Sunday, February 15, 2009

State of the Sector: Welcome to Nonprofit 3.0

Andrew Carnegie
Carnegie nearly coined the term philanthropy in America
American philanthropy soared after the 1889 publication of Andrew Carnegie’s "The Gospel of Wealth." Later expanded by John D. Rockefeller and others, Carnegie’s ideas formed the basis for the modern nonprofit system. 

Over the decades that followed, the passage of the Sixteenth Amendment and subsequent Revenue Acts provided the infrastructure that furthered defined this system by creating the income tax, estate tax, charitable tax deductions and the institutionalization of nonprofit organizations.

This system grew rapidly, and by 1989 -- 100 years after the publication of Carnegie's essay -- there were over 500,000 registered non-profits. 

Then, on August 6, 1991, the European Organization for Nuclear Research, known as CERN, launched the first page of the World Wide Web. As the tech boom of the 1990s generated vast amounts of new wealth, a different culture of philanthropy was born: Nonprofit 2.0.

The hallmark of Nonprofit 2.0 has been the explosive growth in the number, revenues and prominence of charitable organizations. Consider a few facts:
  • The number of nonprofits has more than doubled since the mid-1990s, to over 1.2MM;
  • Nonprofits now employ nearly 1 in 10 U.S. workers;
  • Nearly 8% of the U.S. economy now falls in the nonprofit sector.
Many have seen the past two decades as a “golden age of philanthropy,” but several important indicators now reveal that we are entering a new phase in the development of the nonprofit system.

The first indicator came on October 15, 2007 when the first Baby Boomer applied for Social Security. Although nonprofits will be significantly impacted by the imminent “wealth transfer” from this generation’s passing, special consideration must be also given to the sea change in nonprofit leadership that will occur as Baby Boomers retire. In fact, CNM recently supported a study that determined that nearly 75% of current nonprofit CEOs plan to leave their jobs in the next five years.

This transition comes at the end of a period of over 16% growth in the number of nonprofit jobs, a rate three times faster than the rest of the economy. As a result, a flood of young executives are now preparing to take leadership roles in nonprofits. Having spent their entire careers in Nonprofit 2.0, these executives are eager to make their own mark on the charitable sector.

The second indicator came on December 20, 2007 when the IRS released its redesigned Form 990, the annual tax filing for nonprofit organizations that had not been updated since 1979. According to IRS Commissioner Doug Shulman, "the revised form will give the IRS and the public a much better view of how exempt organizations operate.”

The new form’s expanded requirements in the areas of service evaluation, governance, compensation and financial reporting will significantly enhance transparency throughout the sector. A welcome change by proponents of increased accountability for nonprofits, the new Form 990’s expanded “core form” and increase from two to 16 schedules is nevertheless going to be more difficult for nonprofits to complete (and therefore more expensive).

Previously, nonprofits could get by with weak financial reporting, poor governance and little or no assessment of their actual impact. The age of Nonprofit 3.0 might easily see a contraction of the sector as smaller organizations fold or consolidate operations in response to this heightened level of scrutiny and accountability.

The third indicator of a new era for nonprofits came in September 2008 with the failure of several large financial firms. This was exaggerated on November 27, 2008, when the Business Cycle Dating Committee of the National Bureau of Economic Research officially determined that a peak in the U.S. economy occurred in December 2007 after 73 months of expansion. Although final figures on 2008 giving have not been released, many fundraisers are concerned that annual giving may drop below the $306.39 billion contributed by individuals, foundations, and corporations in 2007. As individuals see their nest eggs disappear and foundations reset their grant-making levels based on 2008’s significantly lower asset levels, it goes without saying that 2009 will see a tremendous dip in contributions.

As we look to the road ahead, we see an increasing need for nonprofits to focus on their core competencies, to develop earned income strategies that can stabilize their revenue streams and to develop genuine partnerships with donors rather than relationships based solely on charity.

Welcome to Nonprofit 3.0 – a world of new leaders and empowered donors who will work together to forever change the face of philanthropy.

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