Does Economic Downturn Mean Crisis for Nonprofits?
Thursday, February 28, 2008
By: Caroline Gallagher

It is nearly impossible these days to avoid thinking - and worrying - about the country's recent economic struggles. The subprime mortgage crisis is a top news event, while presidential candidates pepper their speeches with solutions to turning the economy around once elected. The possibility of a significant and protracted economic downturn has created a cross-industry sense of panic, one that has not escaped the non-profit sector.

But, is the panic warranted? 

HISTORY

This is not the first time non-profits have faced an unfavorable economic climate.  Over the past forty years, data shows that there have been two periods when giving to nonprofits decreased.  These periods were not the result of a standard economic recession, however.  The first, from 1973-1975, was a consequence of the OPEC oil embargo, and the second, from 2001-2003, of September 11, 2001.

The turn in the economy during the OPEC oil embargo was unlike anything our country had experienced before.  Accustomed to uninterrupted sources of imported oil, Americans were suddenly forced to ration their oil intake as prices-per-gallon continued to rise.  This imposed embargo propelled the U.S. into a severe recession.    

The events of September 11, 2001 resulted in a time of panic in the United States and, similar to the early 1970s, were outside of the experience of the American business cycle.  As a result, non-profits suffered.  Josh Ruxin, an assistant professor at Columbia University and the founder and director of the Access Project in Rwanda, notes that “The big shift for many non-profits in 2001-2002 was that many foundations saw their giving drop precipitously, particularly those that were fully invested in single stocks.”

Based on these historical indicators, there is no correlation between the United States’ business cycle and a reduction in philanthropy.  In fact, the only era in which there was a change in philanthropy relative to a change in the economy was from 1995-1998- the Gates, Soros, Turner period of technological change- and that was during an economic upswing. 

The two historical events that have affected charitable organizations negatively were outside the realm of normal market forces and, as a result, we can anticipate factors that would now critically affect the non-profit industry going forward.  These factors include a fundamentally destabilizing event or a previously inexperienced shock.  A general downturn in the economy should not have a substantial effect on non-profits, as it would take a systematically acute and chronic event to repeat the trends of the early 1970s and turn of the century.

TODAY

So, how should non-profits react to the possibility of a ‘run of the mill’ recession?  Ruxin says, “Foundations are constantly shifting their strategies and recipients and, just as is the case in business, the only thing you can be certain of is the past.  There has been enormous wealth creation in the past seven years and new foundations are cropping up by the thousands.  All non-profits should be seeking diversification in their donor base and opportunities to leverage current and future donors.”

It is important to recognize that, as a result of economic woes, weaker non-profits will struggle.  But this is by definition- the weakest non-profits will struggle because of their own weaknesses, while the strongest non-profits have taken measures to prevent this struggle through diversification strategies. 

The recent issues in the economy constitute a small change in the big picture of the entire business cycle, and not a big change in the small picture of philanthropy.  In short, Chicken Little, the sky is not falling.

About the Author

Caroline Gallagher, a Senior Director in Changing Our World’s Fundraising Division, advises nonprofits on successful planning, cultivation and fundraising strategies. She can be reached at cgallagher@changingourworld.com.