2023 will not be a year for the faint of heart in the Houston nonprofit world. However, the thing we know about this sector is that, like the little engine that could, it just keeps on chugging.
Here's what I see on the horizon this year, locally and nationally. If Storyboard HTX can help you navigate these tumultuous waters, Email us at info@storyboardHTX. We can help you make sure your story cuts through all the noise!
1. The nonprofit sector keeps finding a way
Nonprofits are amazingly resilient. They increased revenue by 5% in 2020 and another 4% in 2021, even as the pandemic was shutting everything down around them.
As we got into 2022, many of us thought that donor fatigue and the sputtering stock market would reduce giving. Nope. A brand-new report from the Fundraising Effectiveness Project found that nonprofit donations increased by 6.7% for the first three quarters. Hopefully, the trend continued in the fourth quarter. Somehow, nonprofits managed to adapt and continued to make their case for support.
2. Yeah, but inflation
We haven’t really had to consider the impact of inflation for a decade, but we do now. When we factor in the 6.5% inflation rate last year, it means that the increase in revenue turned into a wash in real dollars.
The impact could be crushing on social service nonprofits that provide people with essentials like food (up 10.4%), Utilities (up more than 20%) and rent (up14%).
As the Red Queen told Alice in Wonderland, “we must run as fast as we can, just to stay in place.”
3. The disappearing mid-level donation is a crisis in the making
The same AFP report that found total revenue increasing also found that the number of donors dropped by 7% and almost all of that decrease was from donations of less than $500.
While the media attention has focused on where MacKenzie Scott is dropping her latest bundle of cash, the real story is that the smaller number of donors, the bread and butter of most nonprofits, have been steadily shrinking.
In a future post, we can get into all the many reasons this threatens the future of philanthropy. The short version is, if we don’t want the nonprofit sector to be seen as a bunch of elitist do-gooders who are beholden to the richest of the rich in our society, we must address the problem.
Individual nonprofits need to find ways to bring smaller donors into the fold and steward them. However, this is a structural problem in our society and the leaders in the world of philanthropy need to collaborate on changing this structural problem. Why not start with Houston?
You listening United Way, Houston Endowment and Greater Houston Community Foundation?
4. Hiring won’t get any easier. Get used to it.
The constant demand for nonprofit services and the challenge to do more with less are a recipe for burnout. Surveys indicate that staffing is near the top of nonprofit executives’ list of things that keep them up at night.
Turnover rates at nonprofits are somewhere around 20% a year. About half the people who leave say they left for a better opportunity, according to a survey by Nonprofit HR. On the development side, about nine in 10 fundraisers responded to a Chronicle of Philanthropy survey that the unfilled position at their nonprofits are putting extra work pressure on them, not to mention hurting their funding efforts.
Don’t look for it to change. Despite the guessing game over whether a recession is waiting in the wings, the job market is still strong in Texas and nationwide. To solve the staffing problem, we need to stop looking at this as a nonprofit problem and start looking at it as an HR problem. The average turnover rate for all U.S. industry in 2021 was 47%. In the education and health fields, it was 37%. In the game of HR musical chairs, more than a third of the American workforce is changing seats every year. To hire and keep qualified staff, think about what works at Starbucks and ConocoPhillips, not just at other nonprofits.
5. Houston will have another media outlet. Fingers Crossed!
Just about a year ago, Arnold Ventures, the Houston Endowment, and the Kinder Foundation announced a $20 million plan to launch what is being called “The Local Houston News Initiative.”
Since then, things have been a little quiet. The new journalism venture…um…missed its first…um…deadline. It was to be out in late 2022 or early 2023. There is a website, reportedly a lot of activity in background and they are taking job applications, but no new launch date has been announced.
Nonprofits, looking for more ways to get the word out about themselves, should welcome the addition of another news outlet. A study by Northwestern University last year found that Texas has lost more newspaper journalists than any other state and that a third of its newspapers have closed since 2005. The problem has been declining readership. For example, one industry survey showed the Houston Chronicle lost about 17% of its print circulation in the 2020-2021 timeframe, which explains why the Chronicle has aggressively shifted its effort online.
6. Houston Foundations and nonprofits need a Kumbaya moment
Emergency grants from local foundations kept many nonprofits afloat during the pandemic. It is ironic that the post-pandemic connection has deteriorated to a certain degree. It isn’t something that is discussed out loud yet, but there are whispers that nonprofits are no longer sure what foundations want to fund.
Relationships COVID made it hard for nonprofits and foundation program staff to meet. Since then, foundations have seen a lot of turnover from the executive level down to the program staff. A lot of new faces and fewer opportunities to engage have weakened a lot of long-term relationships. As a result, more than a few nonprofits have lost what had been reliable funding streams.
Generational shifts The next generation is moving into board seats on many family trusts. They have their own priorities on what to fund. It’s a natural change, but it is a change, nonetheless.
The markets Foundations try to be good stewards of their funds. The last couple of years have tested that. The Lilly School of Philanthropy at Indiana University says foundation giving increased to $90.88 billion in 2021, but when adjusted for inflation - there’s that word again - the value in real dollars actually decreased by about 1%. We don’t know how much foundations gave in 2022 or how they will react if we see a recession this year, but psychologically it would make sense if boards were a lot pickier about their grants, wouldn’t it?
DAFS vs. Foundations In 2021, Foundations gave about $75 billion to charities. Donor Advised funds, DAF’s, gave $45 billion. Foundations still give more, but DAFs are growing quickly and soon that will change the foundation/nonprofit relationship.
We need foundations. They can be responsive to public needs, they are regulated, and they have a degree of transparency. Unfortunately, that is what's causing many people with capacity to avoid them and put their philanthropic dollars into DAFs instead of foundations. For example, when Elon Musk announced that he had given $5.7 billion to charity, he put that money into a DAF, not a foundation. We don’t know how much of that money actually went to nonprofits because there are no public reporting requirements in DAFs.
Houston’s large, endowed foundations and the foundations that represent religious missions, businesses and other organizations will continue to be a factor. However, there are more than 5,300 foundations in the Houston area. Less than 100 of them have assets of more than $50 million. Put yourself in the Gucci loafers of a wealthy Houstonian. If you have millions to give to charity, would you go through the red tape, wait months for approval and then pay the cost of compliance to run a family foundation or would you call your Goldman Sachs broker and set up a donor-advised fund in an afternoon? That’s the new world that existing foundations and nonprofits need to navigate, and they should do it together.
7. Watch for a lot of Texas charities to lose their nonprofit status!
Let’s end with the boldest prediction. I believe that we will see a real shakeout in the number of IRS-recognized charities in Texas and the rest of the country …and it probably won’t be noticed.
Follow my logic here:
There are SO MANY nonprofits - more than 1.5 million 501(C)(3)s - with nearly 100,000 of them in Texas.
Most of them (55%) have less than $50,000 in expenses and 75% have less than $100,000, so they have limited resources and fundraising capacity.
Nonprofits, like old soldiers, don’t die; they just fade away. There is no requirement for a nonprofit to report that it is shutting its doors. Generally, they just stop filing their IRS annual 990, or N990 for nonprofits with less than $50,000 in annual expenses.
The IRS has a process to weed out the “zombie” nonprofits that have ceased operations. If a nonprofit doesn’t file its annual report for three years, the IRS sends a notice that it is revoking the organization’s nonprofit status. Three years ago is about when the pandemic hit. It makes sense that a nonprofit that was hanging on by a thread would make the tough choice to close in 2020, which means we should see a bump in revocations. In fact, it looks like a lot of nonprofits didn’t file the 2019 report that was due in 2020, because the number of Texas nonprofits that had their 501(C)(3) status revoked jumped by one third and nationally the percentage was even higher. In Texas, the IRS revoked the nonprofit status of 4804 organizations and the national number was 59,036.
However, if we know anything about nonprofits, it is that optimism is the air they breathe. Although we lost nonprofits, founders create more nonprofits every year. Just looking at the number of newly approved 1023-EZ form applications (the application for new nonprofits that earn less than $50,000 per year,) 6,000 new ones were approved in 2022 in Texas and 61,000 were approved nationwide.
What haven't even talked about what happened in the social media world! That's for another blog.
