A storm is coming. It will affect the entire US economy. It will likely affect the global economy.
The nonprofit sector will not escape the impact. You need to prepare now.
As 2014 began to wind down, the US National Debt surpassed the $18 trillion mark! That’s over $154,000 of Federal government debt per taxpayer or more than $56,000 per citizen. During the six years of the Obama Administration, the US National Debt increased by nearly $7 trillion, representing 67 percent growth. And it’s still growing.
As if that’s not bad enough, the US Unfunded Liabilities total more than $92.5 trillion dollars, or more than $789,000 per taxpayer! It, too, continues to grow.
President Barack Obama, former-President George W. Bush, and the US Congress are all responsible for the rapid growth in the US National Debt since 2009 as well as the growth in the Unfunded Liabilities. So, I’m not going to engage in specific finger pointing, policy debates, or politics.
Instead, I want to focus on what this means for the charity sector looking forward.
The rapid growth of national debt is not sustainable. We should no longer ignore it. Here are some of the reasons why:
• While our enormous national debt is not significantly affecting the nonprofit sector at the moment, the day is coming when it will. Prudent organizations will prepare for the storm before it hits.
• At some point, failure to address the massive debt issue will lead to a downgrade in America’s credit rating. Think it can’t happen? It already has. In 2011, Standard and Poor’s cut the US credit rating to AA+ because the government “fell short” of taming the nation’s debt. In 2012, Egan-Jones cut America’s credit rating to AA for the same reason. While these downgrades have had a mostly symbolic effect, they foreshadow what is likely to happen unless the government brings the national debt under control.
• Eventually, future credit rating downgrades will make it more expensive for the government to borrow money. Interest rates will rise. That will take more money out of the economy.
• In addition to becoming increasingly costly to borrow, lending sources will be harder to find. Some of those lenders might also use the lender-debtor relationship to force US policy changes. We’ve already seen this with the China relationship. By the way, China, no longer the US, is the world’s largest economy in “real” terms of goods and services produced.
• To deal with the debt, the federal government has four possible courses of action (or some combination of these): 1) pay more to borrow more which will add to the debt and take more money out of the economy, 2) print more money which would be inflationary, 3) cut spending which would likely mean less money for the social safety net and nonprofit organizations, and 4) raise taxes which will reduce individual disposable income. So, even if the government does address the debt situation, it could have a short-term negative impact on the nonprofit sector before it has a positive effect.
• A massive, growing national debt will make it more difficult for the US economy to experience strong growth in Gross Domestic Product. Philanthropy correlates closely with GDP; it’s been about two percent of GDP for decades. If the economy doesn’t grow rapidly, philanthropy is not likely to do so. If the economy truly falters, we might even see a drop in year-to-year philanthropy as we did during the Great Recession.
We’re already beginning to see some of the effects I’ve described above. If nothing is done to tame the national debt, these effects will be magnified and could eventually become catastrophic.
There are some things that nonprofits can do to prepare:
Encourage government officials to tame the debt. While advocating for tax incentives such as the Charitable IRA Rollover are important, charities will see a far greater impact from robust GDP and personal income growth. Therefore, advocating for policies that reduce the Federal debt and unleash GDP should be a priority for the nonprofit sector.
Build stronger relationships with supporters. During the Great Recession, not all charitable organizations suffered. Those charities with a meaningful case for support, strong relationships with supporters, and a willingness to invest in fundraising were actually able to grow. With charities retaining less than half of first-time donors, there is a lot of room for improvement.
Have strategic and development plans. Have a contingency plan. You have to plan your work, and work your plan. As Henry David Thoreau once wrote, “In the long run, men [and women] hit only what they aim at.” Effective planning is the best way for organizations to track progress and achieve goals. A contingency plan will address many of the “what-if” questions and allow the organization to be agile in response to environmental changes.
Engage in planned gift marketing. While raising money to meet today’s needs is essential, investing in future revenue will help provide the organization with future stability. With only 22 percent of survey respondents saying they have been asked to consider a planned gift, there is certainly a tremendous opportunity for growth in this area.
Re-examine how to better protect endowments. Organizations need to look at improved ways to protect their endowments. The stock market tends to drop quickly and rise slowly. As a result, the Great Recession sent a shockwave through the nonprofit sector. Let that serve as a warning. If your organization has an endowment, you must consider investment strategies that will more effectively safeguard it by reducing risk and volatility.
So, what is your organization doing to secure its future? Let me know in the Comment section below.
Fortunately, we have time to avert an economic disaster that would increase demand for nonprofit services while cutting grants and donations. However, we must use this time to demand meaningful action from our elected leaders, and we must prepare for the worst, just in case the worst happens. Do not be lulled into a state of complacency by the strengthening economy.
LPL Financial released a report with an optimistic outlook for 2015. I thank Bruce Kramer, a financial advisor, for sharing the report in the Legacy / Estate / Gift Planning and Planned Giving Professionals Group on LinkedIn.
While the LPL Financial report projects strong GDP growth and robust job creation in 2015, our economy remains fragile. GDP and job growth are good, and such growth can help address the Federal debt situation. An economically robust 2015 will give us a bit of breathing room for dealing with the national debt situation and also lead to stronger philanthropic giving.
However, any number of things could happen that could send the economy into a tailspin that would compound the debt problem. For example:
• As the Russian economy continues to deteriorate, the Russians might become even more aggressive thereby plunging the world into a significant conflict.
• Iran might obtain a nuclear weapon thereby sending the Middle East into an arms race.
• The Saudis might change their minds and throttle back on the flow of cheap oil thereby sending oil prices back up. ISIS, which this week attacked Saudi Arabia, might launch a successful strike on the Saudi oil fields thereby causing a spike in oil prices.
• Any large-scale terrorist attack could significantly disrupt the world economy.
In other words, while the economic outlook for 2015 looks positive right now, the economy is in a fragile position. We would be wise to remain vigilant and flexible.
Those who intend to rely on wishful thinking or simple denial will get very wet when the storm comes. So, make sure you have your umbrella.
That’s what Michael Rosen says… What do you say?
UPDATE (January 17, 2015): My friend Richard Freedlund shared a fantastic, relevant quote with me from American Founding Father James Madison: “I go on the principle that a public debt is a public curse.” He was a very wise man.
Michael Rosen Says... 