A prediction for nonprofits in 2019: Increase in conflicts

Originally published in part on LinkedIn

My prediction for 2019 is very broad and perhaps obvious: an increase in conflicts. Certainly among political parties, political candidates, and political ideologies. But also within the nonprofit sector, which is composed of organizations that represent and/or support political actors and ideologies across the spectrum (whether overtly or not, due to legal and fundraising considerations). Not that this means 2019 will be a bad year. Just that it will be a difficult year. But the increasing conflicts are a necessary ingredient for the change that much of the country seeks and needs.

Philanthropy and Democracy

Last year brought us important readings on the conflicts between philanthropy and our notions of Western democracy. The following are quotes from my short list of the key authors of last year:

Anand Giridharadas, author of Winners Take All: The Elite Charade of Changing the World:

Of course, world-changing initiatives funded by the winners of market capitalism do heal the sick, enrich the poor and save lives. But even as they give back, American elites generally seek to maintain the system that causes many of the problems they try to fix — and their helpfulness is part of how they pull it off. Thus their do-gooding is an accomplice to greater, if more invisible, harm.

– See NY Times

Rob Reich, author of Just Giving: Why Philanthropy Is Failing Democracy and How It Can Do Better:

A hundred years ago, there was enormous skepticism that creating a philanthropic entity was either a way to cleanse your hands of the dirty way you’d made your money or, more interestingly, that it was welcome from the standpoint of democracy. … Because big philanthropy is an exercise of power, and in a democracy, any form of concentrated power deserves scrutiny, not gratitude.

– See The Atlantic

Edgar Villanueva, author of Decolonizing Wealth: Indigenous Wisdom to Heal Divides and Restore Balance:

We have to be honest about the sources of wealth and how wealth was accumulated in this country — a great part of it was on the backs of people of color, and now those communities are benefiting from just a very small percentage of dollars… Once you know, how can you not be equitable about how you’re distributing the money?

– See Inside Philanthropy

Expect more of this criticism of philanthropy in 2019 with some notable clapbacks from the philanthropic community.

Donor-Advised Funds

The philanthropy-democracy discussion also played out in the area of donor-advised funds (DAFs), considered by many to be the fastest growing part of the charitable sector. On one hand, critics argue that DAFs provide the wealthy with the preferred tax advantages of a public charity while retaining the practical control of a private foundation (which arguably means it costs the public more in lost tax revenues to fund public goods). On the other hand, DAFs may increase the capital moving into charitable nonprofits whether spent immediately or held back for future use.

Critics point out that DAF sponsoring organizations (public charities) exercise such minimal control over the funds and collectively pay out an enormous amount of fees to invest DAF assets that it doesn’t make sense to treat gifts to fund DAFs the same way as gifts put to so-called “operating” public charities. Yet many also differentiate between DAF sponsoring organizations that operate as community foundations versus those that were created and remain closely affiliated with some of the nation’s biggest financial institutions (e.g., Fidelity, Schwab, Goldman Sachs, Vanguard).

DAF regulations have been forthcoming since DAFs were first defined in the Pension Protection Act of 2006, but we finally saw some movement on this from Treasury and IRS last year. See Donor-Advised Fund Regulations Step One: Request for Comments. The IRS Notice began to address some smaller issues regarding DAFs, but some of the big controversial issues (e.g., minimum distribution requirement) may be addressed in future bills (though I wouldn’t expect anything to pass this year).

Endowments

The DAF versus operating charity argument also leads some DAF proponents to point to the issue of endowment funds. For some operating charities, like large universities and hospitals, a substantial amount of gifted funds are designated for their endowments. If a donor makes a contribution to a charity’s endowment fund, is such gift very different from a gift to a DAF? In each case, the bulk of the principal amount may “forever” be invested with only a small portion (customarily part of the income generated by the investment) being spent each year, with no strict spending requirement.

Last year, the “Tax Cuts and Jobs Act” (TCJA) imposed a new tax on the investment income of very large college endowments, but the criticism of charity endowment funds has not lessened, and we are likely to see some legislative proposals to address some of the criticisms (though nothing is likely to move forward).

Charitable Giving Deduction

The TCJA also contained provisions that will depress charitable giving. See The New Tax Law and Its Impact on Nonprofits – Part 1. Such provisions were estimated to reduce charitable giving by $12-20 billion, but because there are other influences on charitable giving, it may not be possible to conclusively validate such estimates, particularly because many taxpayers do not yet realize that they will no longer receive a deduction for a charitable contribution. It still seems to be little known that less than 10% of taxpayers will now receive a tax benefit from a charitable contribution.

In part to counter the impact of the TCJA, but perhaps more to make any tax benefits from giving to charity more equitable, many of the anchor organizations advocating for the nonprofit sector are calling for a universal charitable deduction. See Our Burning Platform for a Universal Charitable Deduction. We’ll see a strong push for the universal charitable deduction this year, which will be supported by the fact that the pool of donors has been shrinking for several years and fundraising strategies may be shifting to “catering” to high-income donors, whose priorities may be very different from the rest of the country (cue the philanthropy-democracy tension again).

Core Hot-Button Issues

Conflicts will also increase on our current core hot-button issues where, on each issue, the public has divided into distinct camps and nonprofits will play a growing role (on each side):

  • Climate change
  • Gun control
  • Racial justice
  • Immigration
  • Reproductive Rights
  • Privacy

More and more charities and foundations are inquiring and learning about how they can play a greater role in advocacy. In addition, more attention and resources appear to be flowing into 501(c)(4) social welfare organizations, which are not constrained by the 501(c)(3) prohibitions against substantial lobbying and political campaign intervention. See A prediction for nonprofits in 2018; Examining the Landscape of Section 501(c)(4) Social Welfare Organizations.

Johnson Amendment

The Republican position remains committed to its 2016 party platform favoring a change in the law to allow charitable contributions to fund political candidates. However, the great majority of the public and leaders in the nonprofit sector have diligently fought to preserve the Johnson Amendment (the part of IRC Section 501(c)(3) that prohibits political campaign intervention). We’ll continue to see a battle on this issue as many Republicans see free flowing charitable funds (particularly from evangelical churches) as a critical component in winning the 2020 Presidential election.

In addition, we’ll continue to see back and forth on the issue of “dark money” – money used to fund political parties and candidates, often through nonprofit organizations, without transparency. Last year, the IRS announced that tax-exempt organizations described by section 501(c), other than section 501(c)(3) organizations, will no longer required to report the names and addresses of their contributors on Schedule B for tax years ending on or after December 31, 2018. But, in December, the Senate passed a resolution to repeal the IRS guidance. The resolution would still need to pass in the House and be signed by the President to take effect. 

Nonprofit versus For-profit Businesses

Tension will also continue to grow between the nonprofit and for-profit sectors as nonprofits increasingly look for new and/or expanded sources of earned income and for-profits look to do more good and/or look good for marketing purposes. For nonprofits, the distinction between related and unrelated business income will become even less certain, particularly where nonprofit board members are receiving some sort of economic benefit and/or the nonprofit is affiliated in some way to a for-profit. Such collaborations will be increasingly common, and while most may be motivated by joint “social good” purposes, there will also be a rise in public skepticism as the media and public focus on more insincere efforts, including in the rapidly growing area of impact investments.

Philanthropy and Digital Civil Society: Blueprint 2019

Lucy Bernholz, Senior Research Scholar at Stanford University’s Center on Philanthropy and Civil Society and Director of the Digital Civil Society Lab, annually produces the Philanthropy and Digital Civil Society: Blueprint, the best known annual industry forecast. You can access the 2019 edition (as well as previous editions) here. The following are some quotes from the Blueprint 2019, but you’ll have to go to the document to see the specific predictions for 2019 (on page 37):

One way of looking at the current moment is as one of collapse – a collapse in charitable giving, economic mobility, environmental sustainability, assumptions about data privacy and security, and public trust in institutions. The other way is to see opportunities to build new and better. That’s what civil society and philanthropy need in the U.S. and elsewhere.

 

We need big ideas, big ways of sharing, and big ways of allowing dispersed people to collaborate. There are scholars and activists working to imagine whole new ways that communities, business, and governments could work – redesigning voting, rethinking democracy, and imagining how we can use artificial intelligence and machine learning to protect human rights, strengthen self-governance, and freely associate. Civil society can’t get caught on its heels – reacting to challenges, assuming that the value placed on speed and scale by the corporate sector applies to us, and fighting policy battles that were framed in the last century rather than those our digital dependencies present to us today.

 

The right to free assembly – and the will to act on it and protect it – underpins our ability to think big about civil society, philanthropy, and democracy. If, as many have asserted, social media networks are (part of) the new public square, then we need robust defenses of our own ability to enter and exit these spaces, to identify ourselves or not as we wish, and to act within these spaces without constant surveillance.

 

ASSUMPTIONS THAT WILL GROUND A FUTURE VISION FOR CIVIL SOCIETY

  • Tax incentives for giving are going to matter differently. …
  • Nonprofits are not as “haloed” as they once were. …
  • The charitable is political. …
  • “Giving” happens everywhere, but we’re doing less of it. …
  • Organizations and laws must assume digital capacities (positive and negative). …

The list above essentially argues that today’s popular assumptions about civil society and philanthropy are different in significant ways from those of the past. This is important because we must realize that people moving into the sector today will operate within a different set of norms and will develop their programs, organizations, activism, and policy awareness accordingly.

 

Those of us who’ve made long careers in civil society cannot assume that we understand the perspectives of those who will either inherit or ignore what we’ve built. Research shows that the professionalization of nonprofits has created a sector that doesn’t represent the people it serves nor does it mobilize membership or a feeling of belonging.36 It’s important for us – as we get out of the way – to go where the action is, to listen to those who are making change without us, and to seek to be helpful to them in ways that reflect genuine interdependency.