Charities Must Stand Up to States That Skimp on Payments for Services
By Allen Proctor
AHARD REALITY will soon confront he nonprofit world as the pres- sure to cut government spending
gets more serious.
Nonprofits have long felt the tight
pinch from state budget cuts, but they
have masked much of the impact on
people who rely on their services. That
can’t go on much longer.
A growing number of organizations
that receive state aid will soon be forced
to tell governments they cannot sign
contracts that continue to offer such
punitive terms. If state officials don’t
back down, nonprofits will face a tough
choice: Deny services to some clients to
help others or shut down and thereby
deny aid to all clients.
This dilemma has been slowly building. State, federal, and local governments have been talking about spending cuts for years. Sometimes they have
reduced spending and sometimes they
have not. Either way, most taxpayers
haven’t seen any difference in their
lives. They just see three issues: debt,
deficits, tax increases. Who wouldn’t
want to eliminate or avoid all of them?
Abolishing debt is good for the country,
and it has no obvious personal impact.
Erasing deficits also sounds good and is
abstract enough for many individuals to
anticipate little effect in their own lives.
On the other hand, people can see that
tax increases will come out of their own
Why is this myth that spending cuts
don’t affect real people so popularly ac-
cepted and expansively broadcast by a
wide swath of the political world?
Much of the answer lies with the behavior of nonprofit human-service organizations. In their devotion to helping
serve community need no matter what,
they have left many with the impression that government budget cuts make
no meaningful difference.
Governments have been solving their
budget problems by out-Wal-Mart-ing
Wal-Mart. The discount retailer is famous for pressing its suppliers to lower
their profit margins. Governments have
been eliminating the profit margins of
They have done this in three ways
documented by an Urban Institute sur-
vey of more than 32,000 nonprofits with
percent of nonprofits were paid less
than the full cost of contracted servic-
n Pushing costs to the nonprofits. For
more than half of organizations, gov-
ernments required nonprofits to match
the government aid they received or
absorb a portion of the government’s
Nonprofits have allowed themselves
to be taken advantage of in a manner
that businesses would not tolerate. A
for-profit company would never sign a
government contract that didn’t cover
its costs, would insist on a profit, and
would add a significant interest penalty
for late payments.
Nonprofits may also be encouraging
the situation by penalizing themselves
and their employees rather than exposing the public to any reduction in services because of government cuts. Half
of the nonprofits in the Urban Institute
survey froze or reduced staff salaries,
and more than 40 percent reduced staff
benefits and tapped their reserves. But
nationally only one-fifth made any reductions in services, and in 27 states
the proportion of nonprofits that reduced services was even less than one-fifth. The upshot is that nonprofits have
used their own cash and put their employees’ financial welfare in jeopardy to
maintain government services, thereby leaving many taxpayers with the
impression that tax increases are not
needed to preserve services.
It would be a grave mistake to assume that philanthropy can solve
this problem. Private donations provide only 22 percent of nonprofit revenue, and the share has not exceeded
24 percent since 1985. The only way
the next wave of government budget
cuts will occur with no impact on government services is if nonprofits spend
more from their reserves, assuming
continued on Page 26
Fighting Fraud and Promoting Social Equity: a Nonprofit Agenda
AS THE 2012 elections focus de- bate on the nation’s priorities, it’s time for nonprofits to figure
out how they can best serve a society increasingly divided over ideology, class,
and financial scarcity.
The recent record has not been encouraging. Drastic cutbacks in government aid and the stagnant growth in
foundation support have hurt many
nonprofits, especially small and medi-um-size ones. Some groups have been
forced to close their doors, while others
are trimming programs to the bone.
The largest and wealthiest nonprofits
got richer, while small charities and
grass-roots groups got poorer.
Many of the threats to nonprofits
come from within. Fraud and embezzlement cost nonprofits billions of dollars, while compensation packages for
CEO’s of large organizations remain
alarmingly large at a time when other
workers face salary freezes and layoffs.
Foundation performance has remained
lackluster, as have the advocacy efforts
of nonprofits in combating cuts in social
If nonprofits are to play a more vital
role in society, here are five things phi-
lanthropy and government must do to-
It’s time for Congress to take action
and provide the regulators with the
money and authority they need to crack
down on nonprofit abuses. And nonprofits themselves must step up actions to
protect their assets from abuse.
Make CEO pay more reasonable.
Nonprofit chief executives continue to
earn high sums, even at organizations
that have had to cut their programs,
lay off staff members, and scrap pay increases and benefits.
A typical private-college leader made
3. 7 times as much as the average full
professor on his or her campus in 2009,
according to the chronicle of Higher
education, and more than three dozen
chief executives made more than $1-
This comes at a time when tuition is
high and a paucity of scholarship aid
makes it impossible for many young
people to afford higher education.
Nonprofit hospitals also pay their executives extraordinarily well at a time
when they do little to provide care for
the poor. Local studies by newspapers
have identified scores of hospital chief
executives who make $1-million or
The same excessive compensation
characterizes large foundations, health
charities, and big social-service organizations.
Such high salaries are in part the
fault of the IRS, which has been too
vague about what level of pay is acceptable and too unwilling to penalize organizations that pay overly generous salaries. States have shown some interest
in cracking down, and bills have been
floated in several places to cap nonprofit
But this is not just the responsibility
of government. Nonprofit boards need
to stop approving such high pay at a
time when money is so scarce and seek
greater equity in pay among all workers.
Encourage donors to do more for
the needy. Despite the desperate need
by nonprofits to attract private aid to
make up for the loss of government
funds, foundations have not responded.
Wealthy individuals are not doing
much better. As the chronicle of Philanthropy’s ranking of the 50 top donors
of 2011 showed, most of the superrich
give to colleges, hospitals, and the arts,