New study outlines unprecedented financial risk to many nonprofits

Across the United States, more than 1.5 million nonprofit organizations engage in remarkable work to transform lives, communities and the planet. Unfortunately, these organizations currently face a wide range of growing pressures.

Consider these facts:

  • In 2013, nonprofit organizations employed more than 10.6 percent of the workforce (14.4 million). More individuals are employed by nonprofits than by the national defense, construction, real estate and space research industries combined.
  • In 2014, the nonprofit sector contributed $937.7 billion to the U.S. economy (including wages and salaries) — comprising 5.4 percent of the nation’s gross domestic product. Among the 199 nations tracked by the World Bank, nonprofits would rank as the sixteenth-largest economy.
  • In 2014, more than 25 percent of the U.S. population volunteered for a nonprofit.

Nonprofits face financial challenges

An important new study finds that half of U.S. nonprofits are at risk financially — facing inadequate cash reserves, negative income margins and technical insolvency.

The Financial Health of the United States Nonprofit Sector: Facts and Observations was published in January 2018. Conducted by Oliver Wyman, SeaChange Capital Partners and GuideStar, this comprehensive study examines the Form 990 tax filings of more than 219,000 U.S. nonprofits.

Only larger nonprofits (with revenues above $200,000 or assets above $500,000) are required to file a Form 990. Regardless of their size, churches and other places of worship are not required to file Form 990s.

The new study reached some worrisome conclusions about the health of this segment of the nonprofit sector, including:

  • As many as eight percent are technically insolvent, with liabilities exceeding assets;
  • Thirty percent face potential liquidity issues, with minimal cash reserves and/or short-term assets that are less than short-term liabilities;
  • Thirty percent have lost money over the last three years; and
  • About half have less than one month’s operating reserves.

It is likely that the vast majority of smaller nonprofits, with even fewer resources, face even more significant challenges.

Federal tax law threats

In a further threat to the nonprofit sector, the recent changes in federal income tax laws are expected to reduce the number of taxpayers who itemize deductions from the current 30 percent to only the wealthiest five percent. As a result, giving in 2018 alone could fall by $20 billion.

The five percent who will still itemize tend to focus their giving on big institutions like universities and hospitals. They give less to local, social service and safety-net nonprofits. Historically, smaller nonprofits have been supported by middle-class donors – whose tax incentive to give has been eliminated.

Plus, the newly increased estate tax exemption wipes out any tax incentive for all but the wealthiest 1,800 Americans to make donations at death. This change is predicted to reduce giving by additional billions.

Donors can take action

 The report lists several actions concerned philanthropists can take – a number of which I have addressed in previous columns. These include:

  • Provide adequate funding for overhead;
  • Provide more flexible, less restricted, funding;
  • Create a rescue fund for strategically important nonprofits (see, e.g., Open Road Alliance launches new loan fund, Open Road Ventures);
  • Encourage nonprofit restructurings, closures and/or mergers; and
  • Create different types of funding pools, such as program-related investments, loans and social impact bonds.

Assessing a nonprofit’s management’s financial sophistication, understanding its revenue sources, learning about its fundraising strategies, evaluating its cash position and exploring opportunities for alternative revenue creation can help donors maximize the efficacy of their contributions.

Small and mid-size nonprofits work in every community: caring for returning soldiers, educating children, enabling workforce training, providing healthcare, assisting the elderly, supplying food and housing, elevating the arts, mentoring youth, protecting the environment — and so much more.

With most nonprofits faced with the paradoxical challenges of increased demand at a time of decreased resources, donors must “dig deep” and become more careful, strategic and thoughtful with their giving than ever before.

Nonprofit of the Month

Project VOYCE’s mission is to develop transformational leaders in underrepresented communities by training, employing, and organizing youth to address root causes of inequity. It aims to develop youth as sociopolitical actors who think critically about systems and exercise political agency by developing evidence-based arguments to influence policy. Since 2006, over 400 youth from underrepresented communities have joined the program to create social change in their schools and and communities.