Nonprofits and Government Funding: Opportunities, Challenges, Trends and Trade-offs

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1 FORUM ON THE MILWAUKEE NONPROFIT SECTOR Convened by the Helen Bader Institute for Nonprofit Management University of Wisconsin-Milwaukee in Partnership with Milwaukee Center For Independence, The Nonprofit Management Fund and BoardStar Nonprofits and Government Funding: Opportunities, Challenges, Trends and Trade-offs 1

2 The Government-Nonprofit Partnership: Challenges and Opportunities Steven Rathgeb Smith Georgetown University The University of Washington 12 March 2010 Milwaukee, Wisconsin 2

3 Introduction Very important transition period for nonprofits and their relationship to government in the US. steady and substantial increase in the nonprofit 501 c 3 public charity organizations Fiscal crisis of state and local government Increased attention to accountability and evaluation Public and private support for social innovation and social entrepreneurship Broad support for voluntarism and community service 3

4 Outline of Presentation The Evolution of the Government-Nonprofit Relationship Management and Policy Challenges Next Steps for Improving the Relationship between Government and Nonprofits Concluding thoughts 4

5 Historical Perspective on Nonprofit Government Relationship in US 19 th Century and Early 20 th Century Wave of New Nonprofits Government subsidies for specific services such as child welfare Overall, most agencies depended upon private donations and fees The Rise of the Community Chest (United Way) 5

6 The New Federal Role: The 1960s-1970s 1970s Big increase in federal financing. Diversification of services. New services included: Community mental health Neighborhood health centers Drug and alcohol treatment Transitional houses for youth Anti-poverty agencies Child care 6

7 The New Federal Role: The 1960s-1970s 1970s (con t) Increased state and local spending. Big increase in the number of nonprofit social services agencies. Shift toward reliance on public funding and less dependence on private charitable donations and volunteers. Move toward a more universal model of social services with greatly expanded eligibility and service options. 7

8 The Reagan Era Policy Changes Devolution of Federal Grant programs Creation of block grants Greater state and local administrative discretion Cutbacks in federal funding of nonprofits 8

9 Recent Policy Changes and Developments Growth of Medicaid as a funder of nonprofit social and health organizations Home and Community Based Waiver program Foster care and child welfare Personal care services such as home health, home care, and transportation 9

10 Wisconsin s Medicaid Spending Total Medicaid Spending, FY2007 WI ($) US ($) $4,937,145,634 $319,676,945,585 Distribution of Medicaid Spending by Service, FY2007 WI (%) WI ($ 1000) US (%) US ($1000) Acute Care 55.9% $2,760, % $194,774,315 Long Term Care 42.9% $2,119, % $108,911,978 Disproportionate Share Hospital Payments 1.2% $57, % $15,990,652 Total 100.0% $4,937, % $319,676,946 10

11 Distribution of Medicaid Spending on Long Term Care, FY2007 WI (%) WI ($) US (%) US ($) ICF-MR 7.1% $150,301, % $12,486,987,363 Mental Health Facilities Nursing Facilities 1.5% $31,023, % $4,824,014, % $988,643, % $47,884,851,201 Home Health & Personal Care 44.8% $949,298, % $43,677,723,192 Total 100.0% $2,119,267, % $108,874,000,000 Source: statehealthfacts.org 11

12 Wisconsin s Medicaid Spending Average Annual Growth in Medicaid Spending, FY FY2007 WI (%) US (%) FY % 10.9% FY % 9.4% FY % 3.6% 12

13 Recent Policy Changes and Developments Welfare Reform in 1996 Increase in federal and state funding for nonprofit social services. Shift away from cash assistance to greater emphasis on services Major changes in the organization of local nonprofit social services especially in states such as Wisconsin. 13

14 Upper Midwest States: AFDC/TANF Caseload Average Monthly Cases per Fiscal Year 1996 (AFDC) Illinois 224,148 83,917 37,895 36,330 Indiana 52,873 35,872 52,686 42,534 Iowa 32,785 20,025 19,969 16,675 Michigan 178,002 74,231 75,111 82,953 Minnesota 58,250 39,040 36,500 27,479 Ohio 206,722 97,969 84,292 79,485 Wisconsin 60,058 16,719 20,460 17,951 Total 812, , , ,413 Source: Data are from the U.S. Department of Health and Human Services, Administration for Children and Families, Office of Family Assistance, Caseload Data, 14

15 Recent Policy Changes and Developments Diversification of Government funding: Shift away from direct contracts including away from cost-reimbursement contracts. Growing reliance on vouchers (e.g. child care and housing), quasi-vouchers (Medicaid), and tax credits (Low Income Housing Tax Credit program). 15

16 Recent Policy Changes and Developments Growth of other federal programs supporting nonprofit organizations. Over time, government funding of nonprofits providing social and health care has become more centralized. Faith based Initiative during the Bush Administration and Charitable Choice amendment of the welfare reform legislation. Broad support for community service and voluntarism as exemplified in the Serve America Act of

17 Growth of the Nonprofit Sector Increase in public funding, until the fiscal crisis hit, has contributed to the expansion of the nonprofit sector across the US including Wisconsin. 17

18 Growth in Nonprofit Organizations by Type, 1996 and 2008 Sources: IRS Business Master File 04/2009 (with modifications by the National Center for Charitable Statistics at 18 the Urban Institute to exclude foreign and governmental organizations).

19 Other 501 (c)(3) Nonprofit Organizations 19 Sources: IRS Business Master File 04/2009 (with modifications by the National Center for Charitable Statistics at the Urban Institute to exclude foreign and governmental organizations).

20 Number of Nonprofit Organizations in Wisconsin, 1998 and # of orgs % of all orgs # of orgs % of all orgs % Change All Nonprofit Organizations 27, % 34, % 25.70% 501(c)(3) Public Charities 12, % 20, % 64.00% 501(c)(3) Private Foundations 1, % 2, % 71.50% Other 501(c) Nonprofit Organizations 13, % 12, % % 501(c)(3) Public Charities 12, % 20, % 64.00% Reporting Public Charities 4, % 11, % % Non-Reporting, or with less than $25,000 in Gross Receipts 7, % 8, % 21.20% 501(c)(3) Private Foundations 1, % 2, % 71.50% Private Grantmaking (Non-Operating) Foundations 1, % 2, % 70.70% Private Operating Foundations % % % Other 501(c) Nonprofit Organizations 13, % 12, % % Civic leagues, social welfare orgs 3, % 2, % -9.20% Fraternal beneficiary societies 3, % 1, % % Business leagues, chambers of commerce 1, % 1, % -8.00% Labor, agricultural, horticultural orgs 1, % 2, % 11.00% Social and recreational clubs 1, % 1, % 2.80% Post or organization of war veterans 1, % 1, % -8.50% All Other Nonprofit Organizations 1, % 1, % -6.30% 20 Sources: IRS Business Master File 04/2009 & The National Center for Charitable Statistics at the Urban Institute

21 Number of Public Charities in Wisconsin, 2009 Total 501(c)(3) Public Charities in Wisconsin (2009): 20,184 Source: IRS Business Master File 04/2009 & The National Center for Charitable Statistics 21 at the Urban Institute.

22 Recent Policy Changes and Developments Increased competition between nonprofits and for-profits. Home care Hospices Community care Workforce development 22

23 Growth and Change of the Nonprofit and For-Profit Service Mix Industry Individual& Family Services Type of Operation Facilities NPO 49,618 56,693 1 Commercial 10,887 17, % Change Child Care NPO 24,231 21, Commercial 44,896 52, Service Industry NPO 108, , Commercial 80,369 97, Homes for the Elderly NPO 3,107 2, Commercial 10,965 12,

24 Summary Growth of Nonprofit Organizations Increased Importance of Federal funding to nonprofits providing social and health services Greater competition between agencies Diversification of government funding including sharply greater role for Medicaid 24

25 Management and Policy Challenges 25

26 Fiscal crisis of state and local government due to the economic crisis. Great variation in the severity of the fiscal crisis. Pew Foundation study of state budgets listed Wisconsin as a state with a particularly severe structural deficit. Increased competition for public funding (and private donations) 26

27 Pressure for Accountability and Performance Evaluation More monitoring and regulation of contract agency finances Shift to performance contracting with reimbursement tied to meeting specific program-related related outcome targets Shift by private funders including the United Way and major foundations to an outcome-based grant model Nonprofits and government often struggle to develop appropriate performance targets Funding also often lacking for extensive evaluation 27

28 Pressure for Accountability and Performance Evaluation Concern about program accountability has dovetailed with widespread concern about the accountability of nonprofits to the public. Especially true in the wake of well-publicized scandals involving nonprofits. Diversification of organizational forms and regulations around the appropriate use of different legal categories. 28

29 Adequate Infrastructure and Capacity Growth in nonprofits is concentrated in the smaller community organizations Undercapitalized, underfunded, small boards, lack of extensive community base of support, mission-based. Difficult to respond to the increased demands for accountability Smaller organizations are at a competitive disadvantage vis a vis larger nonprofit and for-profit organizations. 29

30 Next Steps and Suggestions for Government and Nonprofits 30

31 General Approach Emphasize the need for a problem-solving approach that entails all relevant stakeholders and involves the public and philanthropic sectors Specific areas: Governance Reinventing Technical Assistance New Approaches to Standard-Setting Setting Political Voice and Participation 31

32 Governance The traditional lines of authority within government, between government and nonprofits, and within nonprofits must be rethought. Government must be more collaborative in working across departments to develop policies that are appropriate to the complex world of public services. 32

33 Government and nonprofits must address the accountability and performance assessment issue Already happening in many service categories such as child welfare as housing policy Nonprofits must be more accountable to their communities and their members Many nonprofits have only very weak links to their communities and a are often not very accountable to them Nonprofits, especially those receiving public funds, must be more connected to their communities Many models aiming to revamp the board and advisory committee structure to provide more community governance and accountability exist. 33

34 Reinventing Technical Assistance Government and nonprofit agencies must rethink their ongoing relationship and develop ways in which they can work together to solve perennial issues Board recruitment Funding Staff-board relations State and local government (and private foundations) should think of themselves as investors with an ongoing commitment to the success of their grantees 34

35 Developing new technical assistance relationships is often complicated by the reluctance of nonprofits to seek assistance from funders. Many fear it may be perceived as a sign of trouble and threaten current or future funding Public and private funders are trying to overcome this problem by supporting technical assistance provided by third party intermediary organizations. Includes nonprofit assistance centers Umbrella organizations of nonprofit agencies have received support for technical assistance to their members 35

36 New Approaches to Standard-Setting Setting In the current environment, tendency toward over-regulation regulation or inappropriate regulation exists. In response, greater interest in self-regulation by nonprofits. Some efforts are by nonprofit associations that try to certify nonprofits who abide by certain ethical practices Other means of self-regulation are more programmatic E.g. Child welfare agencies attempting to create a type of peer review system Success has been uneven and is still unfolding Government should help support these efforts and work with the nonprofit sector where appropriate 36

37 Political Voice and Participation Many of these changes hinge on the effective political voice of nonprofit agencies. However, many nonprofits may be reluctant to participate in the political process for several reasons: Nonprofits may be worried that political advocacy may jeopardize a tax exempt status Many nonprofit volunteers and staff are unfamiliar with the political process and the laws regulating advocacy and lobbying by nonprofits. Smaller organizations may not have the resources 37

38 Political Voice and Participation Strategies to Improve Nonprofit Effectiveness More funding support from foundations and private donors for advocacy Improved training and education for nonprofit staff Working with intermediary associations representing nonprofit organizations Engaging board members in advocacy on behalf of the agency 38

39 Addressing Resource Problems The Role of Government: Contract Reform Support for nonprofit capital Equitable rate-setting. Collaborative Public-Private Private funding Initiatives The Role of Nonprofits: Broadening political and community support through: outreach changes in organizational structure new forms of organizational membership ongoing community partnerships 39

40 Addressing Resource Problems The Role of Nonprofits: Diversification of revenue Collaboration and partnership with other nonprofits where appropriate Working with other nonprofits, both individually and collectively through associations to pursue important revenue and regulatory priorities. 40

41 Concluding Thoughts Nonprofits: their essential role in social citizenship The importance of civic engagement broadly defined Government needs to invest in its own capacity Accountability and a mind-set focused on performance are essential. 41