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Nov 28, 2012

The fiscal cliff poses a dilemma for nonprofits

Last winter Nonprofit Digest published my article “Strategic Choices in an Era of State Budget Cuts.”  It raised a dilemma that will confront nonprofits again in the context of the “fiscal cliff” and the prospect for future reductions in government funding at all levels, federal, state, and local.  The primary dilemma is that nonprofits have, perhaps unwittingly, insulated taxpayers from the impact of many budget cuts.  The 2010 Urban Institute survey aptly illustrated how they did this:  rather than reduce services to the community, nonprofits reduced staff salaries, benefits, and/or hours and ran down their cash reserves.  It was not surprising that subsequent public discussions of spending cuts seemed abstract, as if it were a math exercise rather than a decision on society’s priorities.

That option has played itself out for many nonprofits:  their salaries and benefits are near the minimum necessary to retain employees and their cash balances are depleted.  Future rounds of government cuts are more likely to result in reduction of services.  Indeed, in my own survey of Ohio nonprofits, I found that service reductions were more common in 2012 than in 2011, indicating that financial necessity was beginning to force nonprofits’ hands.

Before contemplating service reductions, nonprofits should consider the ramifications of the pathways to service reductions.

Pathway 1: Continue to absorb government reductions by reducing salaries, benefits, and hours.  Ultimately they will lose employees, which must lead to service reductions.  If they do nothing, they will go out of business, which is also a service reduction.  When these reductions are announced, the public will likely blame them for inefficiency or poor management rather than blame the government for cutting spending.

Pathway 2: Play hardball and refuse to sign contracts with the government which do not cover the full cost of providing services.  This is the nonprofit nightmare:  if I don’t take the contract, some other, “more caring” nonprofit will.  Then the public will see the “refusing” nonprofit as “not caring” and the government will likely blame service reduction on the refusal of nonprofits to “help” the government provide services.

Pathway 3:  Play hardball and band together to demand better contracting terms along with a public relations campaign that lays out the financial reality in business terms: “pay less than the cost is a sure formula for bankruptcy – and nonprofits aren’t loading a profit margin on top.”  Some of the public will view this analogous to their negative view of unions:  nonprofits trying to better themselves at the expense of larger government deficits.  And the government may not agree to better terms, leaving nonprofits with pathway 1 or 2 by default.

Under all these pathways, service reductions are more likely to occur and this time the nonprofits may take the blame.  Before making their decisions, nonprofit will need to decide which pathway and choice of service reductions has the best chance of preserving their brand, reputation, donor base, and, most importantly, their most essential key mission services.

Want more ideas on how governments (and foundations) need to think differently about their relationship with the nonprofit sector?  Read “Supply Chain Management Lessons” in More than Just Money.