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The State of Nonprofit America
BROOKINGS INSTITUTION PRESS
Copyright © 2012 Lester M. Salamon
All right reserved.
Chapter One The Resilient Sector: The Future of Nonprofit America LESTER M. SALAMON
A struggle is under way at the present time for the "soul" of America's nonprofit sector, that vast collection of private, tax-exempt hospitals, higher-education institutions, day care centers, nursing homes, symphonies, social service agencies, environmental organizations, civil rights organizations, and dozens of others that make up this important, but poorly understood, component of American life.
This is not a wholly new struggle, to be sure. From earliest times nonprofits have been what sociologists refer to as "dual identity," or even "conflicting multiple identity," organizations. They are not-for-profit organizations required to operate in a profit-oriented market economy. They draw heavily on voluntary contributions of time and money yet are expected to meet professional standards of performance and efficiency. They are part of the private sector yet serve important public purposes.
In recent years, however, these identities have grown increasingly varied and increasingly difficult to bridge, both in the public's mind and in the day-today operations of individual organizations. In a sense, America's nonprofit organizations seem caught in a force field, buffeted by a variety of impulses, four of which seem especially significant. For the sake of simplicity I label these voluntarism, professionalism, civic activism, and commercialism, as shown in figure 1-1, though in practice each is a more complex bundle of pressures.
What makes these four impulses especially important is that their relative influence can profoundly affect the role that nonprofit organizations play and the way in which they operate. Understanding this force field and the factors shaping its dynamics thus becomes central to understanding the future both of particular organizations and of the nonprofit sector as a whole.
Sadly, far too little attention has been paid to the significant tensions among these impulses. The nonprofit sector has long been the hidden subcontinent on the social landscape of American life, regularly revered but rarely seriously scrutinized or understood. In part, this lack of scrutiny is due to the ideological prism through which these organizations are too often viewed. Indeed, a lively ideological contest has long raged over the extent to which we can rely on nonprofit institutions to handle critical public needs, with conservatives focusing laser like on the sector's strengths in order to fend off calls for greater reliance on government, and liberals often restricting their attention to its limitations to justify calls for expanded governmental protections.
Through it all, though largely unheralded—and perhaps unrecognized by either side—a classically American compromise has taken shape. This compromise was forged early in the nation's history, but it was broadened and solidified in the 1960s. Under it, nonprofit organizations in an ever-widening range of fields were made the beneficiaries of government support to provide a growing array of services—from health care to scientific research—that Americans wanted but were reluctant to have government provide directly. More, perhaps, than any other single factor, this government-nonprofit partnership is responsible for the growth of the nonprofit sector as we know it today.
Since about 1980, however, that compromise has come under considerable assault. Conservative critics, concerned about what they see as an unholy alliance between the once-independent nonprofit sector and the state, have called for a return to the sector's supposed purely voluntary roots. Liberal critics have bewailed the sector's departure from a more socially activist past and its surrender to professionalism. At the same time, the country's nonprofit managers, facing an extraordinary range of other challenges as well—significant demographic shifts, fundamental changes in public policy and public attitudes, new accountability demands, massive technological developments, and changes in lifestyle, to cite just a few—have been left to their own devices and have turned increasingly to the market to survive. Through it all, nonprofit America has responded with considerable creativity to its many challenges, but the responses have pulled it in directions that are, at best, not well understood and, at worst, corrosive of the sector's special character and role.
Despite the significance of these developments, little headway has been made in tracking them systematically, in assessing the impact they are having both generally and for particular types of organizations, and in effectively getting the results into the hands of nonprofit managers, policymakers, the press, and the public at large. This book seeks to fill this gap: to offer an overview of the state of America's nonprofit sector, to examine the forces that are shaping its future, and to identify the changes that might be needed to promote its long-term health. The result is a comprehensive analysis of a set of institutions that we have long taken for granted but that the Frenchman Alexis de Tocqueville recognized over 175 years ago to be "more deserving of our attention" than any other part of the American experiment.
The purpose of this chapter is to set the stage for the detailed examination of key components of the nonprofit sector that follows. To do so, the chapter first introduces this set of institutions and explains the stake the nation has in its operations. I then look in a bit more detail at the four impulses identified earlier that are shaping this sector at the present time and the implications they have for a number of the key facets of nonprofit operations. Against this backdrop, the chapter then examines the challenges and opportunities that constitute the drivers behind these impulses, the responses nonprofits have generally made to them, and the risks that have arisen as a consequence. A final section then offers some suggestions for steps that would help ensure that a vibrant nonprofit sector, performing the functions for which the country has long relied upon it, survives into the future.
Perhaps the central theme that emerges from this account is one of resilience. The overwhelming impression that emerges from this book's chapters is that of a set of institutions and traditions facing not only enormous challenges but also important opportunities, and finding ways to respond to both with considerable creativity and resolve. Indeed, nonprofit America appears to be well along in a fundamental process of reengineering that calls to mind the similar transformation that large segments of America's business sector have been undergoing since the late 1980s. Faced with an increasingly competitive environment, nonprofit organizations have been called on to make fundamental changes in the way they operate. And that is just what they have been doing.
The problem, however, is that, although the sector's organizations have been responding resiliently, those responses are taking a toll on their ability to perform some of their most important functions. In a sense, nonprofits have been forced to choose between two competing imperatives: a survival imperative and a distinctiveness imperative, between the things they need to do to survive in an increasingly demanding market environment and the things they need to do to retain their distinctiveness and basic character. How the country's nonprofit organizations balance these demands, and how much understanding and help they receive from the broader society in doing so, will shape the condition in which the country's nonprofit institutions survive into the future.
But first we need to clarify what the nonprofit sector is and what makes it so deserving of our attention.
What Is the Nonprofit Sector and Why Do We Need It?
The nonprofit sector is one of the most important components of American life, but it is also one of the least understood. Few people are even aware of this sector's existence, though most have some contact with it at some point in their lives. Included within this sector are most of the nation's premier hospitals and universities; almost all of its orchestras and opera companies; a significant share of its theater companies; all of its religious congregations; the bulk of its environmental advocacy and civil rights organizations; huge numbers of its family service, children's service, neighborhood development, antipoverty, and community health agencies; not to mention its professional associations, labor unions, and social clubs. Also included are the numerous support organizations, such as foundations and community chests, which help to generate financial assistance for these organizations and to encourage the traditions of giving, volunteering, and service that undergird them.
More formally, the nonprofit sector consists of a broad range of private organizations that are generally exempted from federal, as well as state and local, taxation on the grounds that they serve some public purpose. The term nonprofit, which is commonly used to depict these organizations and which will be used here, is actually a misnomer: these organizations are permitted to earn profits—that is, end up with an excess of income over expenditures in a given year; what is prohibited is the distribution of any such profit to organizational directors or managers. Technically, then, we might more accurately refer to these organizations as non-profit-distributing organizations.
Within this complex array of organizations are two broad types: first, member-serving organizations, such as labor unions, business associations, social clubs, and fraternal societies; and second, public-serving organizations, such as hospitals, universities, social service agencies, and cultural venues. For the purpose of this volume, we focus exclusively on the second type, the public-serving organizations, which make up by far the largest, and most visible, component of the tax-exempt-organization sector. Also known as charitable organizations, most of these organizations earn their exemption from federal income taxation under section 501(c)(3) of the Internal Revenue Code, which is reserved for organizations that operate "exclusively for religious, charitable, scientific, or educational purposes." Alone among tax-exempt organizations, the 501(c)(3) organizations are eligible to receive tax-deductible donations from individuals and businesses, that is, gifts that the individuals and businesses can deduct from their income when computing their income taxes. This reflects the fact that the recipient organizations are expected to serve broad public purposes, not just the interests and needs of the organizations' members. The public-serving component of the nonprofit sector also includes another set of organizations, however, which are eligible for tax exemption under section 501(c)(4) of the Internal Revenue Code, which is reserved for so-called social welfare organizations. The major difference between 501(c)(4) and 501(c)(3) organizations is that the former are permitted to engage in lobbying without limit, whereas the latter have limits on the extent of their lobbying activity. Because of this, however, contributions made to 501(c)(4) organizations are not tax deductible.
Size of the Sector
No one knows for sure how many tax-exempt nonprofit organizations exist in the United States, since large portions of the sector are essentially unincorporated and the data available on even the formal organizations are notoriously imperfect. A conservative estimate would put the number of formally constituted tax-exempt organizations, as of the late 2000s, at nearly 2 million, of which 1.6 million are in the public-serving component of the sector.
Within this public-serving portion of the entire tax-exempt universe, moreover, are four subgroups of organizations:
—About 1 million service and expressive organizations, ranging from hospitals to advocacy organizations and cultural institutions;
—A little over 100,000 501(c)(4) social welfare and lobbying organizations;
—Approximately 114,000 foundations, federated funders, and other "support organizations"; and
—Over 400,000 religious congregations.
As of 2007 these public-serving nonprofit organizations employed close to 13.5 million paid workers. This represents 10 percent of the entire U.S. labor force and makes the nonprofit paid workforce the third largest of any U.S. industry, behind only retail trade and manufacturing, but ahead of such industries as construction, finance and insurance, and transportation (figure 1-2). With volunteers included, and their volunteer time translated into the equivalent number of full-time workers, the workforce of nonprofit, public benefit organizations swells by another 4.5 million full-time-equivalent workers, making it the largest workforce of any U.S. industry—larger than construction, larger than finance and insurance, even larger than retail trade and all the branches of manufacturing combined, as figure 1-2 also shows.
Employment provides just one measure of the scale of America's public-serving nonprofit organizations. Also impressive are the financial resources that these organizations command. As of 2007 the revenue of public benefit, nonprofit organizations stood at slightly over $1.7 trillion. Most (76 percent) of this revenue, a sizable $1.3 trillion, accrued to the service and expressive organizations, which form the economic core of the sector. The balance went to the funding intermediaries ($211 billion), religious congregations ($119 billion), and 501(c)(4) social welfare agencies ($85 billion).
Among the service and expressive organizations, most of the revenue flows to health-related organizations. With 11 percent of the organizations, this field captured 58 percent of all nonprofit service and expressive organization revenue in 2007, as shown in figure 1-3. Education and research organizations make up the second-largest component in terms of revenue, with 21 percent of the total. By contrast, social service providers, although the most numerous of the service and expressive organizations, making up 40 percent of the reporting organizations, accounted for a considerably smaller 14 percent of the revenue (though this was still a substantial $182 billion).
These large categories disguise the huge array of separate services and activities in which nonprofit organizations are involved, however. A classification system developed by the National Center for Charitable Statistics, for example, identifies twenty-six major fields of nonprofit activity, and sixteen functions, from accreditation to fundraising, in each. Each major field is then further divided into subfields. Thus, for example, the field of arts, culture, and humanities has fifty-six subfields, and the field of education, forty-one. Altogether, this translates into close to a thousand different types of nonprofit organizations.
Even this fails to do justice to the considerable diversity of the nonprofit sector. Although most of the employment and economic resources of this sector are concentrated in the sector's large organizations, most of the organizations are quite small, with few or no full-time employees. For example, of the more than 1.2 million organizations recorded on the Internal Revenue Service's list of formally registered 501(c)(3) and 501(c)(4) organizations (exclusive of religious congregations, which are not required to register), only about a quarter, or 332,000, filed the information form (form 990) required of all organizations with expenditures of $25,000 or more. The remaining three-fourths of the organizations are thus either inactive or below the $25,000 spending threshold for filing. Even among the filers, close to 45 percent, nearly half, reported less than $100,000 in expenditures, and 75 percent reported less than $500,000. Taken together, these small organizations accounted for a mere 2.6 percent of the sector's total expenditures. By contrast, only about 4 percent of the organizations fell into the largest category ($10 million or more in expenditures), but these organizations accounted for nearly 83 percent of the sector's reported expenditures. The overwhelming majority of the sector's organizations therefore account for only a tiny fraction of the sector's activity.
Excerpted from The State of Nonprofit America Copyright © 2012 by Lester M. Salamon. Excerpted by permission of BROOKINGS INSTITUTION PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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