Are You Ready for the Coming Storm?

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:

Impact of Nonprofit Sector: More than Most People Think

Do you know the impact of your nonprofit organization?

Chances are, I probably got you thinking about the people your organization benefits, its core mission.

The public recognizes that reputable nonprofit organizations benefit the people they serve. However, people tend not to think beyond that impact. Even among nonprofit professionals, maybe even you, the focus tends to be on those served directly.

However, nonprofit organizations have a far broader impact. Yes, hospitals heal patients; universities educate students; symphony orchestras entertain audiences; museums expand our minds; disease research foundations seek cures. But, beyond their core missions, nonprofit organizations do much more for society.

Despite being tax exempt, nonprofit organizations generate tax revenue. They employ people, and those people pay income taxes and sales taxes. They help support local businesses such as furniture retailers, office supply stores, restaurants, hotels, and many others. Those businesses, in turn, pay taxes and employ staff.

Simply put, nonprofit organizations have a profound economic ripple effect. Their benefit to society goes far beyond those they serve.

Recently, the Greater Philadelphia Cultural Alliance sought to quantify the economic impact of the arts and cultural nonprofit organizations in the Philadelphia area. The result of GPCA’s effort is the report The Arts, Culture and Economic Prosperity in Greater Philadelphia. 

Generating 44,000 full-time equivalent jobs, Philadelphia’s arts and culture sector has a profound $3.3 billion impact on the region’s economy including $1 billion to local residents in the form of paychecks and household income and $169 million in tax revenues for state and local governments, according to the research report.

The report also compares Philadelphia against 181 other cities, regions and communities to show how Philadelphia and its cultural community stack up against the rest of the country. Among participating regions, Southeastern Pennsylvania’s cultural sector ranks first in job creation, accounting for 11 jobs per thousand residents, nearly double the national average.

GPCA says that key findings in the report are: