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Government Funding for Charities: When it declines, the charities lose twice

by Emily Navarro, Charity Navigator

May 1, 2005


We all know that charities receive their funding from multiple sources. The majority of contributions come from individuals; foundations and corporations also give significant amounts to nonprofits each year. What most of us don't realize is that another considerable source are taxpayer dollars, or government funding. While overall it represents a small percentage of a charity's contributed income, government funding is a generally reliable source that is typically renewed each year, or even increased. However, in recent years this funding has become less and less predictable.

Government funding is not equally dispersed throughout the nonprofit sector. Health and human services charities are favored over those that work in humanities, the environment, and education. For many years, state and local funding for health and human services continued to grow despite economic declines. Even as the economy began to show a significant downturn after September 11th, state expenditures for health and human services remained constant while funding for the environmental and arts charities was the first to be cut. More recently, however, even those charities that provide crucial health and human services to our most vulnerable citizens are not safe from budget cuts.

As the 2006 federal budget is drafted, state governments are getting a better idea of what the future holds for their own budgets. For the past several years, budget deficits have forced states to reduce funding to charities. This year's budget shortfalls are improving over last year's and it appears that many states are in the position to restore some of the funding to nonprofits. At a quick glance, it would seem that there was room for optimism.

Unfortunately, this may not be the case. Two major obstacles, both handed down by the federal government, stand in the way of charities seeing their government funding reach pre-2000 levels.

  • Funding for discretionary domestic programs is being cut at the federal level. Over $214 billion dollars of cuts are proposed over the next four years for programs providing services that range from education to environmental protection to assistance for low-income families. The budget is being cut, and the cuts are obviously not coming from military spending.
  • The cost of implementing federally mandated programs - such as Medicaid - is rising. Priority is being given to these programs; because they are mandatory, they must be funded at current levels. With this additional burden on state governments, money that was anticipated to be available for charities will likely be redirected, and in many cases cut even further.

With less funding distributed by the federal government and no state increases in sight, 2006 is looking considerably worse for charities.

Additional impact.
In addition to the primary result for the non-profit sector - the lack of available funding - secondary effects exist that will impact their operations:

  • Federal budget cuts mean reduced capacity for general services, leaving many people to fend for themselves or turn to currently-existing non-profits. The lack of government funding for these programs does not eliminate the need for the services they provide. Children and senior citizens still need health care; low-income families still need help paying their utility bills; the environment still needs cleaning up; and undereducated adults still need job training.
  • As the costs of Medicaid continue to increase, state governments are imposing stricter requirements that could cause thousands of people in each state - more than 100,000 in California alone - to become ineligible. As these people can no longer benefit from government subsidized health care, they will begin to seek out alternatives. Where will they turn? Most will look to their local health-related charities.

Ironically, these secondary results will increase the burden on the same charities that are serving in a diminished capacity because of government funding cuts. Not only are they impacted by the budget cuts directly affecting them, but also many are indirectly affected by additional demands for their services. In essence, they get less money to do their work, but more people to serve, because the government's additional cuts make more people in need of non-governmental assistance.

What does this mean for charities?
Nonprofits use a variety of strategies to deal with reduced funding: cutting budgets, looking for new revenue streams (either contributed or other), seeking increased contributions from the public, merging with other nonprofits, and advocating with state and county legislators. Often times foundations step in to compensate for the reduction in government funding.  Some foundations increase their monetary awards, effectively replacing the missing government contributions, while others take a more strategic approach to awarding grants, making more collaborative grants, and in some cases providing low-interest loans instead of grants.

Most nonprofits avoid cutting back on their services to clients until they have no other choice. Unfortunately, as government funding has been cut over the past several years, charities are running out of alternatives. These changes are a short term solution. If funding is not restored within a few years, there are fewer and fewer options. One potentially positive outcome is that budget deficits often initiate more innovative, creative, and perhaps in the long run, better ways to fund and operate the organizations.

Long-term damage.
Services provided by charities solve an immediate problem - they feed the hungry, shelter the homeless and care for the sick. These services provide additional long-term benefits. For example, an organization serving the mentally ill may provide treatment for its constituency. The impact of the treatment provided today can be far reaching. It can help to keep the mentally ill out of jails and hospitals, and off the streets. A charity that regulates pollution can ultimately help to improve the health problems in a community. After school programs for at-risk children can help to prevent crime. Substance abuse programs can turn lives around, keeping up employment and avoid financial problems in the abuser's home. Arts organizations can draw business to the local economy. The bottom line is that by spending a little today, we can avoid a greater financial burden in the future.

As a donor, what can you do?

  • Research charities. An organization that operates efficiently can do more with the same contribution than one that operates inefficiently. With so many charities working toward similar goals, make sure your money is going to one that you trust to use your gift well.
  • Consider increasing gifts to your favorite charities. Even if you can only afford to contribute an additional $10 or $20, every little bit helps, especially if your charity has been dependent on quickly-vanishing state and local government funding.
  • Contact government officials. Let them know that you think funding for human services (or the arts or environment, etc.) is important.

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