By Alan J. Abramson
Nonprofit organizations deliver a substantial portion of this country’s health, education, and human services. Through nonprofit community, religious, arts, and advocacy organizations, we help our neighbors in need, express our faith and creativity, and speak up for causes we care about. Nonprofits account for more than 5 percent of the Gross Domestic Product; and employ roughly 10 percent of private sector workers, not including volunteers.
Nonprofits are critical partners with government in the effective delivery of a broad range of services. About one-third of nonprofit income comes from government grants and payments for services. Besides supporting nonprofit service delivery, government facilitates – and constrains – nonprofit activity through a variety of laws and regulations. For example, government laws incentivize private donations to 501(c)(3) charities by providing donors a tax break for their contributions. At the same time, government regulations limit 501(c)(3) nonprofits’ ability to lobby for specific legislation and forbid their involvement in partisan political activities.
Government relies heavily on nonprofits to provide needed services in communities. Rather than station armies of government workers in neighborhoods to dispense needed services, government turns regularly to nonprofits to provide services that have the experience, specialized training, local knowledge, and community support to deliver effectively. Today, government payments to nonprofit service providers total approximately $560 billion. By partnering with nonprofits, government also leverages the philanthropic and other resources that nonprofits raise to supplement the funding they receive from government.
While there is much that is currently working well with regard to government-nonprofit partnerships, there is also significant opportunity for improvement. In particular, these partnerships face the following challenges:
- Lack of Nonprofit Voice in Government
While most major interests in our society have an office within government that speaks up for their concerns, it is surprising – and problematic – that the nonprofit sector as a whole does not have this kind of representation in government. At the federal level, the Department of Labor represents workers, the Department of Commerce speaks up for business, and the Department of Agriculture is a voice for farmers. However, within the federal government it is now largely the Internal Revenue Service that relates to the nonprofit sector as a whole, with the IRS mostly involved in regulating rather than speaking up in a positive way for nonprofits. To be sure, particular nonprofit subsectors link to different executive branch departments – nonprofit hospitals and nursing homes have a home in the Department of Health and Human Services, and universities have a voice in the Department of Education. But at the same time, there is no federal office that actively represents the nonprofit sector as a whole.
With no federal office focused on broad, nonprofit sector-wide issues, the interests and capacities of this important sector are often overlooked or misunderstood in policymaking. For example, policymakers tend to overestimate the capacity of foundations and philanthropy generally to offset sizeable government budget cuts. Policymakers are also apt to be blind to the problems that new legislation and regulation may cause for nonprofits, as with health care reform and recently enacted overtime regulations. At the same time, policymakers may overlook the capacity that nonprofits have to help address critical national needs, like their ability to put people back to work in the Great Recession. Nonprofit service providers and foundations should have a voice within government to ensure their needs and capacities are taken into account.
- Weak Organizational Capacity of Many Nonprofits
While many nonprofits are strong organizations that deliver high-quality services, many others are fragile entities with relatively weak organizational capacity for information technology, human resources management, accounting and finance systems, evaluation and outcome data, and other management functions. The increased emphasis on performance measurement and performance management in the nonprofit sector in recent decades has highlighted the organizational deficiencies of many nonprofits.
Especially relevant for government are the challenges many nonprofits face in complying with new federal mandates. For example, new federal regulations regarding overtime pay for employees, including nonprofit workers, go into effect on December 1, 2016, and will require adjustments by many nonprofits who are not familiar with the regulations or do not have the know-how or resources to adhere to the overtime pay requirements. Similarly, many nonprofits – and government agencies – are not fully aware of or appropriately implementing the new Uniform Guidance rules that require federal, state, and local governments to pay nonprofits at least 10 percent of their (modified total) direct costs to cover nonprofits’ indirect – or overhead and administrative – expenses when the work is funded in whole or in part by federal funds.
- Resource Strains on Nonprofits and Philanthropy from the Government
Recent decades have seen a change in the implicit social compact between government and the nonprofit sector. Rather than simply partnering with nonprofits to improve performance, government has turned over increased responsibility for meeting some social needs to nonprofits and philanthropy. Unfortunately, however, the scale of resources that can be devoted to the public good is vastly different between the sectors, with combined federal, state, and local government spending accounting for 32 percent of GDP, dwarfing the nonprofit sector’s 5 percent of GDP, or private philanthropy’s 2 percent of GDP. Reduced government support for nonprofit service delivery puts new strains on nonprofit organizations and philanthropy seeking to offset the government cuts.
Moreover, there is a real question about whether the best use of private philanthropy is simply to fill in where government cuts back. Traditionally, philanthropy has been more of a complement to government, funding different kinds of services than government or funding similar services in a different way (e.g., through a faith-based approach). Government cutbacks pressure nonprofits and philanthropy to play unfamiliar and perhaps inappropriate roles.
What can be done to address these challenges and strengthen the important partnership between government and nonprofits? Following are four recommendations for action by a new administration:
- Create a New Government Office to Represent Nonprofits and Philanthropy
To give nonprofits an appropriate voice inside government, a new government office on the nonprofit sector should be created. In particular, what is needed is not a massive new bureaucracy but rather a modest-sized office that would bring together relevant information on the nonprofit sector collected by government agencies and others, and also be a voice for the sector in policy debates within and outside government. The new office would not regulate nonprofits but would leave this function to the IRS and other government agencies.
A critical question is what kind of office to create and where in the executive branch to locate a new office for the nonprofit sector. Several years ago, policy expert Shirley Sagawa recommended establishing a Small Business Administration-type entity for the nonprofit sector. Just as the SBA provides support for and advocates on behalf of small business, including through SBA’s Office of Advocacy, a new agency could work with nonprofits in similar ways. Another option is to create an agency like the National Endowments for the Arts or Humanities, perhaps a National Endowment for the Nonprofit Sector and Philanthropy (or a National Endowment for Civil Society). In recent decades, the closest approximations to a nonprofit office in government have been the various White House offices presidents have established to work on nonprofit-related issues, including some with a special interest in faith-based nonprofits. President George W. Bush’s White House included an Office of Faith-based and Community Initiatives. President Barack Obama has worked with nonprofits through both an Office of Faith-based and Neighborhood Partnerships and an Office of Social Innovation and Civic Participation.
Establishing a White House office focused specifically on the nonprofit sector and philanthropy seems like the most feasible and sensible short-run option. Creating such an office would not require new legislation, with the down side that it would not be permanent. In addition to bringing together information about the nonprofit sector and being a voice for nonprofit concerns in intra-governmental policy discussions, a new White House office could convene the various foundation liaisons that have been established in federal departments by the Obama Administration. In an era of concern about scarce government resources and unnecessary duplication of effort, a new nonprofit office should exist in place of, and not in addition to, similar entities that have been created by previous administrations.
Besides establishing a new office to represent nonprofits, a new administration should beef up of the capacity of the IRS to monitor nonprofits. The IRS office that oversees nonprofits is woefully understaffed, and strengthening the IRS’s capacity would help protect the reputation of law-abiding nonprofits.
- Expand Capacity-Building Support for Nonprofits
One of the responsibilities of a new nonprofit office in the federal government would be to arrange for needed capacity-building assistance for nonprofits. This would require Congress and the president to fund a grant program of sufficient size to pay for the help many nonprofits need in strengthening their organizational infrastructure. Unfortunately, previous, occasional, federal capacity-building efforts have been funded at relatively modest levels, except for the Strengthening Communities Fund which was allocated $50 million in the 2009 Recovery Act. Capacity-building efforts should inform nonprofits about and help equip them to follow the requirements of the new federal overtime and other regulations.
Of course, given federal budget constraints, significant new funding for nonprofit capacity building may be hard to find. Ensuring that federal, state, and local governments follow the new Uniform Guidance rules regarding fuller reimbursement of nonprofits’ indirect costs would help nonprofits to better cover their overhead and administrative expenses and thereby strengthen nonprofits’ organizational infrastructure. Government agencies could also include capacity-building support for nonprofits as part of their contracts with these organizations, although this might take away funding for services to clients.
To be sure, through competitive processes government typically contracts with high-performing nonprofits to deliver services, and these nonprofits have somewhat less need than others for capacity-building assistance. However, the public – and the government – have a stake in the effective performance of both nonprofits with and without government contracts, and government should help to provide capacity-building assistance to both kinds of nonprofits where possible.
- Increase Incentives for Charitable Giving
With new responsibilities being thrust on nonprofits and philanthropy, it is important that public policy support their strengthening. Tax policy, in particular, could increase philanthropy by extending the charitable deduction to non-itemizers, as was done in the early 1980s. The foundation excise tax should also be set, in a revenue neutral way, at a fixed rate of roughly 1.25 percent of net investment income rather than varying with foundation payout.
Federal policy should take note of the increased interest and energy around hybrid activity that mixes nonprofit and for-profit activity in double-bottom-line pursuits that seek both to “do good” and “make money.” Some argue that a hybrid Fourth Sector is emerging, and government should consider policies that would appropriately encourage for-benefit activity that has the potential to leverage significantly greater resources for the public good, an important consideration in a time of government fiscal constraint.
- Examining the Changing Roles of the Government and Nonprofit Sectors
The reordering of sectoral roles, with government cutting back and the nonprofit and business sectors taking on new responsibilities for meeting social needs, requires further study and discussion outside of the partisan arena. In prior times, we might have created a commission to tackle this kind of issue, but commissions seem out of favor these days. In any case, what we need is a study group to address questions related to the role of nonprofits and philanthropy vis-à-vis government and how well equipped each of the sectors is to address needs in the U.S. and around the world. The Filer Commission was an important, hybrid, public-private effort in the 1970s that addressed significant issues related to the role of the nonprofit sector and its relationship to government. With much having changed over the past 40 years, now is the time for a new look at some of these critical questions.
Government has too much at stake in the effective performance of the nonprofit sector to continue to neglect this vital part of our society. The modest steps outlined above will help to make for more effective partnerships between government and nonprofits that will better serve government, nonprofits, and most importantly the American people.
Abramson, A. J. (2016). “Making public policy toward the nonprofit sector in the U.S.: How and why broad, ‘sector’ interests are advanced – or not – in federal policymaking.” Nonprofit Policy Forum. http://www.degruyter.com/view/j/npf.ahead-of-print/npf-2015-0050/npf-2015-0050.xml?format=INT
Abramson, A. J. (2016). “No taxation, no representation: How government is organized – or not – to address nonprofit issues.” Nonprofits and Government: Collaboration and Conflict, edited by Elizabeth T. Boris and C. Eugene Steuerle. 3d ed. Washington, DC: Urban Institute Press/Rowman and Littlefield.
Abramson, A., Soskis B., & Toepler, S. (2012). “Public-private partnerships: Trends, innovations, and challenges.” Arlington, VA: Council on Foundations. http://www.cof.org/sites/default/files/documents/files/Final%20GMU-Report%20on%20PPPs.pdf
Brilliant, E. L. (2000). Private charity and public inquiry: A history of the filer and Peterson Commissions. Bloomington and Indianapolis, IN: Indiana University Press.
Council on Foundations. (2016). “Private foundation excise tax.” http://www.cof.org/page/private-foundation-excise-tax
Delaney, T. (2015). “Nonprofits win key victory in overhead battles with government.” Chronicle of Philanthropy. https://philanthropy.com/article/Opinion-Nonprofits-Win-Key/151979
De Vita, C. J. & Morley, E. (2013). “Final report: An assessment of the strengthening communities fund capacity-building program.” Washington, DC: Urban Institute. http://www.acf.hhs.gov/sites/default/files/ocs/an_assessment_of_the_scf_capacity_building_program.pdf
Ferris, J. M. & Williams, N. P. O. (2014). “Catalyzing collaboration: The developing infrastructure for federal public private partnerships.” Discussion Paper. Los Angeles: University of Southern California, Center on Philanthropy and Public Policy. http://cppp.usc.edu/wp-content/uploads/2014/10/Oct-2014-CPPP-Report-Catalyzing-Collaboration-The-Developing-Infrastructure-for-Federal-Public-Private-Partnerships.pdf
Giving Institute. (2016). “Giving USA: 2015 was America’s most-generous year ever.” http://givingusa.org/giving-usa-2016/
Independent Sector. (2016). “Overtime rules for nonprofits.” https://www.independentsector.org/overtime_rules?s=overtime%20rules
McKeever, B. S. (2015). “The nonprofit sector in brief 2015: Public charities, giving, and volunteering.” Washington, DC: Urban Institute. http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000497-The-Nonprofit-Sector-in-Brief-2015-Public-Charities-Giving-and-Volunteering.pdf
National Council of Nonprofits. (2016). “Overtime regulations and the impact on nonprofits.” https://www.councilofnonprofits.org/trends-policy-issues/overtime-regulations-and-the-impact-nonprofits
Owens, M. S. (2013). “Charity oversight: An alternative approach.” http://web.law.columbia.edu/sites/default/files/microsites/attorneys-general/Marcus%20Owens%203.18.pdf
Pettijohn, S. L. & Boris, E. T. (2014). “Contracts and grants between human service nonprofits and government: Comparative analysis.” Brief #04. Washington, DC: Urban Institute. http://www.urban.org/sites/default/files/alfresco/publication-pdfs/413189-Contracts-and-Grants-between-Human-Service-Nonprofits-and-Government-Comparative-Analysis.PDF
Roeger, K. L., Blackwood, A. S., & Pettijohn, S. L. (2012). The Nonprofit Almanac 2012. Washington, DC: Urban Institute Press.
Sabeti, H. (2011). “The for-benefit enterprise.” Harvard Business Review (November 2011). https://hbr.org/2011/11/the-for-benefit-enterprise
Sagawa, S. (2008). “An SBA for non-profits.” Democracy: A Journal of Ideas. Spring 2008, no. 8. http://democracyjournal.org/magazine/8/an-sba-for-non-profits/
Salamon, L. M. & Abramson, A. J (1982). “The nonprofit sector.” In John L. Palmer and Isabel V. Sawhill, eds. The Reagan experiment: An examination of economic and social policies under the Reagan Administration. Washington, DC: Urban Institute Press.
U.S. Office of Management and Budget. (2016). Budget of the United States Government, fiscal ear 2017: Historical tables. Washington, DC: Government Printing Office. https://www.whitehouse.gov/omb/budget/Historicals
 For statistics on the size and scope of the nonprofit sector, see: Roeger et al. 2012 and McKeever 2015.
 According to McKeever 2015, in 2013 reporting public charities received 47.5 percent of their income from fees for services and goods from private sources; 32.5 percent from government grants and fees for services and goods from public sources; 13.3 percent from private contributions; 4.8 percent from investment income; and 1.9 percent from other sources.
 Calculated from McKeever 2015 as 32.5 percent of total revenue of $1.73 trillion.
 For a more in depth analysis of the need for a new government office on the nonprofit sector, see Abramson 2016.
 A classic example of policymakers’ overestimation of the capacity of philanthropy to make up for sizable government budget cuts occurred at the start of the Reagan administration. See Salamon and Abramson 1982 for a full account.
 See Abramson 2016 for a discussion of the problems resulting from policymakers’ failure to take into account the impact on nonprofits of changes in laws and regulations.
 On the implications of the new overtime rules for nonprofits see Independent Sector 2016 and National Council of Nonprofits 2016. On the Uniform Guidance for nonprofits, see Delaney 2015.
 See U.S. Office of Management and Budget 2016; McKeever 2015; Giving Institute 2016. Note that the 5 percent of the economy that the nonprofit sector comprises reflects funding that nonprofits receive from both government and philanthropy.
 Urban Institute studies of government contracting with nonprofit human service agencies in 2009 and 2012 identified significant negative effects of government cuts on nonprofits, especially in 2009. See Pettijohn and Boris, 2014.
 See Sagawa 2008.
 On foundation liaison offices, see Abramson, Soskis, and Toepler 2012; and Ferris and Williams 2014.
 On the shortcomings of the IRS’s oversight of nonprofits, see Owens 2013.
 For an evaluation of the Strengthening Communities Fund (SCF), see De Vita and Morley, 2013. The Urban Institute’s evaluation found, “a large number of [nonprofit] grantees … believed that the assistance received through the SCF program helped build their organizational capacity in a relatively short time.” At the same time, the evaluation recognized the challenges of assessing the impact of capacity-building on nonprofit service delivery and nonprofit clients’ outcomes, especially in a short time frame (p. xi).
 On the foundation excise tax, see Council on Foundations 2016.
 On the Fourth Sector, see Sabeti 2011.