings show the continuation of a long-running trend that threatens the sustainability of non-profits at a time when our communities need them more than ever.

Chronic Under-Funding Puts Non-Profits at Risk

JengaComposite_LMCThe disconnect between rising demand and lagging resources has been occurring for years, and has been well documented in national surveys and studies as well as those conducted in New Jersey by the Center.

And for years, experts have warned about the risks of ignoring organizational infrastructure needs, and the perils of skimping on these essential investments.

The problem, quite simply, is that this disconnect is not sustainable. If we continue to add to non-profits’ workloads year after year without providing the resources to meet the increased needs, the inevitable result is a steady erosion of critical support systems and structures.

The consequences of such chronic under-funding can be disastrous. To see how, you only need look to New York and last year’s collapse of Federation Employment and Guidance Services (FEGS), a $250 million/year social service organization with 1,900 employees serving 120,000 individuals and households annually. A recent report by the Human Services Council lays out the roots of FEGS’ collapse in detail. Although there were clearly some circumstances that were unique to FEGS, the underlying systemic problems that precipitated FEGS’ failure were years in the making and strikingly similar to those identified by the Center for Non-Profits and our allies in New Jersey, and by national advocates. These include:

  • Government contracts that failed to cover the actual costs of providing services, requiring non-profits to find ways to fill the gaps, whether through private philanthropy, by subsidizing the government through other means, or by foregoing essential organizational or personnel needs.
  • Wasteful, burdensome government paperwork, reporting and monitoring requirements that sap organizations of scarce resources that could be devoted to better purposes.
  • Late payments or delayed contract paperwork.
  • Failure to sufficiently involve provider organizations in planning and policymaking decisions.

This under-funding of non-profits is not new, and it’s hardly unique to government-funded organizations. For far too long, too many policy makers, government agencies, funders, donors and “raters” have told non-profits that devoting resources to institutional infrastructure is inappropriate. Instead of working in partnership with organizations to define real measures of success, too many still rely on the program vs. admin/fundraising expense ratios that even their proponents admit are inadequate (but still persist in using), or they propose legislation designed to prop up these meaningless standards. They cap indirect costs at 5-10% (if they allow them at all) when national studies suggest that 25%-35% or higher is more realistic. They believe, mistakenly, that charities aren’t contributing to the economic well-being of our municipalities, and seek to tax charitable property, scolding charities for “not paying their fair share.”

Non-profits continue to transform lives and lift up communities in the face of extraordinary challenges, tackling these and many other obstacles with professionalism, competence, intelligence, dedication, passion and creativity.

But these obstacles, whether imposed deliberately or unintentionally, place a huge strain on the ability of non-profits to meet continuously escalating needs. And if we, who work in and care about non-profits, allow this situation to fester, we are complicit.

We perpetuate the problem:

  • when we continue to accept contract or grant conditions that are untenable and unsustainable;
  • when we boast that “100% of your donation goes to program” (while neglecting to mention that the other costs have to be covered somewhere);
  • when we silently endure years, if not decades, of flat funding while the mandates placed on non-profits continue to grow;
  • when we perpetuate artificially low compensation structures that force talented people to seek careers elsewhere;
  • when we cannot invest in planning, technology, outreach and facility upgrades, and
  • when we do not speak out, vocally and frequently, about what is needed for success.

If we fail to act, we are putting charitable missions, and the public interest, at risk.

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What can be done?

Fortunately, there are steps that can, and are being, taken by leaders, champions and allies within the non-profit community and our partners in government, philanthropy, and business.

  • Tell the story. As non-profit champions, it’s up to us to improve understanding about non-profits, and to debunk the myths and misconceptions that still permeate opinions about our community. We need to remind government and for-profit leaders, current and prospective donors, the media and the public, about what non-profits do to make our economy and our society strong. If we don’t do it, no one else will.
  • Fund the real costs of non-profit work. The chronic under-funding of non-profits has serious consequences for the communities and causes that depend on us. For non-profits, it means ensuring that our budgets reflect full costs, and presenting full-cost budgets to our funders. For funders (public and private), it means acknowledging the consequences of chronic under-funding and working with non-profits and philanthropic colleagues to tackle the problem together. For all of us, it means sustained communications and education.
  • Focus on the questions that matter. As non-profit blogger Vu Le often points out, few people walk into a restaurant and refuse to eat the meal because they spend too much on electricity. When government contracts with a construction company, they don’t ask if they’ll be using any of the money to pay for tuition reimbursement for their employees. Let’s keep the focus where it belongs: on mission, meaningful results, and the well-being of the causes we serve.
  • Reform the government contracting system. The broken government grant and contracting framework is not a new phenomenon, and many efforts to fix the system date back decades. Thanks to persistent advocacy efforts by the National Council of Nonprofits and others, significant national progress has been made with the OMB Uniform Guidance and in other quarters. But much more can be done. Here in New Jersey, numerous common-sense changes can improve efficiencies and yield significant benefits.
  • Make it easier for New Jersey non-profits to generate revenue. Several bills, some with bipartisan sponsorship, are pending in the state legislature, to promote charitable giving in New Jersey by creating state-level giving incentives. Other initiatives are in exploration to modernize the games of chance framework. We should explore these and other mechanisms to help charities generate the funds they so desperately need to do the work.
  • Keep the conversation going and stand together for change. Our 2016 report isn’t the beginning of this dialogue, and it’s certainly not the end. We do hope that it will encourage a heightened urgency among non-profits, funders, board members, policy makers, and other allies to work together to address the challenges and opportunities we face.

Let’s work together to reverse the tide of chronic under-funding, remove the needless barriers, and create more opportunities for success. There’s too much at stake to hold off any longer.

36fa43eLinda M. Czipo is executive director of the Center for Non-Profits, New Jersey’s statewide umbrella organization for the charitable community.  Through advocacy, public education, technical assistance and cost-saving member services, the Center works to build the power of New Jersey’s non-profit community to improve the quality of life for the people of our state.