California Charities Look for Ways to Fix a Broken Fiscal System

California—long a magnet for people chasing riches, fame, innovative technology, or fun in the sun—has now become a symbol of government dysfunction.

Its never-ending budget squabbles have for years made life miserable for charities that rely on government revenues. But veteran nonprofit leaders say the state’s current fiscal problems—aggravated by the severe recession—surpass anything they have faced in their careers.

While struggling to survive this emergency, many in the nonprofit world are pondering what they can do to fix a broken system and ensure that California emerges stronger once the economy recovers. If they are able to make headway, they could serve as a model for their counterparts in states across the country that are also facing state budget cuts and gridlock. “The crisis is creating a real opportunity,” says James E. Canales, president of the James Irvine Foundation.

Mr. Canales says things have gotten so bad—74 percent of Californians said in a January poll that the state is going in the wrong direction—that momentum is building to “find a new way of doing business here.”

Ballot Measures

Irvine is among five foundations that pooled $16-million in 2007 and asked four civic organizations to create California Forward, a nonprofit group pushing to change the way the state makes budget and other decisions. The group is tackling some of the main complaints about California’s system, for example the requirement that the Legislature approve budgets by a two-thirds majority. That leads to regular impasses between Democrats, who control the body, and Republicans, who have enough votes to block them.

But as if to show that nothing in the Golden State is easy, California Forward—which is backed by a bipartisan group of business, labor, nonprofit, and ex-government leaders—has already had to temper some of its goals.

Its sister organization, the California Forward Action Fund (which does not receive foundation money), was hoping to collect signatures to place two measures before California voters next November. One would require lawmakers to approve budgets with a simple majority, create two-year budgets, identify how they will pay for new programs, and take other steps, such as forfeiting their salaries and travel and living expenses whenever they miss the budget deadline.

Robert M. Hertzberg, a former speaker of the California Assembly who is co-chairman of California Forward, says charities would benefit from such changes. A two-year budget, for example, would help them plan further ahead, unlike now when “one year the budget is up, one year the budget is down.”

The second ballot measure would prohibit the state from borrowing or taking local tax revenue and make it easier for counties to raise sales taxes.

However, California Forward has had trouble raising the $4-million that it needs to collect signatures to put both measures on the ballot.

Mr. Hertzberg’s assessment: It’s hard to get people to contribute money to an effort that benefits the common good rather than one that allows them to “protect their turf,” especially when so many groups have been hurt by state budget cuts.

He says California Forward has dropped the ballot measure about local and county revenues, and the measure to change the way budgets are adopted is on life support. While he is still contacting potential donors, he said last week, “I’m not that optimistic.”

(A separate effort, Repair California, which hoped to place a measure on the November ballot to authorize a constitutional convention to consider changes to the state’s governance system, has also suspended its efforts for lack of money.)

However, Mr. Hertzberg says the foundations that are supporting California Forward expected the effort to take some time and that ballot measures are just one way to accomplish the group’s goals. He believes the group’s ideas are catching on, noting that both Gov. Arnold Schwarzenegger and top lawmakers have endorsed some of its proposals.

State Fiscal System

Changing the way people think about taxes is critical to improving state finances, both in California and elsewhere, some nonprofit advocates argue. Nonprofit groups in California have been holding “Talking About Taxes” workshops, using training materials developed by Kim Klein, a member of the Building Movement Project, a group that promotes nonprofit leadership and activism. Ms. Klein, also a fund-raising trainer and consultant, says she tries to get nonprofit employees, who often have no opinion about taxes, to realize how those revenues affect their work.

She urges participants to learn about what many consider problems with California’s fiscal system. For example, she points to the impact of Proposition 13, a measure approved by voters in 1978 that limits property-tax increases, something she and a group called the California Tax Reform Association maintain has benefited commercial property owners more than homeowners. That measure also introduced a requirement that the Legislature approve all tax increases with a two-thirds majority vote.

While antitax advocates argue that higher taxes would drive out business, Ms. Klein urges nonprofit employees to remember that they are an economic driver as well, representing more than 10 percent of the work force, and that business would be harmed without tax hikes because California has slipped so far behind other states in measures like spending on education.

Taxes are often portrayed as “something that is being done to us, we’re somehow the victims of government,” says Liz Callahan, a senior project director for CompassPoint Nonprofit Services, a California consulting and research group, who got training to lead “Talking About Taxes” workshops.

”But there is another way to look at it, she says: “It’s all about how we keep our society civil, how we keep our communities livable.”

Nonprofit groups should also be willing to play hardball, Ms. Callahan says: “We have to be willing to close our doors and let folks see what happens when you don’t fund those kind of services.”

‘Survival Mode’

Meanwhile, as California lawmakers face the immediate challenge of how to close a budget shortfall of almost $19-billion over the next 16 months, some nonprofit leaders are urging their peers to think about changing the way they themselves operate.

“This is deeper and more systematic than anything I’ve experienced in my career,” says Sheila Anderson, president of the Child Abuse Prevention Council of Sacramento, who has been working in the field for more than 25 years. Demand for child-abuse services is rising, while state and county budget cuts are curtailing money for those services, as well as for others that aim to prevent the stresses that sometimes lead to child abuse, like substance abuse and domestic violence.

Now is the time for nonprofit groups to think about mergers that would help cut down on overhead costs, she says.

“There are over 500 agencies in this county that provide social services to children and families. Do we really need 500 executive directors or CEO’s? Do we really need 500 CFO’s? Do we really need to subdivide corporate and charitable giving that many different ways?”

However, except for some scattered efforts, she says, she is not hearing those conversations. Nonprofit groups, she adds, are in “something of a survival mode.”