Fiscal Cliff Disaster Averted, but Trouble Looms

We ended 2012 by surviving the so-called Mayan Doomsday. We began 2013 by driving off the so-called Fiscal Cliff before averting possible economic disaster. Congress passed the American Taxpayer Relief Act of 2012 which put the nation back on safe ground, for the moment.

Previously, I looked at the Act and provided information about what key elements mean for the nonprofit sector. Now, let’s look at:

What’s next?Road Sign by Madjag via Flickr

The Charitable Giving Coalition, chaired by the Association of Fundraising Professionals, as well as the AFP Political Action Committee, won a great victory when Congress preserved the charitable giving tax deduction and reinstated the IRA Charitable Rollover for 2012 and 2013. Everyone who was involved in visiting members of Congress, writing them, or calling them to advocate for the nonprofit sector certainly has a right to take pride in what the sector has accomplished.

However, before we get too carried away congratulating ourselves, let’s remember that the nonprofit sector continues to face danger.

The return of Pease Amendment provisions will make charitable giving a bit more expensive for wealthy donors. Higher taxes will also mean that donors will have less money with which to give. As a result, organizations may face some challenges. But, these are challenges that we have faced before. We’ll just have to work a bit more creatively.

Unfortunately, there are other looming dangers.

Thelma & LouiseThe Fiscal Cliff legislation, which was originally supposed to decrease the deficit, will actually increase the deficit by $4 trillion over the next decade, according to the nonpartisan Congressional Budget Office. In other words, we’re still headed full-speed ahead to economic collapse which would be a disaster for the nonprofit sector and society in general.

Charitable giving has historically correlated to about two percent of Gross Domestic Product. If GDP growth continues at a slow pace, philanthropy is also likely to grow only modestly. If runaway deficit spending leads to another recession, we can expect a likely decline in overall philanthropy.

All Congress has done is buy a bit of time.

Republicans have signaled that they will address the issue of spending cuts within the next two months. In two months, Congress will have to vote on whether to increase the nation’s debt ceiling. President Obama has already said that any spending cuts will require an increase in tax revenue in order to garner Democrat support.

Having achieved a tax rate increase, The White House now seeks to raise additional revenue in other ways. For example, the Administration may want to apply the top tax rates to those earning less than the current threshold of $400,000 for individuals and $450,000 for married couples. Also, the Administration is likely to seek limitations on deductions, particularly for the “wealthy.” The Administration has previously expressed support for both revenue generating options. Now, it’s likely those proposals will resurface during spending-cut negotiations.

So, while the charitable deduction appears to be safe for the moment, that safety may only last for two months.

Think I’m being alarmist? Let me provide some perspective from the US Debt Clock:

In 2000 the deficit was $5.8 trillion, which was $56,150 per taxpayer.

In 2008 the deficit was $9.2 trillion, which was $85,893 per taxpayer.

In 2012 the deficit was $16.4 trillion, which was $145,620 for every taxpayer.

Now, the Fiscal Cliff deal will add another $4 trillion to the deficit over 10 years!

At some point, the American economy will either collapse, going the way of Greece, or the government will get its act together and control spending. I’ve heard a lot of talk during the debate over the Fiscal Cliff about the need to return to Clinton Era tax rates. Sadly, there was little talk of returning to Clinton Era spending levels, even as a percentage of GDP which would still allow for spending increases.

The situation must be dealt with for the good of the nation. Unfortunately, this may require some pain for the nonprofit sector in the form of a reduced charitable giving tax deduction and reduced direct grants to and contracts with nonprofit organizations.

On the floor of the House of Representatives, during debate over the Fiscal Cliff legislation, Democrats have already begun to argue for additional revenues, echoing statements this week from The White House. In other words, the nonprofit sector has made it out of the first round of debates. But, the second round is quickly approaching.

Challenging times remain immediately ahead.

This is far from over and likely the way of life for the sector going forward.” — Bob Carter, Chairman of AFP

Interestingly, tax policy can produce swings in philanthropy, but those swings will likely not be dramatic. For example, the Obama Administration plan to cap the charitable deduction could reduce philanthropy by $5.6 billion per year. While that’s a great deal of money, it’s not as massive an impact as one might at first believe. Giving in 2011 totaled $298.42 billion, according to Giving USA 2012.  Giving was two percent of GDP, as I mentioned earlier. If giving had been reduced by $5.6 billion, it still would have been 1.96 percent of GDP. Giving would still be roughly at the historic two percent level which has been maintained through every other change to tax policy.

Now, with the Fiscal Cliff action taken on Capitol Hill and with the actions yet to be taken in the coming months, we can argue whether the glass is half full or half empty for the nonprofit sector. But, I’m reminded of a photo a friend showed me recently:

 

Dear Optimist, et al 

My suggestion: Be the Opportunist. If you want to raise more money for your organization, do the following:

1. Be Donor-Centered. Organizations that focus on donors will acquire more donors, receive more generous gifts, and retain more donors than those that put the focus on the organization and its needs.

“[The] typical charity will lose 50 percent of its cash (that is, annual) donors between the first and second donation, and up to 30 percent annually thereafter,” according to a study by researchers Adrian Sargeant and Jen Shang, at the Center on Philanthropy at Indiana University.

Clearly, the old organization-focused model is not working. To build donor loyalty, an organization must be donor-centered.

2. Craft a Solid Case for Support. Do not expect donors to support your organization simply because of its good name. Today, particularly among younger folks, donors want to support outcomes. Don’t expect people to support because of your reputation or cause alone. Tell them why you need their support and what they will be able to accomplish with their gift.

3. Ask for Support. I’m amazed at how many organizations make decisions for their donors. “Oh, the recession has been bad. I don’t think he’ll be able to give as much this year.” If you’re guilty of that, stop it! If you have a solid, worthy Case for Support, don’t be shy about asking for support. Ask more people. Ask more often. Ask for upgraded giving. Ask for monthly donations.

4. Ask for Planned Gift Commitments. Nonprofits should seek the full-range of planned gifts. The Fiscal Cliff legislation restored the IRA Charitable Rollover, so that’s obviously a good giving option to talk with donors about. But, charities should also be talking about Bequest commitments, the most common form of planned giving.

While “common,” only 5.6 percent of Americans over the age of 50 have included a charitable Bequest provision in their will, according to researcher Russell James, JD, PhD, CFP, Texas Tech University.

Shockingly, only 22 percent of Americans over the age of 30 report that they have been asked to consider a planned gift, according to a study by The Stelter Company.

If organizations want more planned gifts, they need to ask for them just as one would ask for any other type of donation. In 2011, Bequest giving totaled $24.41 billion, according to Giving USA 2012. If the nonprofit sector got just 11.2 percent of folks to make a charitable Bequest, that number might have been $48.82 billion.

Instead of doubling Bequest giving, increasing it by just 20 percent, to just 6.72 percent, would be enough to nearly offset the negative impact of the current Administration’s previously proposed cap on the charitable giving deduction.

By the way, the sector once mistakenly thought that eight percent of Americans included a charity in their will. So, my suggested growth targets are certainly not outrageously ambitious.

5. Deserve the Public’s Trust and Support. To be successful, your organization must be ethical, effective, and efficient. This will build trust and ultimately loyalty. Fundraising will become easier. Your results will grow.

The nonprofit sector must continue to advocate for itself on Capitol Hill. However, while our victories will be important, they will never match what the sector can accomplish by following the five steps I’ve just outlined.

If you want to massively increase philanthropy in the United States (or anywhere, for that matter), do not expect the government to do your job for you. Instead, government is likely to make your job more challenging. Your task is to become the Opportunist. Resolve to seize the opportunities that exist. Together, we can make a big difference.

That’s what Michael Rosen says… What do you say?

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5 Responses to “Fiscal Cliff Disaster Averted, but Trouble Looms”

  1. Michael,

    As you said,”The situation must be dealt with for the good of the nation.” Unfortunately, since the government has run out of money, unless it borrows more, that means less support to organizations through grants and other support. Too many organizations have come to rely on Federal support as a major chunk of their budgets, evolving from charities to quasi-government programs. They turned to the government’s money, taxpayer money, and away from finding individual donors and other sources of revenue. As I stated in my most recent blog, A Voice in the Wilderness,”If you read the definition of philanthropy in the dictionary, you will not find the word government.” Nonprofits must learn to turn away from the “easy” money of government support and return to telling their stories to the public, build their bases with individuals and businesses, and cultivate long term support from those sources. Otherwise, not only are they contributing to the excessive spending that is out of control, but their addiction will be painful when the government finally chooses to be responsible and cuts funding for their programs. I have found that it is always preferable to make that decision yourself before someone makes that decision for you.

    • Richard, thank you for your comment. For the reasons you’ve stated, I’ve encouraged organizations not to think of government funding as philanthropic revenue. By tracking government money and philanthropic money separately, it makes it easier to track true development performance and government relations performance more accurately. It also gives board members a much more clear view of things. I once served on a board that separated the two revenue streams. The social service agency received a great deal of government support while underperforming in the development arena. Once the board better understood the numbers, and following a strategic planning process, the agency made the committment to ramp-up its development effort. Staff was added and upgraded. The result has been, even during the recession, an increase in the philanthropic revenue stream. Because of its true fundraising success, the organization was able to relocate to a larger facility and is now serving many more people than it was able to serve in its former, cramped offices. Government support continues to be important to the agency, but the growing development program means it is less dependent on government money than it has ever been and it means it can continue to expand its services.

  2. Using the debt ceiling and the “fiscal cliff” as leverage to extract additional concessions from the other party may be clever hard-ball politics, but at what cost to the rest of us? In http://www.thewordenreport.blogspot.com/2013/02/the-debt-ceiling-and-fiscal-cliff-as.html at the Worden Report, I argue that the high-stakes political poker game may reflect a weakness in democracy itself. In short, self-governance does not confront hard problems very well.

    • Skip, thank you for commenting and sharing the link to your blog. As you know, our democracy has a number of weaknesses, some by design while others are through evolution. The “Fiscal Cliff” and debt mess remind me of a relevant quote from 19th century writer Alexis de Tocqueville: “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

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