April 28, 2011

Brace Yourself! The Fiscal Shakeout Bearing Down on Government-Funded Nonprofits

The long delayed fiscal reckoning in the United States finally appears to be at hand, and government-funded nonprofits need to be thinking now about how they will respond.

By: Daniel Stid

The front-page, above-the-fold story in this week’s Chronicle of Philanthropy notes in its headline that “As Deficit Hawks Circle, Charities Brace for Capitol Hill Battles.”  The opening salvos have indeed already been fired, with Congressman Paul Ryan putting forward his plan to reduce federal deficits by $4.4 trillion over the next decade and President Obama countering with his own plan to reduce federal deficits by $4 trillion over the next twelve years.  Last week S&P downgraded its long-term outlook on U.S. sovereign debt from “stable” to “negative,” something it hasn’t done since the Japanese attacked Pearl Harbor.  This year the first wave of the baby boom generation becomes eligible for Medicare, an entitlement for which the costs continue to spiral out of control.  Starting in 2015, Social Security will go cash negative, paying out more in benefits than it takes in every year.  The long delayed fiscal reckoning in the United States appears to be finally at hand.  The Chronicle thus understates the sidebar observation that “nonprofits must now reconsider their relationship to the federal government.” 

For human service nonprofits, there may be an even more pressing need to rethink their relationships with state and local governments, where the bulk of the funding for the human services they deliver comes from.  (A 2010 Urban Institute/Brookings Institution report noted for example that more than two-thirds of public spending to benefit children comes from state and local coffers).  The fiscal outlook at the state and local level is if anything bleaker than it is at the federal level.

Consider that roughly 25-percent of state government funding in the United States comes from the federal government. (It rose well above 30-percent in 2009-10 but is coming back down to historical levels as the federal stimulus well runs dry.) This funding flowing out to the states is clearly going to be negatively impacted by the federal government’s looming structural deficits and any solutions developed for them.  And state governments have their own demographic time bomb to deal with, in the form of an estimated $1.3 to $2.4 trillion in unfunded pension and retirement liabilities across the 50 states, the eventual payout of which to current and former employees is guaranteed by many state constitutions.  As this week’s Pew Center on the States report indicates, this problem is getting worse, not better, as states continue to put off funding their long-term obligations.  States will be further hard pressed to meet these requirements in the face of rising health care costs for Medicaid beneficiaries, current employees and retirees alike.  Given that all but two states are required to balance their budgets annually, states will have to slash spending in other areas to pay these rising and postponed bills. With the challenges of raising taxes to increase state revenues, especially in states requiring legislative super majorities or public voting on tax increases, there will be tremendous downward pressure on funding for human services.

And in a perverse trickle-down dynamic, state fiscal problems will in turn whiplash local governments, which in the U.S. federal system receive approximately 30-percent of their revenue from the states and are effectively legal subsidiaries of them. As state governments struggle financially, there will be less money to pass down, leading in turn to belt-tightening and budget cutting at the local level.  As the Government Accountability Office observed last week, local governments, like the state governments that oversee them, will be increasingly bogged down by the rising cost of paying for health care for their current workforce and retirees.

The net effect of all these dynamics?  “The state and local government sector continues to face near- and long-term fiscal challenges that grow over time,” the GAO notes, and “…the fiscal position of the sector will steadily decline through 2060 absent any policy changes.”

The “Capitol Hill Battles” that have flared up recently are better seen then as the opening skirmishes of what may be a decades’ long war.  This war will have a knock-on effect and end up visiting as much, if not more, collateral damage to the funding of human service nonprofits at the state and local level. We will pick up tomorrow on the political handicaps these nonprofits and their beneficiaries will face in this struggle.

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