Now that we’ve lived through income tax season during the toughest time since the Great Depression, it seems appropriate to consider the future – the sustainability – of the organizations that comprise the tax-exempt sector.
Foundation executives and just about every nonprofit executive I’ve ever met share the dream of sustainability. They yearn for a business model so cleverly conceived and carefully calibrated that it can balance the books, not only today but in perpetuity. Sustainability is front and center for Next Gen social entrepreneurs who seek to create a new crop of organizations with built-in revenue streams.
Sustainability is a laudable goal. In organizations that attain it, executive directors can direct more of their talent to something other than fundraising, and board members can sleep better at night. Still, I question its importance. I worry that sustainability is as elusive as Jason’s Golden Fleece, glittery and alluring and always just out of reach. Part of me wonders about the assumption itself: that all nonprofits deserve to live forever.
David Fair agrees with me. He thinks sustainability is a lot of bunk. David is something of a philosopher and something of a sociologist, though he’s long made his living as a government bureaucrat and nonprofit manager. His distinguished career has been spent in health and human services, what he refers to as the “safety net services.” I came to David to get his take on sustainability through the lens of those agencies that serve the most impoverished, helpless, damaged and at-risk people in our society.
“How has the Great Recession affected health and human service organizations?” I recently asked David over a cup of coffee at DiBruno Brothers on 18th and Chestnut Streets. “Few have actually gone out of business,” he said, “but most of them are in serious trouble.”
According to David, about 9,000 regional nonprofits are in the health and human services space. Most were founded during the Great Society of the mid-1960s, which sought to eliminate poverty and social injustice. Government has been their primary, if not sole, source of support.
When times are good, government grants and contracts are plentiful, and safety net organizations can provide many important services. During a recession, particularly a Great Recession, when tax revenues decline, government has less money to spend on programs for poor people at the very moment when more people need help. Taxpayers, themselves stretched to the max, are disinclined to endorse new taxes. Those who suffer most are those least able to take it.
Government cutbacks are only one source of the problem. The other, less obvious one lies in the nonprofit sector itself. Between 1990 and 2005, the number of nonprofits in the United States doubled.
Today, according to David, there are some 27,000 nonprofits in Greater Philadelphia. All were founded for worthy reasons. All receive the benefit of tax exemption. Which means you and I directly or indirectly support them all through the taxes we paid on April 15.
“The nonprofit sector is way over-built,” said David. “Do we need all of these? Can we as a society afford all of these?”
The vast majority of nonprofits are tiny; almost 3 out of 4 reported annual expenses of less than $500,000 in 2004, according to the National Center for Charitable Statistics. One would think that some should go out of business, that larger and fewer organizations would achieve important economies of scale. That makes sense, but raises another issue: How do you decide which ones deserve to survive?
This is where things get interesting. The market-driven mechanisms our capitalistic society uses to make such decisions do not play in the nonprofit world.
“Say you’re selling coffee,” David said, taking a sip of DiBruno’s best, “and you consistently sell foul-tasting coffee. You’d soon be out of business. The market determines whether or not your business will survive.
“Now imagine you are running a drug treatment program. Your clients will come regardless of whether the service is good. The government pays on the basis of the number of addicts who participate in your program, not on the number who achieve recovery. Unless you get in trouble, government will continue to reimburse your organization for the service it provides, regardless of the results it achieves.
“Government programs are not working,” sighed David. “Billions of dollars have been spent by government since the Great Society. But are things getting better? Are society’s problems solved?”
I wonder if David is right. Should our society focus on sustaining charitable institutions, especially since there are way too many of them?
What would an organization that’s worth sustaining actually look like?
Here are five signs of sustainability:
- Diversification. Your organization’s budget is a pie and each revenue source is a slice. Go for as many slices, as many different sources of earned and contributed income as your organization can reasonably manage.
- Balance. Remember the pie and its slices? Now try to make them all more or less the same size so no single one dominates.
- Measurable impact. Document the ways your programs are advancing the mission of your organization. Then you’ll have hard facts that prove you deserve to survive.
- Currency. Your organization tracks trends and remains ahead of the curve so it will be positioned for the future. Is your organization receiving stimulus dollars? What’s next?
- Respect. People care deeply about the important difference your organization makes. They believe something important and valuable would be lost in their lives without it there.
I think I’ll stop by DiBruno’s for coffee and ponder this again.