Tough year ahead for charities

If you donate money to save rain forests or support the arts in your community, experts at leading nonprofit watchdogs have a dire prediction for you. If 2010 seemed like a bad year for your favorite charity, just wait for 2011.

Already struggling this year, cash-strapped nonprofits face the prospect of continued high demand with even more cuts next year, especially for those organizations heavily reliant on state and local government funding. And those signs of a slow recovery for the rest of the economy probably won't come in time to buoy the charitable sector in 2011.

"Nonprofits are the caboose of the train," says Ken Berger, chief executive officer of Charity Navigator, a nonprofit ranking service based in Glen Rock, N.J. "We're the last to fall and the last to reemerge."

In fiscal 2009, giving fell 11 percent at the nation's top 400 charities – the worst drop since The Chronicle of Philanthropy started tracking nonprofit flows two decades ago. Small and mid-size nonprofits are on even shakier ground. Nearly 80 percent had less than six months' worth of cash on hand and 61 percent struggled with only three months' cash in reserves, according to a survey of nonprofit executives on their expectations for 2010. The result has been that many nonprofits have scaled back projects, laid off staff, reduced service, and even filed for bankruptcy protection.

And needs continue to grow. Demand for services at food banks and homeless programs are at peak levels, according to Mr. Berger. Take Feeding America, a Chicago-based charity that claims to feed 37 million people each year. While the organization's demand for services grew by 46 percent, its donations dropped by nearly 9 percent in 2009. The group's spokeswoman isn't expecting 2010 to be any better.

Donations aren't the only worry. Cash-strapped states and counties – desperate for more revenue – are eyeing nonprofits and their cherished tax-exempt status. Numerous state governments, including Hawaii, Georgia, and Kansas have proposals to limit property tax exemptions or otherwise tax nonprofits. Others are getting tough on charities. The state of Illinois sued a Champaign, Ill., hospital, claiming that it did little charity work, and the state's Supreme Court agreed. The hospital now owes millions of dollars in property taxes.

"With ballooning deficits, everything is on the table and those nonprofits whose charitable value is low are prime targets," says Daniel Borochoff, president of the American Institute of Philanthropy, based in Chicago. Many states will look to tiered systems where taxes are ranked based on the service provided, he predicts. "Homeless organizations might be taxed far lower than, say, a polo club."

Scrutiny at the federal level isn't looking much better. Mr. Borochoff predicts heightened inquiries from Washington stemming from the role of nonprofits in the recent election.

One such nonprofit, the Commission on Hope, Growth & Opportunity in Washington was heavily scrutinized by media outlets for supporting largely Republican issues without disclosing its donor base as traditional political action groups do.

"Nonprofits are intended to be social welfare organizations, not ones that simply allow you to hide your identity," says Borochoff. He hopes the Federal Trade Commission will take a greater role in policing nonprofits, which has traditionally been left to the Internal Revenue Service. "There needs to be greater disclosure of where your money is going and how much is being spent to get your donation."

In the face of all this adversity, nonprofits are getting creative. The American Cancer Society's division that represents most of northern California undertook an aggressive restructuring that left the group more nimble, more reliant on volunteers, and still able to support a 20 percent increase in demand for services, according to Michael Chae, the group's regional vice president. "We've found that volunteers actually provide better service and are far less costly [than employees in] providing vouchers" to the charity's clients, he says.

Still Charity Navigator's Berger worries that nonprofits – especially those that rely heavily on state and local government funding – aren't prepared for the year ahead.

"States were buoyed by the stimulus bill, but as that dries up, state governments will need to find ways to shore up their balance sheets and charitable programs will be prime targets," he says. "The disaster delayed by the stimulus will be the disaster that is. Charities just aren't ready for what's to come."