The leaders of nonprofit organizations should consider merging with their peers. The cascade of federal money supporting the nonprofit sector is decreasing and it appears unlikely to increase in the coming years. We need to keep the “thousand points of light” shining.
Rising federal Government debt is a constraint on federal spending. The federal deficit appears unlikely to diminish significantly, and the federal debt will continue to grow. Roughly 80% of the federal budget is essentially locked-in and most of that portion is expanding (e.g., defense, interest on the debt, Social Security, Medicare). The remaining 20% of the budget faces continuing pressure (e.g., social services, education, environment). And while artificial intelligence may boost productivity and economic growth, shrinking white collar employment could necessitate increasing federal income supports – a potential incremental financial demand on Washington.
The nonprofit sector is a large and growing part of the U.S. economy. According to the U.S. Bureau of Labor Statistics, nonprofit sector employment in 2022 represented 9.9% of private sector jobs and comprised 5.2% of GDP. Philanthropy Roundtable notes that the number of nonprofit organizations nationally increased by 36% between 2000 and 2023 (to a total of 1.85 million). But financial scale matters. According to the National Council of Nonprofits, 97% of nonprofits have annual budgets under $5 million, 88% report budgets under $500,000, and 54% have budgets under $50,000.
Assuming other funding sources can substitute for federal dollars may be unwise. Although increases in private giving may occur episodically, it may not be sustained. According to Philanthropy Roundtable, charitable giving as a percentage of U.S. GDP has been approximately 2% for more than 60 years. Although charitable giving can vary from year-to-year (e.g., giving declined by 3.4% year-over-year in 2022), the long-term 2% number appears to be relatively constant. Individuals represent two-thirds of total U.S. charitable giving.
Expecting additional funding from state governments could also be unrealistic. For example, Colorado’s $750 million budget shortfall requires more fiscal restraint on discretionary budget items. Many other state governments face similar budget shortfalls as federal contributions decline.
The aging of baby boomers could reduce the number of volunteers for nonprofits. According to the Corporation for National and Community service, baby boomers have the highest volunteer rate of any age group, and they volunteer in greater numbers versus prior generations. AmeriCorps notes that baby boomers represent 31% of nonprofit volunteers. The average age of baby boomers is 68 and rising. As this cohort “ages out” of volunteer service, there might be a decrease in total volunteer availability. If so, this could require more paid staff to maintain service levels.
Consolidation entails cutting costs. Typically, consolidation reduces overhead costs by shrinking administrative staff but retaining program-oriented employees. Although initially painful, consolidation may be necessary to maintain nonprofit service levels.
Is the nonprofit sector structurally different from for-profit industries? When growth fades in for-profit industries, consolidation is often a remedy. Examples of consolidation in other industries include oil and gas, chemicals, pharmaceuticals, metals, autos, semiconductors, telecommunications, media, software, computer hardware, banking, capital markets, trucking, railroads, and airlines.
Three recent Colorado mergers include Schauble Law and Sector Law, two for profit law firms uniting to expand services to nonprofit, tax-exempt organizations; Hope COS joining with The Redemption Project, both nonprofits, to aid the homeless; and Clinica Family Health melding with Mental Health Partners, also nonprofits, to expand health services. Two local examples of nonprofit mergers are San Juan Mountain Association combining with the Durango Nature Center, and The Garden Project uniting with Manna.
Nonprofit boards of directors should consider consolidation as a means of maintaining service levels. The social and environmental strains in our country are growing, not diminishing. Tomorrow’s nonprofit support will be more necessary than yesterdays. Those nonprofit organizations that are already struggling financially probably are subscale and they should consider merging with stronger peers. We need a viable nonprofit sector.
Tom DeHudy is a 40-year investment professional with a Master's Degree in Public Policy and a full-time Durango resident.
