Regional Expert: Linda Persen | January 15, 2019

In an essay for the Nonprofit Quarterly, former Nonprofit Finance Fund president Clara Miller describes the move from for- to nonprofit finance as “stepping through a looking glass.” For-profit CFOs can trust certain rules: Cash is liquid. Supply and demand determine price. Organizations turn profits or they don’t stay in business.

In the nonprofit world, such rules, “when they apply at all, are reversed.” Cash is often restricted, not liquid. Prices can’t fluctuate with the market. Most nonprofits must accept “a ‘market defect’ of some kind—lack of profit being the most common—as a standard operating condition.”

Miller’s essay underscores the layered challenges facing nonprofits. Charity leaders must walk a fine line. They must satisfy both the populations they serve and the donors who fund them. They must endure withering scrutiny. They must do more with less.

In 2019, challenges old and new will further complicate life through the looking glass. The full impact of US tax reform will become clear when taxpayers file 2018 returns this spring. New collaboration models will continue to change how charities cooperate. Data science will pose new challenges for the sector. Twenty-year patterns of demographic change will alter the donor landscape. A recent spate of #MeToo scandals will intensify nonprofits’ fight for public trust.

1. Tax Reform: The Long Morning After

Last year, we noted experts’ predictions concerning the Tax Cuts and Jobs Act, passed in December 2017. Two of the bill’s measures seemed certain to reshape the nonprofit world: the doubling of the standard deduction, and the near-elimination of the estate tax. Since donors can only take charitable deductions if they itemize, and since the estate tax motivates most bequest giving, sources projected a multi-billion (estimates ranged from $13-20 Billion) drop in donations.

How did these predictions play out in 2018? In one sense, we can’t say yet. Most individual givers have still to file their 2018 tax returns. And as of yet, taxpaying donors seem largely unaware of how the TCJA will impact their deductions. Fidelity Charitable relays that 82% of donors plan to maintain 2017 levels of giving in 2018, with 58% still intending to itemize on their 2018 returns. While the Fidelity numbers skew towards households under $100,000 of annual income, they still suggest that April will bring a rude awakening for many taxpayers.

Yet other factors could mitigate or even prevent any donation drop-off. The authors of Indiana University’s 2018-2019 Philanthropy Outlook chide dire predictions for failing to consider many of the most important variables. If the Laffer curve holds true, then lower taxes could result in an economic updraft and corresponding surge in donations. Donors with powerful religious and ideological motives could help offset decline. State-level deductions remain in place. With more clout than ever, wealthy and DAF funders will likely mobilize to save their charities of choice.1

Savvy donors can maintain long-term giving levels without incurring higher taxes. The most popular tactic, bunching, could have substantial impacts on the outcome of tax reform. In bunching, donors alternate between itemizing and the standard deduction. By delaying yearly donations (often to a donor-advised fund), bunching taxpayers can concentrate several years’ worth of charitable giving and deductions into a single year. If widely adopted, bunching could mean that even were the timing of gifts to change, “the amount that donors contribute over the long term may not.”2

Total giving will probably decline in 2019, but the ugly truth is that nobody really knows by how much. Expect nonprofits to continue doubling down on fundraising and operational efficiency. Look also for a flurry of last-minute attempts at donor education in the run-up to April.

2. Demographics: Donors Get Bigger

Tax reform will likely dovetail with several nearly twenty-year trends in donor demographics. Since 2000, we have seen the total amount given in the US rise, even as the total number of US givers has declined.

Patrick M. Rooney observes that although total and total household giving have never been higher, both the percentage of American households that donate at all and the average amount donated per household have declined since 2000. The percentage of donating households has fallen over 10%: from 66.2% of households in 2000 to 55.51% in 2014. In the same period, the average amount given declined from $962 to $900.

Meanwhile, households with over $1 million in annual income have increased overall giving four-fold since 1993, and have increased itemized giving three-fold during the same period. The private foundations that frequently serve as vehicles for wealthy donors have also increased as a portion of total giving, from 6% in 1977 to 16% in 2017.

A professor of Economic and Philanthropic Studies at Indiana University, Rooney makes the obvious inference: “gifts at the higher end (minimally greater than the median) are driving the increases in total household giving.”

In other words, an ever larger portion of US giving is comprised of high-end givers. Those same donors have increasingly chosen to itemize, and they are also the most likely to be the 30% aware of wealth-saving strategies like ‘bunching.’ Thus, tax reform seems relatively unlikely to disrupt ‘ultra-philanthropy,’ and may accelerate the shift of charitable giving to the high end of the income spectrum.

This increase in donor wealth will bring advantages for many. Givers with income over $200,000 tend to donate more evenly across causes than those in lower income brackets. And the organizations that wealthy donors choose to patronize will gain powerful, deep-pocketed allies.

However, some critics have expressed concern about the fate of small and mid-sized nonprofits if these trends continue. Charities of modest size have always struggled for funding and name recognition, and that struggle has long been complicated by the creation of thousands of new nonprofits every year in the US. But as the number of donors in the middle and lower classes declines, smaller nonprofits face even more intense competition for an often-diminishing pool of resources. As economist Paul Schervish predicted in Time, charities at “local levels are going to feel that they’re facing greater challenges in their fundraising…The total amount of dollars can be still given to local charities and so on, but they will be divided up even more.”

2019 will likely motivate small and local nonprofits to seek new sources of support, whether through messaging overhauls, revised fundraising tactics, or radical new forms of collaboration.

3. Public Perception: #MeToo Breeds Mistrust

Nonprofits have never enjoyed overwhelming public favor. Last year, we noted a discouraging stasis in the American public’s estimation of nonprofits. Between 2008 and 2015, the percentage of the US public distrustful of nonprofits rose from 34% to 35%, while the percentage expressing trust in nonprofits fell from 64% to 62%. These numbers improved only slightly from respective levels of 37% and 60% in 2002.

The #MeToo hashtag and movement first gained prominence in 2017, after multiple women accused entertainment mogul Harvey Weinstein of sexual assault. Since then, #MeToo outcries have toppled powerful figures in media, politics, academia, business, and religion.

Unfortunately, nonprofits have not proven immune. In 2018, a spate of #MeToo scandals at the Red Cross, the Humane Society, Oxfam, and other notable charities threatened to further tarnish the sector. An investigation into sexual misconduct recently ousted the CEO of the nation’s largest community foundation—in Silicon Valley, funded by the likes of Mark Zuckerberg and Jack Dorsey. And a recent survey found alarming prevalence of sexual harassment in the fundraising sector.

The belief that it won’t happen here couldn’t protect organizations in 2018, and it certainly can’t protect them in 2019. Nonprofits will need to reinforce their stance against sexual abuse with clear policies. Thankfully, many nonprofits have already gotten the memo.

In 2019, we will likely see organizations across the charitable sector rethinking and reworking HR. Common measures will include mandatory training, clarified reporting channels, revised codes of conduct, and renewed public commitments.

4. Collaboration: The Year of Inclusion

Asked to predict global charity trends in 2019, Kenyan nonprofit leader Charles Ngiela says he expects “many civil society organizations [to] seek alliances and merge across the globe for a common goal…Going solo has proved not to be working anymore—be it crowdfunding or grantmaking, both require support from other networks.”

Nonprofits and funders alike have expressed a growing level of interest in collaboration. A 2014 Bridgespan Group survey found that 91% of charities had engaged in some form of collaboration since 2011, with the most common being joint programs (merging services but not governance). The Urban Institute describes its increasing popularity among funders: “Over the past few decades, philanthropy at large has shifted toward greater alignment,” with funders demonstrating an increased willingness to “cross lines to address complex problems.”3

Yet two factors complicate predictions about nonprofit collaboration.

First, what funders say they support and what they actually support are often at odds. While 80% of funders exalt the values of collaboration, only 13% reliably support collaborations among the nonprofits they fund.4

Second, nonprofit collaboration takes multiple forms, many of which have disappointed expectations. Writing in the Stanford Social Innovation Review, Peter Penepento characterizes charitable collaborations as “one-off arrangements,” created “almost by chance,” and having little impact on organizational cultures. Fellow industry leaders are likewise skeptical. “If collaboration is so helpful, why is it not the norm with nonprofits?” wonders Art Taylor, head of the BBB Wise Giving Alliance. He finds an answer in the history of collaboration. In the past, he advances, collaborations have primarily served “to keep sinking organizations afloat.” When these financially motivated team-ups fail to produce immediate benefit, many nonprofits give up, judging collaboration a waste of scarce resources.

According to Penepento, Taylor, and the National Council on Nonprofits, the answer lies in a radically different motive: mission. Financial motives rarely justify nonprofit team-ups. Rather, charitable collaborations succeed when they form around shared goals and common problems.

Among models for mission-driven collaboration, one in particular has drawn widespread attention. “Collective impact” networks have been heralded as the future of the nonprofit sector.5 Jeff Edmondson and Ben Hecht call collective impact “the only path forward to address complex social problems.” While examples of collective impact have existed in some form for nearly 20 years, it was not until SSIR coined the term in 2011 that the model began gaining traction.

Collective impact networks are multi-stakeholder alliances formed around a shared goal. According to the SSIR’s original definition, “Collective impact is the commitment of a group of important actors from different sectors to a common agenda for solving a specific social problem.” Such networks are distinguished by their centralization and the diversity of their participants. Stakeholders typically include representatives from businesses, foundations, nonprofits, governments, and local communities. Structurally, CI networks share five elements: a common agenda, shared measurement, mutually reinforcing activities, continuous communication, and backbone support.

At first blush, we might expect nonprofits to balk at the high levels of commitment required by CI networks. However, the model’s popularity speaks to another feature: as Kania and Kramer observe, collective impact projects generally seek to maximize, rather than deplete, existing resources. While it demands time and effort, entering a collective impact project does not place extra strain on a nonprofit’s donor relationships. And since the CI model includes funders as formal stakeholders, nonprofits need not worry about maintaining givers’ support for the initiative.

2019 will likely see collective impact networks spread and assume new forms, especially among local nonprofits. Of particular interest will be how the ‘data for good’ movement reshapes the collective impact model.

5. Data Science: It Takes a Village

Nonprofits already face immense pressure to measure. The emergence of charity watchdogs like Guidestar and Charity Navigator changed the game for both donors and organizations: for the first time, nonprofits could chase donor trust through financial reporting, while donors could evaluate nonprofits by reported metrics. Although several metrics have misled donors (see the kerfuffle over the Overhead Ratio), financial and operational measurement have become norms in the nonprofit sector. Kathleen Kelly Janus reported in a March 2, 2018 article for the Stanford Social Innovation Review that although only 6% of nonprofits feel confident they know what to do with it, 75% do regularly collect data.

Additionally, most nonprofits already enter 2019 with better data habits than 2018. Europe’s General Data Protection Regulation (GDPR) took aim at abusive data collectors. However, the historical data protections overhaul imposed sweeping regulations on any nonprofit even remotely connected with EU citizens, whether the Brookings Institution or the March of Dimes. Threatened with the same steep fines as for-profits, charities have had to mature their data practices in order to comply.

A pronounced gap in data maturity still separates non- from for-profits. However, both sectors face the challenge of promoting data literacy. A Wall Street Journal poll gathered that 35% of enterprise Chief Data Officers (CDOs) name “poor data literacy” as among their greatest challenges.

In 2019, data collection habits will only become more essential for nonprofits. But collection must empower action. Charities will need to convert the data they gather into intelligence they can act on. Thus, BI tools will likely penetrate deep into the charitable sector in 2019.

Nonprofits will have help in building their data cultures. Several growing organizations help nonprofits build data acumen: Datakind pairs nonprofits with data scientists willing to work pro bono, while Tech Soup Global hosts a worldwide clearinghouse for discounted tech and training.

The surging ‘data for good’ movement will also catalyze the maturation of charitable data. Gartner remarks a growing impulse among tech organizations to launch philanthropic data-sharing initiatives, projects that channel troves of data toward a variety of organizations and causes. Google helps hospitals detect outbreaks, Yelp equips local food safety departments, and Mastercard delivers insights into donor habits.

2019 will likely bring data-hungry nonprofits and impact-hungry for-profits ever farther into each other’s orbits. Nonprofits will continue to mature in their data collection and management, driven by GDPR and shifting donor bases.


***

Nonprofits have exploded in number and influence since World War II. In 1945, they accounted for 0.9% of US GDP. By 1980, that number was 2.9%, and by 1995, nonprofits made up 4.4% of the US economy.6 Today, nonprofits produce 5.4% of US GDP and 10.3% of US private sector employment. If nonprofits worldwide established a country, it would be the world’s sixteenth largest economy.

2019 will bring new challenges. But so has every year, and so will every year to come.

Nonprofits have thrived through worse. They’ve never had it easy. They’ve had to obey the rules of one universe while living in another. They’ve had to fight for public trust. So they’ve scraped and scrimped and teamed up. And they’ve gotten through.

Expect the nonprofit sector to emerge from 2019 changed.

And strengthened.

http://martsandlundy.com/wp-content/uploads/2018/03/Philanthropy_Outlook_2018_2019_RS.pdf

3 Shena R. Ashley and Joycelyn Ovalle, “Investing Together: Emerging Approaches in Collaborative Place-Based Impact Investing,” The Urban Institute, May 2018. https://www.urban.org/research/publication/investing-together-emerging-approaches-collaborative-place-based-impact-investing

https://www.geofunders.org/resources/is-grantmaking-getting-smarter-703

Penepento; Ashley and Ovalle; Henig, Houston, and Lyon; and Kania and Kramer.

https://journals.sagepub.com/doi/pdf/10.1177/0899764001302002