Alaska’s Nonprofit Sector Generates Economic Impact
In 2007, The Foraker Group and the Institute for Social and Economic Research (ISER) at The University of Alaska developed the first comprehensive study of the nonprofit sector’s impact on the Alaska economy. In 2010, the second study was completed, and a precedent was set. Now we work together every three years to monitor the nonprofit economy, using the data to help sector leaders address current concerns as well as plan for the future.
When we reviewed data from the first study to the second, we saw signs of three trends the sector should monitor, and we reported those in our January 2011 newsletter. We received much comment both in Alaska and around the country and knew we had captured people’s attention. As described in that newsletter, the trends are:
- The “funding crisis.” The current funding mix for Alaska nonprofits is not sustainable. We must transform revenue streams – and fast! Alaska nonprofits must grow individual philanthropy and learn how to earn income. We have too little time to do each well, but we must try.
- The “crash of the herd.” We have too many nonprofits for our “eco-system” or population. While the funding crisis could exacerbate this trend, the real culprit is a scarcity of the right people to serve on the boards and staffs of all these organizations. Even if we can adjust to the funding crisis, we can do little to avert the scarcity of people.
- The need to “restructure” how we do business. As a result of the first two trends, as well as other societal and technological changes, nonprofit organizations will need to find more adaptable business models. Merger, consolidation, integration, and cooperation are no longer nice thoughts. Enlightened leaders will seize this opportunity and begin discussions on what structure could work for them in the 21st Century. Others with a wait-and-see attitude will find they have few choices – they will be like those standing on the beach when the tide goes out. Most will either go out of business or find themselves merged into another nonprofit, not of their choosing.
Over the last three years we have spoken to thousands of people around the state and we have provided insight on how to better prepare and respond to the changing environment marked by these trends. Apparently some listened.
We just completed the latest study that validates our predictions from 2010 and suggests that we are not yet out of challenging times. Still, this study is different because it provides some glimmers of hope. While we wanted to get people’s attention in 2010, now we want to elevate the conversation. The need for nonprofit leaders to adapt their practices is clear, as is the need to better understand our role in public policy and act when needed.
One objective of our study is to overcome negative perceptions about the nonprofit sector. Some see nonprofits as a drain on the economy – something we know is not true. We’ve heard this both in Alaska and during discussions with our colleagues outside the state. Others question our management ability. At this spring’s gathering of the National Council on Nonprofits, sector leaders from around the country discussed what to maintain as norms for the sector and what to change. Opinions varied on what to keep. However, opinion was almost unanimous on what should change and that’s the mistaken perception that our sector’s leadership is not competent compared to the for-profit and government sectors.
We want Alaskans and policy makers to understand the positive impact nonprofits have on our quality of life – and on our economy. This impact is accomplished through the outstanding work performed by highly skilled professionals who are addressing a broad range of missions. Effective advocacy based on sound data is the best way to tell the real story and correct misperceptions – and the data in our study is a good place to start. Here’s an analysis of what we learned.
The data on economic impact
For the first time, ISER calculates direct, indirect, and induced impacts of nonprofit wages and salaries on the broader economy. Direct impact indicates specific jobs that are a direct result of nonprofit activity. Indirect impacts represent employment generated by firms that provide services to the sector. Induced impact represents the multiplier effects caused by successive rounds of spending throughout the economy as a result of an organization’s direct and indirect impacts. As noted, the impacts we report cover only wages and salaries. If we had access to data on overall sector expenditures, in addition to wages and salaries, the impacts would be significantly larger.
ISER found that Alaska’s nonprofit sector accounts for $6.2 billion in expenditures, almost $4 billion in 501(c)(3) charities alone. It also found that the sector employs 39,000 people – or 12% of Alaska’s workforce. Of the expenditures, $1.7 billion is in wages and salaries. Using ISER’s indirect and induced formulas, the total impact from wages and salaries is $2.5 billion and the total employment impact is 63,000 people.
The percentage of the workforce represented by the sector grew from 10% of total employment in the first two studies to the 12% mentioned above. That percentage is a third higher than the national norm. We also learned that in the vast area across the middle of the state, from the Yukon-Kuskokwim region to Canada, almost 50% of the workforce is in the nonprofit sector. In fact, most of rural Alaska has more than 25% of its workforce in nonprofits, validating the critical role the sector plays in the economy of rural communities.
Makeup of the sector
Our sector is diverse. This study includes data on every type of 501(c), or IRS approved nonprofit. Eight percent of all nonprofits in Alaska are classified as 501(c)(4), or civic leagues like AFN. Seven percent are 501(c)(6), or associations like chambers or business groups. Ten percent represent other nonprofit tax codes as varied as credit unions, social clubs, electric co-ops, and labor unions. But 73% are 501(c)(3), or charitable nonprofits with missions like health care, the arts, conservation, human services, and many others. The rest of this study primarily focuses on charitable nonprofits.
Some specifics about these charitable sub-sectors are revealing. At 13%, arts and culture nonprofits make up a large portion of charitable nonprofits, yet represent only 4% of revenue. On the other hand, the health sub-sector represents 10% of the total portion of nonprofits, but makes up the largest percentage by revenue at 66%. Conservation groups represent 9% of the total portion, and produce 3% of total revenue. Human service organizations make up 34% of the total portion, and produce 17% of revenue. These ratios are comparable to former studies, so not much has changed since 2010.
Regional data now available
Additional data in this report comes from a study conducted by the Chronicle of Philanthropy. They used federal income tax returns to develop a zip code by zip code, community by community, state by state comparison of the charitable giving of individuals who itemize deductions. The study confirms what we have known for some time, personal giving in Alaska lags behind the national norm – although not as far behind as in the past. Another remarkable finding is that people who file itemized returns in many regions of rural Alaska give a higher percentage of their income to charity than those in urban areas – and they give more dollars.
Denali Borough leads the state. The regions around Delta Junction, Dillingham, and Bethel are close behind. The median individual contribution in Anchorage is $2,600 or 3.4% of discretionary income. In the Denali Borough it is $4,450, or almost 7% of income. We also learned that Bethel households that make $200,000 a year or more lead the state by giving 11% of income! Granted, there are more people in urban areas and that may lessen the collective impact, but this is a study that compares apples to apples, so to speak. It only includes those who itemize deductions. In the future, those who perceive that rural communities are takers, not givers, must now re-think their bias. That is why data can be important. We can argue the validity of data, but when vetted data is used, it can help change people’s perceptions. If you want to see the entire study it can be found on the Chronicle of Philanthropy website.
What the data tells us about “crash of the herd”
The newest study highlights some interesting news related to “crash of the herd.” In 2010, we reported that Alaska had approximately 7,000 nonprofits operating in the state. That number has declined in this report. Our data now shows that Alaska has approximately 5,600 nonprofits that are registered with the state and around one hundred more actively operating in Alaska but registered in another state, for a total of 5,700. We can easily identify 800 organizations that account for the decline. Those were ones that neglected to file 990s after the IRS started implementing a new rule in 2010 that expanded the number of organizations required to file. As a result of this change, approximately 1,000 nonprofits in Alaska were at risk of losing their tax status. Foraker joined others reaching out to as many organizations as possible to help them comply with the new rules. About 200 were able to respond. The remainder, we assume, were taken off the IRS role.
We are not certain what accounts for the remaining decline. We know that new organizations did form over the last three years. These new incorporations may be fewer than previous years. In addition, more nonprofits may have merged or gone out of business. Or perhaps we just have improved data. Until we better understand the facts, we will continue to monitor the total to see if the trend continues. For now, I can say this is the first time in my 22 years of reviewing data that the number of nonprofits in Alaska appears to have dropped.
Given that Alaska has almost twice the national norm of nonprofits per capita, that has become a major discussion topic at Foraker. While we support people who want to pursue worthwhile causes, we are concerned that the development of additional infrastructure to support new organizations may be difficult to sustain. The sector needs to consider new ways of doing business. And we need to adapt to a workplace shortage that will result when Baby Boomers retire and succeeding generations have not worked into leadership positions.
A 2006 Bridgespan study on the leadership void found that the number of CEO transitions from retirement alone – not including those voluntarily (or not) leaving their jobs for other reasons – cannot be compensated for until the Millennial generation completes college and gets a few years of experience under its belt. We have already seen a doubling of time required for most nonprofits to identify the right new CEO. The shortage of qualified and willing candidates for CFO positions has been an issue for over 20 years – and seems to be getting worse. And now, both Foraker and the Alaska Chapter of the Association of Fundraising Professionals are actively looking for solutions to the shortage of development directors in our state.
Another caution from 2010 was the coming shortage of board members. Identifying, recruiting and retaining boards continue to be among the biggest concerns of our Partners. The scale of this problem may not be fully understood as long as Boomers stay on boards. When they leave their board seats, however, we fear efforts to satisfy the demand may be too little and too late.
How nonprofits are adapting to the funding crisis
The intriguing news in this study is that the charitable sector has done a great job in compensating for the shift in funding we anticipated – at least it has so far.
The funding crisis was predicted from data that showed a significant decrease in government grants as a percentage of revenue for 501(c)(3)s – from 57% in 2007 to 43% in 2010. Add to that a united voice from our congressional delegation in 2010 to anticipate even more federal cuts, sequestration last year, discussions on tax reform, and the alarm bells went off. Since then, we have received little positive news to suggest a brighter scenario. The 2013 data has confirmed the trend – government grants continued to decline as a percentage of total revenue and now only represent 34%.
The good news is that Alaskan nonprofits increased program fees (earned revenue) from 34% in 2007 to 58% of total revenue in 2013, compensating for this decline in government grants. Program fees include some governmental funding like Medicaid and Medicare. Since health care organizations represent 65% of nonprofit expenditures, this dramatic increase in program fees could largely be the result of the Native health system increasing reimbursements from Medicaid as well as from third party payers. In addition, another factor that could be at play is that the state shifted some of its funding for social services, i.e., for disability and mental health programs, from grants to Medicaid.
We also know that more nonprofits not in health care understand that generating earned revenue is beneficial on many levels, and they are increasingly embracing strategies to maximize program service fees. Our charitable sector appears to be more entrepreneurial.
The smallest source of unrestricted revenue, charitable giving, still represents less than 10% of the total. That compares to the national norm of 19%. However, total charitable support grew from $279 million in 2007 to $332 million in 2013. So while the percentage didn’t change, the sector raised 19% more dollars over the period while total revenue grew by only 10%.
One of the other bright stories on charitable giving is Pick.Click.Give. Pledges increased from just over one-half million in its first year in 2009 to almost $2.8 million this year. Another way to appreciate this success is to understand that from 2010 to 2013, total charitable giving grew 1% nationally and 5% in Alaska, while Pick.Click.Give. grew 200%! So while charitable support as a percentage of total revenue has not yet increased, thanks to the organized commitment to build a culture of philanthropy in Alaska, there is confirmation that charitable support is gaining momentum.
Transforming the way we work
The last trend mentioned in 2011 was the likelihood that the sector would need to restructure. Unfortunately we do not have much data to update our understanding of this trend. The decrease in the number of nonprofits may provide some clues. We know that we have had more calls to assist nonprofits going through dissolutions and mergers during the past three years than in the first nine years of Foraker’s work. Some communities like Talkeetna have even convened nonprofits to search for opportunities to create new models to meet local needs. Restructuring the sector is inevitable according to many experts because of shifts in funding and demographics. Perhaps by the 2016 study we can provide better evidence related to this trend. One way you can help gather that data is to complete your Partner Assessment Survey, which will include questions related to collaboration and restructuring.
The Foraker boards began an initiative on strategic restructuring as a result of the 2010 study. It has been their priority for the past two years to clarify our thinking on this issue. As a result, we’ve taken action to prepare for the “crash of the herd:”
- As mentioned earlier, we convened a task force on the shortage of development directors.
- We created an entity called Sultana that will serve as a fiscal sponsor for new initiatives that may not require a federal tax status, reducing the need to form new nonprofits. We also convened a cohort of other nonprofits that serve as fiscal sponsors to enhance our ability to do this complex work with quality.
- We provided support for groups seeking to identify potential board members.
- We started to provide free training on how to start a nonprofit and on sustainability for individuals and groups interested in forming new organizations. We hope this training will better equip those committed to succeed and better inform those with less understanding on the real challenges they will face.
- We significantly increased capacity to provide financial shared services and began providing human resources shared services with support from the Paul G. Allen Family Foundation.
- We initiated the Catalyst for Excellence leadership development program, building a strong network of sector leaders, thanks to support from BP.
- We entered into partnerships with the Oak Foundation and the Gordon and Betty Moore Foundation to increase the capacity of emerging leaders in rural regions.
- And our most recent response, with support of the M.J. Murdock Charitable Trust, is an initiative to identify and support new or recent nonprofit executives, along with individuals from other sectors who may consider a career working in nonprofits.
To prepare for the ongoing funding crisis:
- We continue to support Pick.Click.Give. and with our partners, we successfully improved the state’s statute ensuring its sustainability.
- We increased offerings on business plan and advocacy training.
- We embraced our role in public policy, not only advocating for nonprofit priorities using the newly energized public policy committee, but by providing training and data to nonprofits so they can become more competent advocates. Through our partnership with the National Council of Nonprofits, we have increased our capacity to monitor policy trends in other states that could affect our state as well as the national debate on issues like the charitable deduction.
- We convened an initiative to energize young Alaskans to envision the economic future of the state, post oil wealth.
- And starting this summer, through a partnership with a national nonprofit arts consulting organization, EmcArts, and with funding from the Rasmuson Foundation, we will work with arts groups to help them become more adaptive and sustainable.
We hope to complete our data analysis before fall and publish a summary for nonprofits to use internally and externally. As in past years, we will make the data available to our Partners. Once the report is complete, we will begin speaking to as many groups as possible around the state. If you are involved in any civic club, professional group, or business association that would welcome such a program, please call now to make sure we get to your town.
Finally, while this is our most comprehensive study to date and we better understand how to use the data, validity continues to be a concern. We used trusted sources including the IRS, State of Alaska, US Census Bureau, Chronicle of Philanthropy, Giving USA, National Center for Charitable Statistics, and BoardSource. But even data from the IRS can be inconsistent and incomplete. We had to make allowances to ensure all Alaska nonprofits were included in the study. We even purchased the complete file of Alaska nonprofit 990s so we could better analyze data. With a significant effort by ISER, especially Dr. Mouhcine Guettabi, and with many hours of our staff time, especially from Andrew Cutting, our level of confidence in this study is better than ever. With each report, our capacity grows.
How you can use the data
You may wonder how to use this data to alter those misperceptions I mentioned earlier.
For example, if it’s true that others see our sector as a drain on the economy, let’s assume they think the charitable sector is supported by fundraising alone. The data is clear, less than 10% of nonprofit revenue in Alaska comes from charitable donations. Almost 20% of that amount is given by foundations that have but one purpose – to give to nonprofits. Another 15% comes from corporations that give, in part, to make sure they can attract and retain good employees by providing a better quality of life. So that only leaves 65% of that 10% that could be seen as any kind of economic drain. And many of us willingly and eagerly give to support important missions in our communities – so even that logic is flawed.
The remaining 90% of nonprofit revenue looks more like the for-profit sector. Fifty-eight percent is from program fees, or earned income. Nationally, charitable nonprofits rely on program fees for 49% of their total. Therefore, in Alaska we may have become better entrepreneurs than our colleagues Outside. And the 34% in government grants we do receive is not draining the economy because it provides services that the government deems to be required – it, too, is like earned revenue.
As you review our report and share the data with others, the important point to emphasize is that the nonprofit sector is an asset to the economy – not a drain on it. Nonprofits make a significant contribution to Alaska – both by improving our society as a whole and, especially, by adding to our state’s economy. For our sector to succeed in running businesses that help to generate $2.5 billion in salaries and wages, help to employ 63,000 Alaskans or 21% of the total workforce, and comprise total expenditures of $6.2 billion, we must assume that some pretty competent people run our organizations. In fact, that’s the case. Alaska nonprofit professionals are highly skilled and carry out their missions with commitment and integrity. This, combined with the quality of products and services we provide, makes us an integral foundation for Alaska’s economy.
Soon it will be your turn to take this data and make the case in your community. We look forward to working with you.