Funding cuts undermine vision for government-nonprofit partnership

The financial crisis of recent years forced many nonprofits to restructure or rebuild their funding streams. Many had to give up donations and grants they’d long relied on, cut staff and services, and create new revenue-earning programs.

Most nonprofits found strategies to help them through the recession and cope with falling funds and rising demands. But now, with the Federal government calling for trillions of dollars in spending cuts over the next decade, it seems the last few years may just have been an opening act for an even larger test of survival.

It’s impossible to ignore the signs that nonprofits are entering a new era of financial reckoning, including the compromise 2011 budget passed last month, the 2012 budget plan, the various 12-year plans to reduce the Federal deficit by no less than four trillion dollars, the first year of baby boomers coming up for Medicaid, and the fact that by 2015 Social Security will be cash negative.

In a compromise over the 2011 budget, Congress and the White House agreed to cut $40 billion from last year’s budget. Across-the-board reductions of 0.2 percent were made in addition to cuts in the arts, community health centers, national and community service, family planning, and many other programs. According to the Chronicle of Philanthropy, “nearly every kind of nonprofit program financed by the government will have to fight to keep the budget scalpel at bay.”

That nonprofits must reconsider their relationship to the Federal government seems altogether obvious, but what does this mean? Some conservative thinkers believe that nonprofit dependence on government funding has always been inappropriate and has kept the sector from developing sustainable levels of private funding. According to the Chronicle, observers such as Howard Husock of the Manhattan Institute for Policy Research propose that the current crisis is an “opportunity” for private donors to pick up the slack.

Given that saving nonprofits was hardly top priority for the country’s wealthy corporations and citizens during the recession, this solution seems far-fetched. On the other hand, the lobby to prevent budget cuts may be just as idealistic. Liberals who believe the government can best serve its citizens by funding nonprofits are calling for aggressive advocacy against the cuts that will undoubtedly burden vulnerable people and communities. But few clear alternatives have been proposed. Any effective plan to save nonprofit funding will necessarily involve detailed ideas for reducing program and administrative costs, not to mention a compelling case for changing tax policy, which never gets much traction.

Perhaps the real battleground is closer to home, where the fiscal outlook may be even bleaker.  Closing the Federal budget gap will entail cuts to already struggling state and local governments, which constitute a huge portion of public spending on human services programs. One quarter of state funding comes from the Federal government, even more in recent years due to the 2009-2010 stimulus package.

Now states are certain to slash their nonprofit funding, especially because most are in a state of crisis over unfunded pension and retirement liabilities. Last week’s Pew Center on the States report described the estimated $1.3 to $2.4 trillion in payout obligations paralyzing state coffers, and how rising Medicaid costs are adding to debt that will certainly put downward pressure on human services spending. And just like at the national level, raising state taxes to increase revenues is an unpopular solution, and not easily achieved due to requirements for legislative super majorities and public voting.

But funding trickles down even further, to the local governments that receive almost a third of their revenues from states. As the GAO reported in its April 2011 Update, local governments are in a precarious position with respect to the rising cost of health care for their workforces and retirees. According to the report, state and local governments can expect that “the fiscal position of the sector will steadily decline through 2060 absent any policy changes.”

Talk of a “new era for nonprofits” under the Obama administration once referred to the President’s ideas for building new government-nonprofit partnerships, expanding social entrepreneurship, and scaling up effective community programs to the national level. Now this new era is looking a lot less rosy. Greater reliance on nonprofits to deliver essential services assumed a proportionate allocation of funds. But partnerships with nonprofits always take a hit when budgets are cut at every level of government, and all the nonprofit innovation in the world can’t make up for a lack of public investment in the work it’s entrusted to do.

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