January 10, 2013

For Government-funded Nonprofits, the Fiscal Cliff Just Got Steeper

Did the initial fiscal cliff deal hurt nonprofits? Bridgespan Partner Daniel Stid suggests that, for organizations that rely on government funding, things just got worse, not better.

By: Daniel Stid

Happy New Year, Cliff Noters!

Last week's deal gives us plenty to discuss. We managed to avoid the combination of across-the-board tax increases and spending cuts that would have put the economy into recession and a lot more people out of work. Policy-makers, investors, and taxpayers in households earning less than $450,000 a year exhaled in unison: "Phew—that was a close one!"

They were joined by leaders of the nonprofit sector's trade associations, who had without shame focused on and succeeded in fending off any substantial cap on the charitable deduction enjoyed by the wealthiest Americans.

The outcome was different, however, for government-funded human service nonprofits—and for the foster youth, homeless families, recovering veterans, and others supported by these organizations. For them, I'd contend things just got worse.

This is in part because the legislation did nothing to reverse the budgetary forces that have pushed social services funding to the brink. The biggest problem here is insufficient tax revenue to cover the cost of government. Closing this gap requires raising income taxes on the middle class, not just the "one percent."

Last week's tax increase for top-bracket filers did very little to address our core fiscal imbalance. Over the next ten years, the Congressional Budget Office estimates that the net effect of the legislation will reduce the $10 trillion in federal deficits they have projected based on current policy by only $700 billion to $800 billion.

How will we cover the remaining $9 trillion plus in deficits? By borrowing money and paying more in interest to service our accumulating debt, which leaves fewer resources to invest in marginalized communities and the nonprofit organizations supporting them.

Nor did the cliff deal result in a restructuring to slow the growth of mandatory spending for Social Security, Medicare, and Medicaid. As the baby boom retires and health care costs increase, these entitlements are effectively squeezing out spending on other programs.

Last week's deal did provide a two-month reprieve from the $109 billion in annual, across-the-board cuts in discretionary spending, split 50/50 between defense and "non-defense" programs, which had been scheduled to kick in on January 1. However, there is good reason to believe that the delay could ultimately lead to steeper reductions in social programs than those already planned.

Why? Consider that the negotiations between the President and Congress over the mix and size of the spending cuts are now going to be intertwined with those to raise the debt ceiling. Consider also that many Republicans in Congress are determined to use the debt-ceiling issue to force steeper cuts in domestic spending while shoring up defense spending.

By March 1 if not before, Congress must act to raise the debt-ceiling so that the Treasury can once again borrow the money it needs to fund government operations. The postponed sequestration is scheduled to commence on March 1. Are you seeing the issue here?

If I were a betting man, I'd wager that the cuts to domestic programs will be at least as extensive as those that have been temporarily put off, and they could well be larger. Nor do I think that we will see a more rational and differentiated approach to making these cuts—e.g. preserving spending for programs with more evidence for their effectiveness—than the universal haircut that is now planned.

But I may be overly pessimistic. What is your take on the likely outcome?

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