The State of the State Budget Crises

The nonprofit sector is the final frontier, at least in the midst of a state budget impasse. A local news story on public radio recently explained why the protracted budget crisis in Pennsylvania has elicited little outcry relative to its momentous impact on nonprofits. Lawmakers and state employees continue to get paid, so only the remaining “voice” belongs to the nonprofit sector, which isn’t inclined to scream.

Such reluctance is partly inherent in the charity model. According to the IRS, a 501(c)(3) organization may not devote “a substantial part of its activities (toward) attempting to influence legislation.” While the rules around actual lobbying are vague, most nonprofits aim to limit such activities to 5-7% of their total budgets. For fear of risking their tax-exempt status, charitable nonprofits often lay low during the legislative battles around state budgets.

More often, though, they simply are not invited to the discussions. Given shrinking dollars and growing desperation for stable funding, nonprofits are beginning to raise their voices about their roles in the system and the impact of political posturing around state budgets.

In Alaska, for instance, the state’s nonprofit association recently convened nonprofit leaders to tap this “large, but often quiet, portion of the state’s economy” before budget talks resume, stated the Alaska Journal. Alaska’s nonprofits employ 12% of the workforce (compared with 10% nationally) and provide over 1/3 of all jobs in certain rural areas in the state. While the overall workforce in Alaska grew just over 5% from 2007 to 2013, there was a 22% increase in nonprofit jobs over that period.

Ironically, as job numbers have increased, federal funding has shrunk. The Alaska Journal explained such funding comprised 60% of the sector’s revenue portfolio in 2007, compared with 40% today. The national average is 32%.

In the absence of that funding, partnerships with state and local governments become even more essential. When Alaska’s state budget negotiations were prolonged last spring, those nonprofits with savings were forced to tap them. Now, nonprofit leaders are claiming their stake in budget discussions and challenging the structure of the political system that has excluded their voices.

Similarly, the state nonprofit associations in Connecticut and Delaware are stepping up their advocacy efforts to protect members. In Connecticut, the nonprofit sector presented data and leveraged community support to oppose potentially debilitating cuts due to a $103M budget shortfall. According to the National Council of Nonprofits, their rallies and messaging efforts have paid off, as the governor seems to be sparing those served by nonprofits from any additional sacrifices. Similarly, nonprofit leaders in Delaware developed materials to help nonprofits advocate for themselves amid significant budget gaps in an attempt to avoid the devastating financial crises that face Illinois and Pennsylvania now.

In Pennsylvania, many nonprofits face dire conditions as they work to meet constituents’ needs, whether for food, foster care, health care, shelter, preschool education, or any of the countless urgencies they address. As described in the Pittsburgh Post-Gazette, organizations that serve those who simply can’t wait for financial equilibrium must cover for the state’s lapse in funding by tapping lines of credit, seeking bank loans, curtailing hiring, reducing staff, and putting office technology upgrades on hold.

According to a survey by the Greater Pittsburgh Nonprofit Partnership and the Forbes Funds, over 85% of human service and community development agencies are experiencing cash flow issues. Some are predicted to stop providing services temporarily or permanently if the impasse is not resolved this month.

A legislator in Illinois noted that human services fall under the frozen 18% of the general revenue fund in her state that represents $7B annually. She further noted that the state is functioning as a poor partner to agencies that can’t afford to sacrifice funding. “We are putting at risk (a) whole infrastructure” that’s not easy to restore.

Meanwhile, recent world events remind us about the remarkable strain on both the financial infrastructure and nonprofit sector in every state. As state governments declare their stance on accepting Syrian refugees, we can appreciate the illustration of how essential the nonprofit sector is in meeting the basic (and complex) human needs of new – and all – constituents.

Perhaps more than ever, it is important for nonprofit board members to understand the state of the sector – and world – in planning for organizational sustainability, growth, and alignment among mission, organizational capacity, and constituent needs.

Sonia J. Stamm

Sonia J. Stamm is Governance Consultant at BoardEffect. Since almost our inception, she has shared a best practice perspective on governance with our team and clients, partnering to guide boards toward optimal implementation of our software. As founder and principal of a nonprofit leadership consulting firm, Sonia supports the evolution of mission-based organizations through her work in board development, leadership transition and succession, and organizational effectiveness. A seasoned facilitator, trainer, and consultant, she enjoys guiding boards and organizations through critical junctures in their development.