Reply to Nonprofit Quarterly article

Ruth McCambridge of the journal Nonprofit Quarterly has written an article sent by email today entitled: "Late Payments and Other Tough Stuff." In this brief but excellent article she relates the following comments from an executive director of a nonprofit organization that receives state funds for a local service population:

"One executive director told me that the state contract that comprises most of her budget requires that her organization never turn anyone away or even put them on a wait list. But they have just been informed that the state will not pay for any work done under this contract since mid April until September -- and the amount they will be owed at that time will be between $700,000 and $800,000. The organization has a credit limit far less than that so this makes the near future nerve wracking at best. In short, the state has forcibly taken a loan from this small organization while the agency worries about how to make payroll and tries to convince vendors to wait to be paid. Says the executive, 'We've always had to "slow pay," and all the providers have always found a way to make it through so there's never really been a huge up-in-arms, "this-has-got-to-stop" reaction.'"

Here in Michigan this type of situation is being experienced by hundreds of our nonprofit organizations as our state is in dire financial straits. But the financial crisis in Michigan comes as a result of two independent factors. Let's first take a look at this situation, then at the question involving payments to nonprofit service providers.

First in Michigan, for more than a decade, there is the refusal of the state legislature to deal with corrections and health care, while these two expenditure "lions" eat up the state's revenue in greater shares every year. We have a structural budget deficit that isn't going away, and we don't have the moral and political will to stop this from happening. All the legislators, in both parties, are afraid to deal with these two issues because they may well lose their jobs. ANd they would lose their jobs because the clear solution is that taxes are going to have to be raised, or else our standards and preferences in the fields of correcitons and health care are going to have to be drastically altered. Neither is a popular decision among Michigan's people, who pretty much want everything for themselves and nothing for the society -- we won't allow taxes to be raised, and we want to be comfortable in the niches we've created for ourselves individually given the present healthcare situation, and we really want people we don't like to be locked away with the people who are dangerous to us. So this means that each year the bulk of whatever revenues come to the state are going to continue to be eaten away by these two hungry lions.

Second, there's the worldwide Depression, or Recession -- whatever you call it, it's bad and growing worse, and thanks to the greed and avarice of the excessivly paid executives and managers of insurance companies and the financial and banking institutions of our country. Whatever it is, it's wreaking havoc with our states budget and presumably that of all the other states. And here in Michigan we have the death of the automobile industry to top it all off and make things even worse.

The result, then, is that property taxes and income taxes are not enough to make the state of Michgan's budget balance EVEN IF the above two issues of corrections and health care could be solved instantly overnight. So the consequence is that our state legislators and our governor just keep trying to cut, and shave, and cut, and shave the budget's expense column, and we're making public policy by dint of paring down the budget.

This is the chicken's way out. Legislators are not fulfilling the responsibilities of being elected officials; they're afraid of making the tough policy decisions that deal with issues we've had now for decades but have refused to face squarely. Even to the point that they have used the Federal bailout money to try to balance this year's budget.

Now, given this state of affairs in Michigan, my response to the situation with the nonprofits receiving cuts to their allocations to provide social services is this: If a state agency is going to a)set a condition that no one can be turned away or put on a wait list; and b)cut the amount of funding they pay for nonprofits to provide social services, and c) continue to be late payers to those charities, I see only one response that can really be made to this administrative type of public policy making: the nonprofit should stop serving the people, return any state monies held, and simply go out of business. Period.

There's really no other way to deal with this type of situation. Any move the charity's board or executive might make to try to stay in business and meet the needs of whatever service population we're talking about simply serves to set up a co-dependenr relationship that permits the state to have its cake and eat it too. If the charity keeps trying to stay alive and meet the needs of the service population, then the people are served off somebody else's dollar. They are served because the charity has gone out into the philanthropic marketplace and asked willing contributors to step up to meet the shortfall the state has occasioned. But that "shortfall" is pretty huge, so donated funds are not likely to cover adquately for very long.

State legislators first need to make just and sustainable public policy and then carefully thought out budgets need to be constructed to pay for its enactment of policy, in good economic times or bad; then taxpayers need to pony up to paying to make society better through presumably raised taxes, levied to meet the state's obligation or commitment to the maintain the social safety net. This would alleviate the need for contributors and donors being asked by the charities normally receiving state funds to pay for providing services.

The current situation just means service continues to that service population even though the state is not responsibly meeting its obligation for seeing to it that certain populations are served and their guidelines (no one turned away) are followed.

The state, any state, good economic times or bad, can't have it both ways. A state should not try to put the burden on nonprofits to pick up the slack and somehow find money to continue services when the taxpayers and their elected representatives will not raise taxes to keep the state's commitment to making society better. Public policy shouldn't be made in this co-dependent way. But that's what Ruth McCambridge's executive director is facing. We already have an over-crowded, under-funded philanthropic marketplace, thanks to Reaganomics and the conservatices' policies for the last thirty years. Now the recession brought about by their financial practices makes things even worse.

There is one other issue raised in this article, and it is this: that contributors to charity cannot, in the midst of a Depression or Recession that is international in scope, ever hope to give enough money to fulfill a state's obligations, or the federal government's obligation, to making society better and care for people in need. What we need is a strong commitment by a state or by the federal government to meeting peoples' needs and carrying out their responsibility for a livable and sustainable society as a TOP priority, recession or no, in good times or bad.

If we just stop serving the needy, and the many people who receive state and charitable services, then hopefully there will be enough hue and cry in the streets, enough tragedy and death reported by the media, enough expression of dissatisfaction with the state of things by knowledgeable people, and (god forbid) even mob action in the streets, that the state's legislators or federal elected officials will be forced to raise the taxes necessary to keep their commitment to the quality and sustainability of the social fabric. If nonprofits keep rolling over and refusing to end services and go out of business when states make these draconian cuts, we'll never get any further than we are now in having a public policy that, at both the federal and state levels, provides what people need to live in a society that is peaceful, just and sustainable. The voters won't be moved out of selfishness and complacence, the legislators won't be moved to act courageously, until disaster happens. You'd think we would have learned better by now, but we're apparently going to repeat a scenario that has been seen time and again: no action until disaster strikes.

We shouldn't be trying to keep these nonprofits going in the kind of rock-and-a-hard-place siutation that is described in Ruth McCambridge's article.

Proposed Limits on Charitable Tax Deductions

I see that the following press release was being prepared, and by now has been sent out by my fundraising colleagues. Here's an excerpt that explains what they're up to.

"The Association of Fundraising Professionals (AFP) and the Association for Healthcare Philanthropy (AHP) oppose the proposal in the President's budget that would impose new limits on charitable tax deductions. Both AFP and AHP applaud the President’s overall efforts in the budget to revive the economy, reform health care, revise energy policy and tackle other important issues affecting the country. However, the budget also contains a proposal that sends the wrong message at the wrong time to those who support charitable causes. It puts forward a scheme that would effectively devalue charitable gifts made by the very people who are in a position to make substantial donations at a time when they are sorely needed...the proposal would limit the federal tax deduction they may take for their generosity to 28 percent. Currently, they may claim up to a 35 percent deduction....The federal government, therefore, should seek ways to bolster charitable giving—as opposed to requiring charities to do more with less."

Frankly, in my view,while the sentiment is noble, and while this effort is historically consistent with the approach of nonprofits any time the President or Congress threatens to tinker with the tax deduction, it's not helpful now, and is in the wrong direction.

In this time, and in this economy, fighting on multiple fronts, the President needs us to to support his efforts, not detract from them for the sake of satisfying our own preferences. Sure, we'd all like the tax on capital gains and the tax on regular income to be even higher, so that the wealthy could escape even more taxation by giving to charity. That would be nice!

In reality, however, budgets need to be balanced, outputs need to equal inputs and if we're going to reduce the whopping federal deficit caused by the greed and failure of practically the entire financial system, then we need to find the money sin a host of places. If it means a few points less in charitable tax deduction, let's just thank our lucky stars we have some deduction left.

But even more to the point, as representatives of the nonprofit sector we've screamed "bloody murder" any time the tax deduction comes under fire. It's a knee-jerk reaction bourne from many years of having to defend the voluntary sector from business and political vultures who don't understand the human impulse to give and help a neighbot. Like all entities in the political process we can tend to become defensive about our turf, especially when there are those out there who don't understand the voluntary sector and its value to society and would easily vote to just wipe it out. We don't like Congress to mess with the tax deduction because we never know how that will turn out. But, while quite understandable, from the the position of having to defend our turf, and quite appropriate,from the viewpoint of being within a nonprofit organization and stretching every hard-earned donation dollar to touch as many lives as possible, nevertheless, right, now I believe this kind of defensiveness is unnecessary and unhelpful. Why?

Two reasons: First, if we're going to create a better, more just, more equitable society, then we must do more dialoguing and less debating. And dialogue involves being more open and honest, more transparent about what we're trying to accomplish, what we need to do that, and what the results will be for the measure we're advocating. Now if we can ever get the conservative Republicans to take on those characteristics that could produce some very interesting concepts, and in the process they would have to see that, basically, they are wrong about what they want to do, because it would not lead to a more just, more equitable society.

Second, when the capital gains tax was lowered a few years ago, we charities screamed, as we always do when Congress tinkers with the tax code, that donations would plummet and charities would be left high and dry. But, in the event, nothing happened. Donations didn't decrease, they kept on increasing, as they have done for the past 40 years or so. And now that the charitable deduction is proposed to be lowered to 28% from 35%, I doubt if this will make a difference in peoples' giving. Donors work around these things; they keep on giving, and they don't let a few points in the tax code prevent them from accomplishing their charitable objectives. Why?

First, because giving is from the heart. Those who want to give to charity, and are able, tend to go ahead and do that on a regular basis. The tax deduction is something of an incentive, but when donors are polled, it's way down the list. Only about 30% of donors acknowledge that the tax deduction is a motive for giving.

Second, because giving is from the head -- when the oxytocin runs, the checks get written. When people identify with those in need, they respond positively. So if we, as charities, are out there with strong, visual media promoting our case for support in compelling and motivating ways, we'll get those donations that are there to get. And as long as our boards and executives aren't afraid to invest in fundraising capacity -- and as long as fundraisers are out there forming and nurturing relationships with donors and prospects, then we're going to get the contributions we need to do our charitable mission.

The real tragedy of the situation is NOT that the President wants to lower the charitable deduction on those with incomes of more than $250,000. It's that the charities themselves are in panic mode, pulling back so hard and fast that they're destroying the ability of the professional fundraisers they employ to keep up those donor relationships that are so vital and that keep the donations coming. Boards and executives of charities in this area at least are running scared and cutting back on fundraising capabilty and infrastructure at just the time when it is most needed.

And there's good reason for many of them to be scared, too, because most of our more than 5000 charitable 501-c-3s in southeastern Michigan have not been doing their donor homework through recent years. They have not been out there forming relationships with donors, cultivating them, asking them repeatedly for their gifts and contributions to our various missions. The boards and executives, particularly in the thousands of small and mid-sized charities, have been stingy with their resources, failing to build good fundraising techniques and enlarge their pools of donors and prospects. We've been leaving a ton of money on the table by not getting out and asking anyone and everyone we see for assistance in charitable mission. It's not the President's fault; we've cut our own throats on this.

Consequently, as charities, we have no one else to blame but ourselves. I say leave the President to make the tax deduction decisions, and let the charities do a better job of applying the basics of fundraising on a day-to-day basis, so they can get the money they need to accomplish their charitable missions.

But there's another value at stake here, and along with it a better solution to the problem of taxing the wealthy. It is that we have, in essence, TWO tax codes. One for the wealthy and one for the rest of us. It's brought about by the disparity in the capital gains tax and the income tax. The wealthy may not have that much regular income. So if you drop the amount of the charitable deduction, you're not goin to net out that much income for the government to use. But the wealthy do have TONS of capital gains, and this can make up the lion's share of their income. And they are only being taxed 15% on those gains. Thus Warren Buffett was reported in the press recently as having said that his secretary is taxed more than he is!

So what to do? Mr. President, please just go ahead and forget about the charitable deduction, and please raise that capital gains tax to about 45%, OK? Now you're going to get some real money into the treasury, AND you're going to provide really wonderful incentives for charitable donations. Now the wealthy really have something to avoid. Charitable organization fundraisers could have a field day here and boost their nonprofit organization income significantly enough to take care of the great needs out there. At the same time, the U.S. Treasury will get a much bigger boost than it ever could with a paltry reduction in the charitable gift deduction.

Make sense? Sure. Unless you're wealthy. But then you have to figure that they elected to pursue money and try to get ahead of the pack in the first place so they could live better than the rest of us, so why shouldn't we, the pack, go after them in a big way!?