Current nonprofit sector research and recommendations for effective day-to-day practice from ASU faculty, staff, students, and the nonprofit and philanthropic community.
Social Service nonprofit organizations have long been relied upon to provide services to those in need in the United States. Federal, state and local governments increasingly depend on Social Service nonprofit organizations and, because of that dependency, have been willing to help fund them.
The U.S. government funding accounts for approximately one-third of the annual revenue received by nonprofit organizations, primarily through grants and contracts. The largest portion of these grants and contracts, according to an Urban Institute 2013 study, is received by Social Service organizations.
However, the government funding to Social Service organizations is not without challenges.
Challenges due to the government-nonprofit dependency include:
- Government Funding as the Primary Source of Revenue – When the government becomes the primary source of revenue for Social Service nonprofit organizations, any fluctuations in that funding can have an impact on the ability of the organizations to serve those in need.
- The Complexity and Instability of Federal Funding – Bureaucracy and complex systems can hinder Social Service organizations’ abilities to apply, receive and spend government funds as intended. Additional issues with government funding include delayed payments, incomplete payments, government shutdowns, changes in government spending and budget cuts.
- The Impact of Government Funding on Nonprofit Boards – Nonprofit boards are intended to represent the needs of their communities. However, with more government influence, Social Service nonprofit boards can become increasingly politicized and focused on meeting the needs of the government rather than the communities they serve.
- Changes in Government Regulations & Laws – While some governmental changes can be beneficial to Social Service nonprofit organizations, such as the Edward M Kennedy Serve America Act of 2009, others can have a negative impact, such as the 2017 Tax Cuts and Jobs Act (TCJA). It is estimated that TCJA will cause charitable donations to drop 6-9 percent annually, costing 220,000-264,000 nonprofit jobs.
While the challenges presented can seem significant, they can be overcome. Leadership and management recommendations for overcoming the government-nonprofit dependency include:
- Diversify Revenue Sources – Diversifying revenue can help to mitigate the impact of government funding challenges on the organization. If challenges arise and government funding becomes limited, the connections have already been made for other revenue sources which will make it easier to shift the portfolio to another revenue source either temporarily or permanently depending on the organization’s financial needs.
- Create a “Rainy Day” Fund – Social Service organization tend to decrease their reserves with increased government grants, thus it becomes prudent for Social Service organizations to follow recommended guidelines for reserve funds. Recommended reserve guidelines include having liquid, unrestricted, board-designated funds that can cover 3-6 months of operating expenses.
- Build a Strong Board – Social Service nonprofit board involvement directly influences the ability to diversify revenue, have a “rainy day” fund, stay mission focused and help the organization grow by providing needed oversight as well as maintaining the community focus.
- Invest in Overhead – Make sure overhead costs fully support staffing needs, financial stability, organizational growth and longevity. According to a letter to donors written jointly by the CEO’s of Charity Navigator, GuideStar and the BBB Wise Giving Alliance, “in fact, many charities should spend more on overhead. Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs.”
- Work Together, Rather Than Against One Another – Through uniting, Social Service organizations can increase efficiency and organizational effectiveness while increasing financial stability. Organizations can share the fundraising costs, as well as leveraging each organization’s strengths to help make a larger impact in the communities for which they operate.
Social Service nonprofit organizations face many challenges in acomplishing their missions. The dependence on government grants and contracts is one such challenge, which can be volatile at times as well as time-consuming, complicated and bureaucratic. However, the issues that arise from government funding can be overcome by Social Service nonprofit organizations through strategic planning, using the best practices of diversifying revenue, setting funds aside for when times get tough, making sure the board is strong and invested, spending on overhead to help increase financial stability and joining with other nonprofits on joint programatic and fundraising opportunities. Strategically implementing the recommendations can help to build financial stability, helping to improve communities and increasing the quality of life for future generations.
Kate Albaugh-Wayan is a graduate of the Master of Nonprofit Leadership and Management program at Arizona State University. Kate currently works as a Partnership Ambassador for Excelsior College, a nonprofit educational institution. Prior to working at Excelsior College, she worked at the United Service Organizations (USO), a nonprofit that supports military members and their families. Kate is passionate about the nonprofit field and making a difference in the communities for which she lives. She is an Army spouse with a motto of leaving every duty station a little better than when she arrived. Her passion for helping others is what led her to Arizona State University’s Master of Nonprofit Leadership and Management program, wanting to learn more about the nonprofit field and how she could make a larger positive impact in the world. She currently has a B.S. in Chemistry, B.A. in Psychology, Master of Arts in Teaching and is excited to be a graduate from ASU with her MNLM. When she is not studying, she spends her time volunteering in the local community, spending time with her spouse and taking long walks with her three Weimaraner puppies.