How Are Nonprofit Finances Changing? New Data Make It Hard to Tell

Five years ago, when a new version of the Nonprofit Almanac — a key reference guide — was issued, it said that government grants and contracts accounted for 31 percent of the revenue that charities and social-welfare organizations received in 1997, the last year for which such data were available. Dues and payments for services made up 38 percent; contributions, 20 percent; and other sources of income were responsible for the rest.

Yet, by 2004, according to highlights of the new edition of the almanac released last month, government grants had fallen to just 9 percent of the revenue of those groups.

Private contributions had dropped as well, to 12.5 percent, while fees for services and goods sold by nonprofit groups had soared, now amounting to 70 percent of their income.

At first glance, those figures would seem to confirm what many observers of the nonprofit world have long feared: that the nation’s charities were becoming overly commercialized and support from the public was diminishing. As a result, scholars have warned, the philanthropic world risks losing its distinctiveness and capacity to serve the neediest or to champion unpopular causes.

But such a conclusion would be incorrect, as is clear from a careful reading of the Nonprofit Almanac, which was produced by the Urban Institute, a Washington think tank.

Figures about the nonprofit world can be presented in a variety of ways, and it is crucial to recognize what is actually being reported.

The data in the new version of the Nonprofit Almanac were calculated using an approach that minimizes the amount of government backing that charities actually receive.

One reason is that the figures it presents refer chiefly to organizations that are required by the Internal Revenue Service to account publicly for their finances because their revenue exceeds $25,000 annually. Included among them are hospitals, universities, performing-arts groups, and other organizations that have always relied heavily on payments for their services.

While those groups tend to get a big share of income in the nonprofit world, they represent only about a third of organizations. The rest of the nation’s charities — those with revenue less than $25,000 and religious groups that are not required to register with the IRS at all — undoubtedly depend substantially on donations and other forms of philanthropy.

And even many of the big groups that rely heavily on fees also raise significant amounts of contributions. (Consider any university with a multibillion-dollar development campaign.) The prices of goods and services delivered by nonprofit groups can also be set in ways that provide subsidies from those who can afford to pay to those who cannot, so it’s unwise to look at any figures on such transactions without taking that into account.

In short, the fact that fees and other kinds of commercial transactions may make up 70 percent of the revenue of big charities reveals little about how much public support the majority of nonprofit organizations actually receive or how much the larger ones provide in services to the needy.

But the 70-percent figure is misleading in another important way.

As the Nonprofit Almanac notes parenthetically, included within its estimate of fees are reimbursements provided by Medicare and Medicaid, government programs that pay for the hospital and medical bills of low-income and elderly patients. Additional government and private assistance is available to help eligible people with the costs of higher education, child care, housing, and other items, often provided by nonprofit groups.

Since individuals decide on their own whether to obtain particular services, the Urban Institute, like the IRS, considers the income as a payment for services, made by a third party, rather than a government grant or private donation that directly supports the organization’s work. Yet, insofar as these programs enable nonprofit groups to offer assistance to people who are unable to pay for it, they obviously serve philanthropic and public purposes as well.

Indeed, although the previous edition of the Nonprofit Almanac also included a calculation that treated those reimbursements as payments, far more prominence was given to estimates that considered them as forms of government aid, which is why the share of government support for public charities and social-welfare organizations was reported as 31 percent.

Moreover, although not all parts of the nonprofit world have benefited equally, government support in the past two decades has been shifting away from government grants and contracts and toward reimbursements for services received.

This change has produced new challenges, but to exclude it from estimates of government backing overlooks a revenue source that has helped fuel an expansion of nonprofit aid for people in need of it.

The Nonprofit Almanac is hardly the only recent publication to present surprising findings that turn out to result from different approaches to assessing the evidence.

Last month the Bank of America issued a report that was prepared by the Center on Philanthropy at Indiana University (with which I am affiliated) examining the giving patterns of wealthy households.

Among the highlights, a summary of the report said, was that most wealthy people said that eliminating the estate tax would not change their charitable giving, and nearly 30 percent said their contributions would increase if it were abolished.

That finding is at odds with much of the research produced during the debate over eliminating the estate tax that has been under way in Congress. Critics of that move contend it would significantly lower bequests, usually citing U. S. Treasury Department data about how much the wealthy actually deduct for gifts to charities in their wills.

The problem with such estimates is that they are better at explaining how people respond to current tax rules than what they say they would do if these rules were changed, as the Center on Philanthropy’s study tried to determine.

In any case, since members of most wealthy households make large gifts during their lifetimes, the fact that repealing the estate tax would have little impact on their philanthropy should not be surprising. By contrast, according to the Center on Philanthropy’s survey, eliminating the deductibility of donations from income taxes would lead close to half of these donors to reduce their contributions.

But to understand this, as well as recognize what statistics such as those collected in the Nonprofit Almanac are really saying, it is essential to look closely at the numbers.

Leslie Lenkowsky is professor of public affairs and philanthropic studies at Indiana University and a regular contributor to these pages. His e-mail address is llenkows@iupui.edu.