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Weekly UpdatesIs the wolf at the door, or just passing through the neighborhood? Right now, it's hard to know precisely what the economy's effect on nonprofits and charitable giving will be, but current signs are not encouraging, and it's unlikely the nonprofit sector will escape unscathed.
The U.S. Gross Domestic Product (GDP) is estimated to have declined three tenths of one percent during the third quarter of 2008, a sign economists might signal the beginning of a slide recession, and many other economic indicators are also down. Endowments felt a significant impact from the Street meltdown, and some nonprofits .. reporting increased demands to meet basic needs.
For now, the good news might be that so far nonprofits are not seeing universally bad news. Anecdotally, nonprofits' experiences are running the gamut from real difficulties to banner years. Some nonprofits are reporting record amounts raised so far this year, and others say key donors and funders are stepping up with large or larger than usual gifts to help offset potential gaps in funding from other donors, institutional giving, endowment losses or government cutbacks.
On the other hand, though, many organizations say they're having a harder time raising funds, with some reporting reductions in or more difficulty obtaining foundation or corporate gifts, while others are not seeing that at this point. Some nonprofits are cutting back or delaying capital fundraising and donor acquisition efforts. Many others are preparing contingency plans that can sustain them if giving to their organization declines.
In this environment, it is prudent for nonprofits to plan and prepare for the worst case scenario, and then hope--and actively work--for the best. If you're among the majority of nonprofit professionals wondering whether, when, how and how hard your nonprofit might get hit, watch the overall picture and your local and organizational situations (which may vary for better or worse from national reports), and prepare options for a range of potential outcomes.
What's past is not always prologue, or, as they say in the financial industry, past performance is not a guarantee of future results. But looking at what has happened in previous economically challenging times, examining what is known about the relationship between the economy and giving, and gaining insights into donors' behavior can help nonprofits understand the possible scenarios.
The most important sign to watch is where the stock market (as measured by the Standard & Poor's 500 Index) closes on December 31, 2008 compared to where it closed on that date in 2007. The best indicator of what happens to total U.S. giving in a given year is the change in the stock market at the end of that year compared to the end of the previous year. If the market is down from the end of last year, total giving in 2008 likely will have been negatively affected, and the reverse is also true. A 100-point change in the S&P 500 at year's end equates to at least a $1.7-billion change in charitable tax deductions by households, according to research by Partha Deb of Hunter College and researchers at the Center on Philanthropy at Indiana University.
Interestingly, swings in the stock market at other times during the year historically have not significantly affected overall giving (after controlling for other factors known to affect giving). It remains to be seen whether that pattern will hold this year, or whether the impact might be more damaging, given the huge fluctuations in the stock markets and the fact that they have come late in the year, when many people may have been making decisions about their year-end giving.
The end-of-the-year stock market value, though, is not the only indicator of how giving might be affected. Changes in personal income, changes in tax rates, how much was given in the previous year and other factors all play a role.
A recent report from The Foundation Center examining historical patterns of foundation giving in recessions since 1975 indicates that while the prospect of decreases in giving might vary from foundation to foundation, overall foundation giving probably will not be curtailed as much as nonprofits may fear. Several foundation leaders also have indicated that they will continue to fund their current commitments or in some cases will increase their grant-making to help sustain nonprofits during difficult economic times.
During the past 40 years, total giving in the U.S. declined an average of 1 percent in recession years, according to new research conducted by the Center on Philanthropy at Indiana University for Giving USA Foundation. This contrasts with an average growth in giving of 4.3 percent in non-recessionary years.
Giving remained flat or grew in nine of 15 years that included at least one month of a recession, but fell by an average of 2.7 percent per year in years with eight or more months of recession. The largest drop, 5.4 percent, occurred in 1974 during the Organization of the Petroleum Exporting Countries (OPEC) oil embargo. (A recession, two or more consecutive quarters of negative growth in GDP, has not yet been declared in 2008).
These shifts might not seem dramatic, but they can present real problems for individual nonprofits, many of which are already reporting serious concerns. An October 2008 survey by the Michigan Nonprofit Association and the Dorothy A. Johnson Center for Philanthropy and Nonprofit Leadership at Grand Valley State University found that 90 percent of Michigan nonprofits surveyed said the economy has negatively impacted their fundraising efforts during the past year. Some 50 percent said their Financial/in-kind support declined during the previous 12 months, while 17 percent saw support increase and 33 percent said it had not changed. Looking ahead, 54 percent expected support to decrease for the coming year, with 16 percent anticipating an increase and 29 percent expecting no change.
Every year, even years when overall giving increases, a large proportion of nonprofits report that their organization's fundraising revenues declined from the previous year, surveys for Giving USA Foundation show. In 2005, the best year for increases in this decade, more than one in four organizations saw contributions drop. In 2002, the worst year in recent times, about half of nonprofits said donations fell.
Nonprofits are especially concerned about major gifts now. The number of contributions of $1 million or more made by individuals, which had been on track to equal or exceed 2007 levels during the first half of this year, declined substantially in the third quarter of 2008. It's not uncommon to see the number of large gifts fall in the third quarter, regardless of the economic situation, so it is not yet definitive whether this is part of the normal pattern or a sign of things to come, but the recent decline was rather steep.
Numerous studies have found that people at all income levels are more likely to give and to give more when they feel financially secure, a finding that does not bode especially well for the current giving environment. One bright spot is that a majority of households is likely to continue giving at some level, albeit possibly reduced, even in difficult economic times, according to the Center on Philanthropy Panel Study.
Beyond the impact on individual organizations, how might the big picture questions in the nonprofit sector be affected? What looming changes might be accelerated by the economic situation? What opportunities might it afford?
For example, consider how changes in the U.S. economy might affect the sector's leadership gap. Will recent graduates and people considering a career transition feel they can't afford to pursue a nonprofit position? Or, might people see the needs nonprofits meet and decide to help? Will those who lose jobs in the for-profit sector make a career change or go back to school to prepare to work in nonprofits? Or, will they avoid nonprofit employment at a time when budgets might be down, conditions might be tougher and fundraising even be harder? Perhaps they'll see an opportunity to redirect valuable skills. For example, financial industry professionals knowledgeable about decision-making by people of wealth might choose fundraising careers.
Will the economic downturn contribute to the demise of fledgling nonprofits or those lacking strong management or sufficient investment in effective fundraising? Might it increase nonprofit collaborations and mergers? Would such moves help organizations survive and thrive, or would the economy make mergers harder because of the additional time and resources required at the outset?
Will a possible need to increase government revenues due to a faltering economy bring changes to tax rates or tax treatment of nonprofits and charitable deductions? Will policy makers concerned about nonprofits' accountability further increase scrutiny of the sector and demand that nonprofits do more to prove they deserve certain freedoms or their tax-exempt status? Will it revive interest on Capitol Hill and at the IRS in further regulating nonprofits?
Regardless of what comes, nonprofits must not use tough economic times as an excuse to relax standards or retreat from the gains they have made in increasing transparency and accountability. They must press forward with both, because in a time of scarcer resources donors will be even more discerning about the organizations to which they choose to give, and because it's the right thing to do.
Most importantly, the current economic situation presents a tremendous opportunity. In hard times, people need nonprofits more than ever, and nonprofits' work is more visible than ever. While nonprofits can't make up the whole difference or meet all the needs, this is an opportunity to demonstrate to donors, community leaders, policy makers, the media and the public how vital nonprofits are to communities and to the country, and to show the nonprofit sector's unique leadership.
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