The Nonprofit World Must Stand Up for Itself

When Minnesota’s highest court denied tax-exempt status to a child-care center, it sent shudders throughout the nonprofit world.

The Minnesota court said in December that it agreed with concerns raised by Minnesota government officials that the Under the Rainbow Child Care Center was not providing any free or reduced-price services to needy families and therefore did not deserve its property-tax exemption.

But the challenge raised by this court ruling is just one of many concerns facing nonprofit organizations. Among the others:

An erosion of public support. Nonprofit groups face increased questions from the public and policy makers about whether they are doing a good job. According to a recent survey by Paul Light, a professor of public service at New York University, one-third of Americans say they lack even a “fair amount” of confidence in charities, and only 16 percent express “a great deal” of confidence in the work of nonprofit organizations.

Continued fiscal distress. While many nonprofit groups are growing in size, the vast majority are not gaining in financial security. Government cutbacks, tepid growth in private donations, and the pressures of a declining economy keep too many nonprofit groups on the edge of fiscal panic.

Growing needs. Financial woes have come into even starker relief as the number of Americans in need has increased rapidly. The newly unemployed and underemployed are adding to the burdens on organizations already taxed by demands to care for the growing elderly population and the influx of immigrants into the United States.

Heightened competition. The proliferation of charities, as well as for-profit businesses that have now entered markets that nonprofit groups formerly served on their own, means that many organizations face intense competition to attract clients, donors, and supporters.

Increased demands to demonstrate performance. Supporters of all kinds — private donors, government agencies, clients who pay fees for nonprofit services — are all calling on nonprofit groups not only to make a difference, but also to demonstrate what difference they are making.

Pressures to attract qualified workers. A series of recent reports has chronicled the burnout, generational tensions, and shortage of workers that already or will soon test nonprofit groups of all kinds.

Increased public scrutiny. Nonprofit groups are in the spotlight — or the headlights — and there is little room for error.

Many nonprofit groups have responded to these challenges by seeking to become more like businesses. They pursue earned income rather than charitable donations, trim their costs, increase their marketing, hire M.B.A. graduates, and cut out activities that do not cover costs.

But that response can get charities in hot water, as the decision by Minnesota’s highest court has shown. This kind of court ruling might have been expected in regard to wealthy hospitals and universities, which have long come under attack from policy makers for not being sufficiently “charitable.” But when small and medium-size groups face such threats, it is time to look beyond the conventional approaches to dealing with current challenges.

Three other options therefore deserve attention.

One option is to drop the pretense that all organizations categorized under Section 501(c)(3) of the tax code are equally charitable. Now that organizations have learned how to “do good” and “make money” at the same time, some observers suggest it may be time to create a special legal designation for organizations that, while charitable, receive a sizable share of their revenue from market sales. The “L3C” legislation that Vermont put into law in May may be a model for establishing a new type of organization that would operate under different rules and receive different government subsidies than other charities.

Another response is for nonprofit groups to beef up their advocacy efforts. As Larry Ottinger, president of the Center for Lobbying in the Public Interest, recently wrote, “If nonprofits aren’t at the table, they will be on the table.”

Even taking into account the valiant efforts of Independent Sector, the Council on Foundations, the National Council of Nonprofit Associations, and others, the nonprofit world could do a better job of standing up for itself.

For example, it could demand that reimbursement rates under federal programs like Medicaid cover the true cost of services. Today, reimbursement rates rarely do, so nonprofit groups end up subsidizing federal programs by raising money from private sources.

The nonprofit world’s weak voice in public policy results in part from uncertainty about what it really stands for. Nonprofit groups have failed to articulate a clear vision for themselves or to explain convincingly how modern nonprofit organizations operate.

Instead, charities paint romantic images of selfless volunteers and generous donors tending to the needs of the disadvantaged — images that are increasingly inconsistent with the prevailing realities of complex organizations supported heavily by fees and government support, managed by skilled and decently paid professionals, and improving the quality of life for the entire society. Lacking clarity about their own values and vision, nonprofit groups invite others to question their operations and the need for their activities.

So how can nonprofit groups devise a more convincing rationale for themselves?

First, nonprofit organizations must regularly set aside time to engage their boards and staffs in serious discussion of organizational values and operating style. Survival is not the only value that should motivate organizational behavior. “Survival for what?” should be the central question every nonprofit group asks.

Second, they should reflect on their vision in many more discussions among themselves — in town-hall meetings, annual conferences, and other gatherings.

Finally, as they ponder these questions, nonprofit leaders should reach out to the nonprofit researchers who have been studying how nonprofit groups are — and are not — different from other kinds of institutions. A thoughtful discussion among nonprofit leaders and researchers might advance understanding about what kind of value nonprofit groups add to society.

No matter how pressing the challenge of money constraints, human-resource problems, competition, and organizational performance may be to nonprofit leaders, it is time for them to realize that nothing is more important to their future than developing and communicating an updated rationale and compelling vision for the nonprofit world.

Alan J. Abramson is a professor of public and international affairs at George Mason University and a senior fellow in the nonprofit sector and philanthropy program at the Aspen Institute. Lester M. Salamon is a professor of political science at the Johns Hopkins University and director of the Johns Hopkins Center for Civil Society Studies.