Thinking About the Future of Society

I care about the quality of life in America and in our communities, and I am concerned about the future of our society as we know it today.  And yes, I know that’s a huge topic, and I am certainly not going to try to condense a graduate level course into one short article.   So I will try to narrow the topic a bit.

Let’s start by defining “society.”   If we were to look up the definition, we would see that a society is defined as “The institutions and culture of a distinct self-perpetuating group.” (Note 1)  What does that entail?  Let’s break that down a little more.   There are three broad sectors in every society – the business sector, the government sector, and the social sector.  All are important, but to me the thing that makes our American communities so rich and so unique is the social sector.

But what is this social sector?   Glad you asked.  The social sector in our society is the vast array of nonprofit organizations that do just about everything in our society that is good.  These nonprofits provide health care, shelter the homeless, conduct medical research, distribute food to the hungry, educate our young people, provide cultural arts, run museums and libraries, create refuge for the battered and abused, and many, many more things.  Even a frequent critic of nonprofits, Senator Charles Grassley wrote, “I can’t imagine American society without nonprofit work, and I sure don’t want to.” (Note 2)  In my opinion, he’s right.   

A lot of people make the mistake of thinking the social sector is not very large or important.  This could not be further from the truth.  The social sector is a big deal.  Its expenditures constitute 10% of the nation’s GDP, and it employs about 7% of the total U.S. workforce.  Expenditures range in the area of a trillion dollars a year, and if you were to compare this sector alone to other world economies, it would rank sixth in the world ahead of even Canada and Russia.  Imagine that.

In America today, there are some 1.6 million non-profit organizations of which about 1.1 million are categorized as 501(c)(3) charitable organizations.  In Los Angeles alone, there are over 19,000 registered nonprofits listed in the Guidestar data base.  19,000!  And like Senator Grassley, I do not want to even think of society without strong and vibrant nonprofits and the wonderful services they provide.

With that said, I am worried about the future because I see at least four significant challenges facing the social sector and the organizations that make it up.  The first of these is funding.  Three things related to funding concern me.  The first is the economy.  Nonprofits get their funding from five sources.  By far the largest is individual giving.  Other sources include foundation grants, government grants and corporation grants.  And, of course, there some nonprofits that sell goods and services (including internal events) to earn revenue.  All of these are impacted by the state of the economy.

In particular, charitable giving is directly proportional to the state of the economy and to the value of the stock market.  If one goes back and studies total giving in the U.S., even in constant dollars, giving doubled between 1995 and 2005 from about $150 billion to over $300 billion.  With the exception of a slight setback in the early years of the millennium, this period has been one of tremendous growth in United States.   I remember many years in the late 1990’s my retirement account grew by more than 30% a year, and many of the top endowment managers were recording returns approaching 50% a year.  So it’s not surprising that charitable giving grew exponentially during this time period of unparalleled growth in personal and institutional wealth.

But recent years have not been so kind.  Since 2007 total charitable giving in the U.S. has declined by more than $15 billion, and even though the stock markets have nearly returned to normal, charitable giving remains down.  Partly as a result of this, last year 31% of all nonprofits reported operating in a deficit mode, and 57% had 3 months or less cash reserves on hand.  Wow! That’s not a good sign for the future.  (Note 3)

So what does the future hold in this area?  I don’t know, but I am concerned about the inability of some countries to tackle their debt issues and the inability of our own nation to come up with an agreed-upon approach to tackling our own deficit problems.  Every time some debt problem in Europe sneezes, our stock market and our individual portfolios catch a cold.  This does not bode well for creating the type of personal comfort that leads to substantial charitable giving.

A 2011 study by the Bridegespan Group put it more bluntly.  They said “the long term outlook for human services funding is bleak.”  Nonprofit leaders seem to agree and in a recent national survey only 9% predicted that 2012 would be better than last year. (Note 5)

The second concern I have in the area of funding is related to IRS tax exemptions.  About 75% of all annual giving in the U.S. – over $210 billion a year– comes from individuals.  Some of these donors support charities, at least in part, because the charitable contribution deduction on their income tax.  Currently in the U.S. the government reportedly foregoes something in the neighborhood of $280 billion a year in lost taxes revenue because of nonprofit tax exemptions (both individual and corporate).  (Note 1) I don’t know how the personal exemption will fare in the future, but I know the nonprofit donation deduction has a target on its back among budget balancers in Washington.  My concern is that the days of the tax deduction may be coming to an end, and if that is the case, it remains to be seen what the impact of that will be on our society.

There is also the larger question of tax exemptions in general.  There are enough rich universities, churches, hospitals, sports leagues and national charities out there that many in power are questioning whether or not there should be tax exemptions for the social sector at all.  If things are bad with tax exemptions, I can only imagine the crises our social sector organizations will face if they have to pay taxes on their income.

The third concern I have in the funding area is something called “PILOTs”.  PILOT stands for “payments in lieu of taxes.”  Using the PILOT concept, communities are insisting that nonprofits, particularly large institutional ones like universities and hospitals, pay taxes on their property and assets to the same extent as if they did not have a tax exemption.  PILOTS are still primarily an East Coast phenomenon where they have been adopted in Boston, Baltimore, Philadelphia and Pittsburgh.  But there is already one city in California which has adopted this model – Palo Alto – and they are being considered in other communities.

A related aspect is the increasing charge for public services.  In the past, many social sector sector organizations received free or minimal cost services from the communities they benefit.  Things like security, health services, parking services, etc. would often be provided at little or no cost to the organizations involved.  This is changing dramatically as cities all over the nation are looking to recoup their costs in any way they can.  I know of organizations around the country that are wondering whether they can even survive in the face of the drastically reduced profits from their public events that are caused by increased costs for  city services.   I should emphasize that this is not a criticism of city managers around the country.  It is a fact of life that they are facing horrible budget shortfalls themselves and are looking wherever they can to cover costs.  Do not expect this to be a short term problem.

The second big challenge in the future is competition.  Each year there are approximately 50,000 new 501(c)(3) organizations created in the U.S.  This sound like a lot, but it is actually down from over 80,000 in 2007.  I find this number staggering, and it means that each year there are 50,000 more mouths to feed from a dwindling total pie.  It is not hard to do the math and determine that there will be continuing fund restrictions for nonprofits in the future.  Someone asked me the other day whether this growth was being offset by social sectors organizations going under.  Well, this does not appear to be the case.  In the years from 1991 to 2011, the number of 501(c)(3) charities more than doubled from just over 500,000 to over a million, and the only year in which there was a decrease was in 2011 when the IRS revoked the tax exempt status of some 275,00 organizations.  (Note 4)

A second area of competition is just emerging.  This is the new corporate structures for social entrepreneurs such as benefit corporations, flexible purpose corporations, and L3C low profit limited liability corporations.  All of these corporations allow investors to make financial investments in areas of social good in return for a fair but not maximized profit.  As I am not a lawyer or social entrepreneur, I do not know all I should about these corporate structures yet, and I do not yet know whether their impact on traditional nonprofits will be good, bad or neutral.  I read recently that San Francisco voted to give city contract preference to benefit corporations.  Ironically, this action was opposed by the California Association of Nonprofits which stated, “We’re not against the existence of these corporations.  We’re against them getting nonprofit-like preferences without nonprofit-like restrictions and oversight.”  Are battle lines being drawn?  Probably too early to tell, but it is a potential challenge that warrants watching for the future. (Note 7)

My third great concern for the future is increasing demand.  One cannot pick up a newspaper today without reading about some government agency facing economic woes.  Service reductions as a result of government funding shortages abound, and people are losing their jobs.  It is inevitable that social services provided in the past by the government elements in society will be transferred to the social sector.  This will place increased demands on the social sector, particularly those who provide first line human services.  Last year 85% of human services nonprofits reported increased demand for their services, and 88% expect continued growth in 2012.  Moreover, we still have millions of people out of work and struggling to survive.  Many of these unfortunate folks are adding to the demand on social sector organizations.  Last year, 48 percent of these organizations report that they were unable to meet the demand placed on them, and this number increases to 50% in 2012. (Note 5)

A second component of increased demand is demographic.  The baby boomers — like me — are retiring and are requiring more services.  The combination of these two factors will result in nonprofits being expected to do more with less.

The fourth element of future concern for me is the leadership drain.  A few years ago, the Bridgespan Group published a report saying that in a few years from now nearly 80,000 new senior managers will be required in the nonprofit sector each year – a four-fold increase from 1996.  This is driven by two factors, the retirement of baby boomer leaders and the growing number of nonprofits.  Where will this leadership come from?  (Note 6)

These four factors combine to give me pause about the future of the nonprofit sector and the continuation of the benefits it provides to the nation and to individual communities.  The challenges with be significant and the effort of a lot of people – people like you and me – will be needed to ensure that a strong social sector is maintained in American.  Like Charles Grassley, I do not want to think about the alternative.  In my next article, I will provide some suggestions to help those of you, either already working in the social sector or who volunteer time and talent to keep the sector vigorous, make your organization better prepared for these emerging challenges.

 

Notes:

1.  Free Online Dictionary.  www.thefreedictionary.com/society.
2.  Grassley, Charles.  Nonprofit Law and Governance form Dummies, Wiley Publishing, New Jersey, 2007.  Pg. xix.
3. Giving USA 2011, “The Annual Report on Philanthropy for the Year 2010”, The Center on Philanthropy at Indiana University, Pg. 16.
4. “Number of Registered Tax-Exempt Organizations in 2011”, The Chronicle of Philanthropy, March 29, 2012.  (philantropy.com/article/Number-of-Registered/131327.)
5. Nonprofit Finance Fund.  “2012 State of the Sector Survey Results” (http://nonprofitfinancefund.org/files/docs/2012/2012survey_brochure.pdf.)
6. Tierney, Thomas J., The Nonprofit Sector’s Leadership Deficit, The Bridgespan Group, March 2006. Pg. 12.
7. Nonprofit Law Blog, April 20, 2012.