Fights Over Taxes and Spending Bring Boom, Bust, or Uncertainty

The 2013 fundraising year could cement one of the more lasting effects of the economic downturn: a growing gap between the haves and have-nots of the charity world.

Bitter and politically divisive battles over federal taxes and spending and changes in how donors are responding to the lackluster economic recovery are causing problems for all charities, but small ones are facing the brunt of the challenges.

An analysis of contributions to more than 3,000 charities from January through November released last week by Blackbaud, a fundraising-software company, found that donations to those organizations were flat last year, at about $8-billion. Based on the analysis, officials predict that giving is unlikely to increase much this year and that donors will choose to give to fewer charities in 2013.

As donors are forced to make cutbacks, the Lancaster Area Habitat for Humanity, in Pennsylvania, for example, suffered in its year-end giving. Donations dropped 20 percent in November and December compared with the same time a year ago. The charity reported a meager 2-percent response to its 2012 holiday direct-mail appeal, which in better years drew a 15- to 20-percent response, and big gifts are “missing.”

But meanwhile, in the neighboring Garden State, at the New Jersey Performing Arts Center, donations grew by $500,000 over 2011 as affluent people paid off pledges early or made other large gifts to take tax deductions they feared would be reduced this year.

Such uneven results signal a profound change, says Scott Nichols, a veteran fundraiser at Boston University.

While in previous downturns contributions to nonprofits tended to be down across the board and to recover faster, “now it’s a game for winners and losers,” he says.

Big Winners

Among the very biggest winners at the end of 2012—and most likely for the next few months—are donor-advised funds, which allow donors to set up charitable accounts, take an immediate tax deduction, and decide later which charities get the money.

Donations to Schwab Charitable, the nation’s second-largest donor-advised fund, grew by more than 200 percent, to $1.6-billion, in the last six months of 2012 compared with the same period in 2011. The National Philanthropic Trust, a similar fund, reported that donors in December gave triple the amount they had given in the final month of 2011.

The possibility that Congress will make more changes to the tax code is likely to encourage yet more giving to donor-advised funds, as affluent donors worry that deductions for their charitable donations could be curtailed.

Many charities are using the uncertainty, plus news about the changes Congress approved in a deal New Year’s Day to stave off the fiscal-cliff deadlines, to promote giving.

Smith College is sending an e-mail appeal to 8,000 older alumnae to tell them that Congress reinstated a law that allows people age 70 1/2 to make tax-free donations to charities from their individual retirement accounts.

The appeal highlights a special inducement available only this month: Donors who make an IRA gift of up to $100,000 by the end of January can count the gift as having been made in 2012. That means they can make a second IRA gift this year, using their retirement accounts to give up to $200,000 in 2013, double what they could have done in previous years.

Writing Off More

Other charities are planning appeals that emphasize the possibility Congress will limit charitable deductions as it faces continued deficit-cutting pressure.

Fundraisers are reminding donors in the two highest tax brackets that they can now write off 35 or 39.6 percent of their gifts, which lowers the cost of making a contribution. Rich donors are especially likely to be interested in that message, because they previously were able to write off only 35 cents of every dollar donated and now can save close to 40 cents on the dollar.

In addition, people who give appreciated stock, real estate, or other property can save more, because Congress just raised the capital-gains tax from 15 to 20 percent. A donor in the top tax bracket who gives appreciated securities this year can write off 39.6 percent of that gift, plus he or she saves another 20 percent in taxes that would be owed if the stock were sold.

To tell its donors about such changes, Meridian Health Affiliated Foundations, the fundraising arm of six New Jersey hospitals, is now planning a series of intimate dinners, each one for six to eight couples who have made large gifts. The dinners have a “healthy, wealthy, and wise” theme and include presentations about advances in health care, implications of new and anticipated tax changes, and ways donors can make smart giving decisions now.

Changes to tax law provide a perfect opportunity to contact a charity’s existing supporters, says Brian Sagrestano, a New Hartford, N.Y., fundraising consultant.

“Send out a mailing and say here’s what is going on and how it might impact you,” he says. “Donors appreciate when charities look out for their best interests. So often charities get accused of only reaching for another gift.”

Maintain Momentum

With the tough economy and federal tax-and-spending decisions in coming months that could negatively affect charities and giving, experts say that fundraisers should:

Keep up the pace of fundraising. Rather than slowing down solicitations, as many charities typically do after the holidays, experts say that charities should be reminding donors that incentives for giving may never be stronger than they are right now.

Smart fundraisers “will treat January and February like the year-end giving season,” says Robert Sharpe, a Memphis fundraising consultant. He notes that because Congress faces another fiscal-cliff deadline in March, it’s possible that that will be a time for new tax changes.

Do a better job of thanking donors. In the booming 1990s and early 2000s, “when money was plentiful, almost anyone could raise it,” says June Bradham, a Charleston, S.C., fundraising consultant. But even America’s wealthiest are cautious about giving this year, she says. “Philanthropists have narrowed their giving, and they are giving to fewer places. Donor fatigue is heightened, and it’s not as easy to go to these people as it used to be.”

Ms. Bradham and other fundraising experts say that thanking and cementing relationships with generous donors is now more important than ever.

“Nonprofit organizations that have the infrastructure to handle donors extremely well will be fine,” Ms. Bradham says. “Those who are shaky in infrastructure and stewardship will have a really hard time.”

Embrace new forms of giving. With the country’s financial ills and the threat of huge cuts to government programs that aid the poor, donors will increasingly change how they give, predicts Betsy Brill, a Chicago consultant who advises wealthy individuals and families on their philanthropy.

For instance, wealthy people might shift to providing general operating support and give to fewer charities, while family foundations may increasingly offer loans instead of grants.

Other experts point to donors’ growing interest in social-impact bonds and other ways of applying investment or business models to charitable work.

One example is an investment fund started by the Nature Conservancy last year. Donors who invest at least $25,000 for one to five years get their money back and up to 2 percent interest; the fund raised more than $16-million in its first five months.

Increasingly, “donors will have to take a long, hard look at their own strategies,” Ms. Brill says.

Respond to new fiscal realities. Charities need to acknowledge the difficult economy and talk to donors about what they’re doing to work through it, says Ms. Brill, who reviews grant proposals aimed at her affluent clients.

“I am dismayed to continue to receive business-as-usual proposals,” says Ms. Brill, noting that she would prefer more requests for resources that help charities find new ways of cutting costs or accomplishing their work. Nonprofits, she says, should talk to donors about how they are streamlining their operations to be more effective or collaborating with others to achieve more now. “Don’t send me the same thing you sent three years ago,” says Ms. Brill. “Speak to the current reality and how you are meeting the challenges.”

She adds: “I am not saying your mission should be shifted. I’m saying I want to hear how you are grappling with today. None of us are in a business-as-usual environment. And none of this is easy, for donors or nonprofits.

Raymund Flandez contributed to this article.