Nonprofits that count on government funding expect deeper cuts, especially for programs serving the most vulnerable populations such as elderly and homeless people, and they expect those cuts will cause big problems for their organizations, a new study says.
The study by Bridgespan Group dismissed the likely effectiveness of some strategies promoted by nonprofit-sector leaders to address the problem of government cuts, but it identified two sector-level solutions to the fiscal shakeout that might work despite barriers they face.
"For those nonprofits that depend on government funding - especially those organizations that deliver human services - there is a cliff at the end of the tunnel," says the study, The View from the Cliff.
Much of government revenue "is poised to fall off amidst the public sector's ongoing fiscal shakeout," says the study, which is based on a survey in late 2011 of 68 nonprofits that receive most of their funding from federal, state and local government, and on in-depth interviews with about 20 of them, and conversations with several state and local officials.
According to the Urban Institute, government contracts and grants for human-services nonprofits in 2009 were worth over $100 billion and accounted for 65 percent of their total revenue, Bridgespan says.
But the funding and "safety net" of essential services that government supports is "under threat," the study says, with $2 trillion in federal spending cuts in the works over the next 10 years, roughly half of them in domestic spending, as a result of the Budget Control Act of 2011.
Those cuts "will have a big impact on state and local government budgets that have already been heavily strained by the recession - and the nonprofits that all three levels of government fund to deliver human services," the study says.
Most nonprofits involved in the study "have managed to survive the tough economic times with their government funding intact, floating in large part on a bubble created by federal stimulus funds," it says, referring to over $700 billion put into the economy since 2009 as a result of the American Recovery and Reinvestment Act.
"But the bubble is set to burst, and the cliff is just ahead," the study says. "Nonprofits are deeply concerned about the coming government funding squeeze and appear to have only limited options available as they look ahead to tougher times."
Despite big reductions in state and local funding in particular, the study says, some of the impact "has been blunted by the ongoing execution of grants and contracts awarded before the downturn, and by the continued outsourcing of state and local functions" to nonprofits.
Thirty-eight percent of survey respondents reported a decrease in government funding since the recession began, 27 percent reported funding had stayed the same, and 35 percent said they funding had increased.
But 91 percent agreed federal cuts would "cause significant problems for our organization as we seek to fund our mission," and only 55 percent said their organization "has an adequate understanding" of the cuts' impact.
The recession has resulted in "belt-tightening" for government-funded nonprofits, the study says, including staff cuts, freezes on hiring and salaries, and administrative efficiencies.
But a "belt-easing" is not likely to follow for many government-funded nonprofits, the study says, and in many cases "cinching the belt even tighter will still fall short of the restructuring that will ultimately be required."
Still, many nonprofits are responding the downturn in ways that could lead to a "fundamental reset in their work," the study says.
Most of those surveyed are clarifying their strategy, diversifying funding streams, measuring outcomes, improving productivity, and "engaging government funders as customers," it says.
Less than a third have a contingency plan for various government funding scenarios, but another third plan to develop one.
The study said many "solutions" touted by nonprofit leaders and advocates "don't appear up to the task - and will be harder to realize in the ongoing fiscal crunch."
Advocacy to preserve and enhance funding, for example, will be a "zero-sum game, helping one set of nonprofits or program category at the expense of another," while calls for improved government contracting fly in the face of the likelihood that, with the coming shortfalls, "government is going to be even more inclined to use its dominant market power to squeeze its nonprofit contractors rather than to improve the contracting relationship."
And despite predictions of a "shake-out," with weaker nonprofits merging with larger ones or even shutting down, only 10 percent of survey respondents indicated they found mergers or acquisitions to be effective ways to cope with government funding cuts.
Bridgespan also says it has seen few examples of collaboration that "was taking costs out of the system."
The study says solutions that hold "practical promise," while still facing barriers, include using improved human services to reduce health-care costs, and focusing resources on programs and providers that "demonstrate superior results."
Instead of making across-the-board cuts in programs and in the funding of nonprofits that deliver those programs, Bridgespan says, government should set priorities on funding programs and providers "in the best position to provide better results for the funding invested - and make the hard choices of defunding those with less impact in order to free up the resources to do so."
And, recognizing that its costs on health continue to rise, government should examine "how certain kinds of human-services funding, tied to tested strategies in public health, could help control health-care costs by serving society's most vulnerable in more carefully targeted and effective ways," Bridgespan says.
"If things are going to change," says Daniel Stid, a Bridgespan partner and co-author, "there needs to be a countervailing constituency that demands public money be spend on programs that deliver better results for lower costs, delivered by nonprofits with a demonstrated ability to improve the lives of the people they serve, and funded at levels that enable them to increase their impact over time."
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