April 20, 1998
By Alan W. Dowd

"If government becomes the sole manager of change, America’s three-sector society will become a two-sector society, and it will then soon become a one-sector society."
-Richard C. Cornuelle

In October of 1995, Lester Salamon, arguably the chief scribe and researcher of the nonprofit sector, addressed the annual conference of the Independent Sector in Boston, Massachusetts. "I am here today to convey what many of you will consider an unduly alarmist message," Dr. Salamon intoned ("The Crisis of the Nonprofit Sector", p.1). In the very next sentence, Salamon announced that the nonprofit world was in the midst of a "fundamental crisis." He went on to outline the consequences of the crisis, offer possible solutions to the crisis, and implicate ideological conservatives as the chief culprits of the crisis.

It was no coincidence that down in Washington, the President and Congress were considering solutions to a much larger and wider crisis: the nation’s budgetary crisis. Medicare, which provided healthcare to 40 million retired Americans, would be bankrupt within just seven years--by 2002 ("Social Security and Medicare Programs Annual Reports", p.6). Medicaid, the state-federal program providing healthcare to millions of low-income families, was expanding at an unsustainable clip of 10% annually. The nation’s welfare system had become a behemoth of waste, fraud, and illegitimacy, losing the essential and critical political support of the middle class.

It was amid those realities that the political composition of Congress changed in 1994, and it was in that economic-political context that Dr. Salamon made his assertions in Boston. My aim is to test those assertions. Drawing from a broad range of data, analysis, and commentary, this essay will explore the possibility that the "crisis" facing today’s nonprofit sector is nothing new, that political philosophy does not necessarily predetermine support for or opposition to the nonprofit sector, that Dr. Salamon’s speech had more to do with politics than research, and that nonprofit dependency on government is the real culprit in this new crisis.

Inside the Crisis of 1995: Salamon’s View

A brief review of Salamon’s presentation is both necessary and helpful. After his attention-grabbing introduction, which employed the word "crisis" four times in eight sentences and warned of the sector’s imminent alienation from society, Dr. Salamon hedged a bit, admitting that crises had affected the nonprofit world on other occasions. (He mentioned the Reagan presidency and the Tax Reform Act of 1969.) He then outlined three major interrelated challenges to the nonprofit sector--political, moral and fiscal--that actually triggered what this paper will call the "Crisis of 1995."

While he does not list it at the front of his discussion, the political challenge presented by the "New Right" is central to his message of alarm and crisis ("The Crisis of the Nonprofit Sector," pp.11-12). Salamon argues that it is from this political, ideological, even philosophical challenge that all other challenges seem to flow. According to Salamon, there now exists "a right-wing campaign dedicated to discrediting the nonprofit sector" ("The Crisis of the Nonprofit Sector", p.12). The Democratic Party, Salamon laments, can no longer resist this assault ("The Crisis of the Nonprofit Sector", p.17). By implication, then, the Republican Party is responsible for this anti- nonprofit campaign. This political challenge is innately linked to the moral challenges facing the sector, which threaten the very nature of American nonprofits ("The Crisis of the Nonprofit Sector", p.6). Some question the value of and need for the sector. Scandals and new revelations of the sector’s profit-making efforts serve as fodder for those who attack the sector’s moral legitimacy. Salamon views the growing willingness of local governments to attack nonprofit organizations’ tax-free status and Congressional efforts to limit federally-funded nonprofit lobbying as indications of the sector’s declining moral support ("The Crisis of the Nonprofit Sector", pp.6-7).

The third and final challenge that contributed to the Crisis of 1995 is fiscal in nature. Changes in government policy and reductions in the sector’s financial base have forced nonprofits to do more with less, according to Salalmon. To underscore his point, he claims that, under Republican budget proposals, "Federal spending on programs of interest to nonprofit organizations...would decline by 21%...This translates into a cumulative reduction of $773 billion in federal spending" over seven years ("The Crisis of the Nonprofit Sector", p.4). Salamon further asserts that federal housing expenditures will decline by 57%, international humanitarian assistance by 47%, education by 25%, and health by 25% in order to meet Congressional budget goals ("The Crisis of the Nonprofit Sector", p.4). To keep pace with these so-called "cuts," private donations will need to "grow by an added 22% over [their] projected rate in fiscal year 1997" ("The Crisis of the Nonprofit Sector", p.5).

The Crisis of Perpetual Crisis

A review of nonprofit history reveals that "crisis" is characteristic of the sector, just as tax-exemption or innovation are descriptive of the sector as a whole. While the current situation may or may not be a crisis, the fact that such rhetoric has been employed repeatedly over the last seven decades to describe the state of the nonprofit sector speaks to the very nature of the sector. Salamon makes only a passing reference to the crisis-marked history of the Third Sector, leaving the impression that this is a relatively new phenomenon. A longer view of history paints a much clearer picture.

Robert Bremner notes that the sector’s modern troubles go back at least to 1913, when Congress authorized the Industrial Relations Commission to investigate nonprofit foundations (Bremner, p.113). The years following would be difficult for nonprofit foundations. Many in government suspected nonprofits of fomenting unrest among labor and industrial groups. In 1915, the Industrial Relations Commission’s director of research impugned all nonprofit foundations for their concentrated wealth, abuse of tax-exempt status, undefined powers, and freedom from public oversight (Bremner, p.113).ÇéExternal distrust led to crisis again in the late 1940s and early 1950s. This time, both Congress and the public at large suspected that certain nonprofits were supporting subversive or "un-American" activities. Two separate special committees were convened by Congress to investigate the allegations. The first, which met in 1952, reported that some foundations had indeed supported individuals or organizations of questionable background (Bremner, p.166). However, it took no action beyond releasing that report. The findings of the Reece Committee, which convened in 1954, were far less measured. Its chairman and staff implicated foundations and other nonprofit organizations in a "diabolical conspiracy to foist socialism on the American people" (Bremner, pp.166-167). Foundations were not even given an opportunity to reply publicly.

Less than a decade later, Congressman Wright Patman persuaded the House to reopen its sporadic investigations of nonprofits, especially foundations. The Internal Revenue Service and Department of Treasury soon launched their own reviews of nonprofits. After six years of research and hearings, the Patman committee concluded that many nonprofit foundations had become shelters for tax-dodgers (Bremner, pp.181-182). Patman’s efforts culminated in the Tax Reform Act of 1969, which levied new fees, distribution requirements, and restrictions on the foundation world, closing what Bremner terms a turbulent decade for philanthropy (Bremner, p.183).

The 1970s would be no easier for nonprofits. The Tax Reform Act and a major recession conspired to reduce foundations assets, causing a ripple effect throughout the nonprofit sector (Bremner, p191). By 1970, twenty states had passed laws limiting fund-raising by charities (Bremner, p.190). To combat unethical fund-raising schemes, some states forced nonprofits to meet strict, even unfair standards of behavior. As a consequence of these various pressures, charitable giving nearly ground to a halt in the 1970s, often trailing the annual inflation rate. By the end of the decade, personal giving as a percentage of income had plummeted below 2%, lower than it had been in nearly a quarter-century (Bremner, p.192). As Peter Dobkin Hall writes of the 1970s, "the nonprofit independent sector appeared to be in grave danger" (Hall in Powell, p.20).

In 1979, Waldemar Nielson provided the exclamation point for the crises of the 1960s and 1970s in a speech not unlike Dr. Salamon’s. Speaking before the National Council on Philanthropy, this distinguished nonprofit researcher and administrator offered a dire assessment of the sector, an assessment which will sound quite familiar to Salamon’s readers and listeners: "The Third Sector is now in serious difficulty--under simultaneous assault by inflation, government regulation and competition, and the negative effects of some misbegotten tax policies...To preserve its freedom and vitality will require a long, determined, and persevering struggle" (Nielson in O’Connell, p.369).

In this broader context, Salamon’s Crisis of 1995 seems far less threatening and far less "fundamental." Coping with crisis, for better or worse, is part of being a nonprofit. Had Salamon not been so openly and aggressively biased throughout his speech, the alarmist tenor of the speech might have been explained by a desire to rally the troops. As one nonprofit scholar put it, "Adversity is often the mother of donation" (Lenkowsky in Novak, p.86). However, the whole truth should not be sacrificed in the process. One such truth is that turmoil and crisis define the nonprofit sector. Like the boy who cried wolf, Salamon and the sector itself may find that such cries of crisis--seemingly repeated on a decennial basis--are falling on deaf ears.

What Defines a Cut?

At the heart of Salamon’s argument is the contention that a "right-wing" Congress is cutting nonprofit-related items in the federal budget. The heart of this paper’s counter-argument is a discussion of what constitutes a cut and a review of who does the cutting. As the following section will illustrate, in several instances, what Salamon labels and attacks as a "cut" is actually a decrease in the rate of growth--an effort to slow projected spending, not to take funding away. Moreover, in several of those cases involving real cuts, the president proposed the funding adjustments which Salamon blames on Congress and its alleged anti-nonprofit right-wing leaders.

There were indeed cuts in the FY96 budget. The Medicaid program topped the list, falling from $89 billion to just over $82 billion ("Congressional Quarterly 1995", p.10-15). The Departments of Agriculture and Housing and Urban Development (HUD) lost over $5 billion in funding apiece ("Congressional Quarterly 1995", pp.11-84,11-9). NASA would be cut, as would the Department of Defense. House budget proposals called for over a billion dollars in Education cuts; the final budget agreement ultimately shaved $500 million off the Education budget ("Congressional Quarterly 1996", p.10-15).

What Salamon does not mention is that Bill Clinton’s budget also called for real cuts in each of those programs or agencies. Medicaid was funded down to the exact dollar figure proposed in the President’s budget ("Congressional Quarterly 1996", p.10-15). The Education savings came almost completely from cuts in libraries, cuts in higher education grants, cuts in guaranteed student loans, and cuts in the Impact Aid program, all of which the President proposed ("Congressional Quarterly 1996", p.10-15).

Funding for the Women, Infants, and Children (WIC) program increased by more than a quarter of a billion dollars ("Congressional Quarterly 1995", p.11-9). General child nutrition programs picked up almost $500 million, as the "right-wing" House proposed even more funding than the President ("Congressional Quarterly 1995", p.11-9).

The Health and Human Services budget grew from $179 billion in FY95 to $197 billion in FY96 (a whopping 70% increase in spending); again, the House proposal called for even higher funding than the final agreement signed by the President ("Congressional Quarterly 1996", p.10- 15). Medicare spending jumped from $37.5 billion to $63.3 billion, the funding level proposed by the President and House Republicans ("Congressional Quarterly 1996", p.10-15). Welfare grew by a billion dollars, to the level proposed by both the White House and the "right-wing" Congress; the same was true for the Workfare program ("Congressional Quarterly 1996", p.10-15).

Among the budget items the President and Congress disagreed on cutting or sparing were the Department of Interior, the EPA, the Agency for International Development, the food stamp program, the Veterans Administration, the Department of State, and the National Endowments for the Arts and Humanities ("Congressional Quarterly 1995"). Some of these agencies have no interaction with nonprofits at all, and the two that have the most--the NEA and the NEH--are far too small to have the effect Salamon outlines and derides in his crisis speech. By way of comparison, the NEA and NEH lost about $120 million in funding; nonprofit expenditures exceed $150 billion.

Baseline Budgeting

How can Salalmon get away with calling something a cut that isn’t, and why is he silent about Bill Clinton’s cuts? The first question is easier to answer than the second: The 21% loss in nonprofit revenue mentioned above, as well as the other "cuts" that triggered Salamon’s Crisis of 1995, is "calculated from the so-called ‘baseline’ budget, an invention of Washington which assumes that government spending will be growing...to keep up not just with inflation, but also with relevant demographic variables" (Lenkowsky in" Essays on Philanthropy", p.2).

In other words, under baseline budgeting, budgetary funding is based not on an annual assessment of need, but on the previous year’s budget allocation plus the current inflation rate. This figure--not zero--becomes the baseline, the starting point, for the new year’s budget allocation. Further increases, as deemed necessary by Congressional appropriators, Congressional Budget Office economists, and White House actuaries at the Office of Management and Budget are piled on top of the baseline figure to arrive at the new budget outlay. Determining federal spending according to baseline budgeting rather than "zero-funding" (which builds the budget from a zero dollar-figure) creates a dramatically different picture of the budget, and in fact distorts actual spending levels, if not the parameters of a debate such as this.

Hence, Salamon can call the Congressional proposals to increase Medicare spending and welfare spending "cuts" because the baseline projections called for larger increases. However, he does this without fully explaining what he is saying. That is disingenuous.

Regarding the second question posed above, one can only conclude that by depicting Republicans as budget-cutters and the President as a budget-protector, Salamon was trying to emphasize what he sees as an anti-nonprofit bias among conservatives--regardless of the facts. This is underscored by Salamon’s silence in the wake of the FY97 and FY98 budgets, which expand domestic spending far beyond what Bill Clinton and a Democratic Congress attempted in 1993 and 1994. Under the budget agreements of 1996 (for FY97), which the non-partisan" Congressional Quarterly" labeled "a virtual GOP surrender," domestic spending was allowed to rise by 5.4% per year--twice the rate of inflation ("Congressional Quarterly 1996", p.10-3; Moore, p.12).

Nearly all of the real and imagined "cuts" that triggered the Crisis of 1995 have been replaced with massive infusions of cash, yet the Congress trumpets its ability to make hard spending choices. Ironically, it is the Republicans who are now using the word games of baseline budgeting to tout their erstwhile commitment to fiscal conservatism (Moore, p.12).

Obviously, a much sharper picture of federal spending develops if one looks beyond the rhetoric of "crisis" and beyond the phantom cuts of baseline budgeting. Perhaps a clearer picture of Dr. Salamon develops, as well. Here is a man who is ostensibly speaking as a scholar and researcher, representing the highly-regarded Johns Hopkins Institute for Policy Studies. He makes sweeping political commentaries and offers opinion based on partial-facts; however, he has yet to announce that the crisis has subsided. He has yet to admit that ideological conservatives alone should not be blamed for changes in federal spending. He has yet to applaud Congress for its dubious budget victories and consequent re-expansion of the state sector in the 1997-98 spending cycle. Nor has he recognized the dangers of the sector’s continued dependence on government. His silence speaks volumes

Czar Reagan?

The point of this brief survey of the budget Salamon attacked for its anti-nonprofit, right-wing stance is to underscore three truths: many of the real cuts were in areas that did not affect nonprofits; what Salamon defines as a cut often amounts to a substantial spending increase; and many of the spending changes were proposed by the President himself. This is significant because Bill Clinton is not part of the anti-nonprofit right wing.

Nor was President Carter. However, buried deep in "Partners in Public Service", Salamon admits that it was the Carter Administration that began to "restrain the growth" of government spending in the late 1970s, an effort which impacted social welfare programs and the nonprofits funded through them (Salamon, "Partners", p.225). Salamon devotes much of "Partners in Public Service" to criticizing the Reagan Administration for simply trying to rein in domestic spending. In many ways, the Crisis of 1995 is a rehash of this attack on President Reagan.

However, the facts do not support Salamon’s assertions. Under President Reagan, domestic spending grew by 4% annually (Moore, p.5). Even Salamon concedes that "the inflation-adjusted value of total federal support to nonprofit providers remained relatively constant between FY80 and FY85" (Salamon, "Partners", p.89). By the end of Reagan’s second term in the White House, the United States government had appropriated and spent $2 trillion more than it had actually collected (Moore, p.14). Most of that spending went to domestic entitlement programs, from which nonprofits directly benefit.

Furthermore, recent studies show that private giving picked up in the 1980s to offset the "losses"--according to baseline budgeting methods--nonprofits might have experienced due to the modest annual spending increases proposed by Reagan and adopted by Congress (Lenkowsky in Novak, p.92). Even Dr. Salamon admits, albeit grudgingly, that the "nonprofit sector as a whole registered an overall increase in total income...over this period" (Salamon, "Partners", p.197).Çé After reading Salamon’s account of the last twenty years, one is left with the distinct impression that the United States government was run by an omnipotent czar in the 1980s and by a runaway parliament in the 1990s. Reagan’s first budget did include spending cuts, but it was a Democrat-controlled House that agreed to the cuts. Reagan did not create the budget by executive fiat, just as the Congress of 1995 did not pass the FY96 budget over President Clinton’s objection. In both the 1980s and 1990s, Congress worked with the executive branch to set domestic spending priorities. The facts are that none of these spending proposals could have become law without the action of Congress and the signature of the President, regardless of what Salamon would have his readers believe.

Moreover, as a group of thoughtful nonprofit researchers recently observed, all of this is dependent ultimately on the will of the people. For better or worse, "We have decided as a polity to reduce the role government plays" in providing social services (Diaz, p.125). "[T]his is virtually a bipartisan position in our country" (Diaz, p.125). The result is a redirection of the nonprofit sector, at least when it comes to funding.

Salamon fails to consider the possibility that the political-governmental changes of 1994 (and 1980, for that matter) may be caused by a legitimate desire on the part of the public to restrain government in all its forms: direct, third-party, or otherwise. In the main, the electorate has been saying this since the election of 1980, by endorsing candidates who promise to slow the growth of the federal government. The failure of their rhetoric to translate into action is a topic for another paper (or perhaps a book).

Political Philosophy and the Nonprofit Sector

Salamon makes a critical mistake in averring that conservatives are opponents of the Third Sector and that the Democratic Party alone supports the sector ("The Crisis of the Nonprofit Sector", pp.12,17). In addition to the foregoing, a brief survey of recent legislative initiatives illustrates the patent wrongness of Salamon’s assertion. ÇéCongressman Pete Stark is pushing a bill that would increase the minimum payouts for foundations (again). When he was a senator, Sam Nunn called for the elimination of charitable deductions for businesses (Salamon, "Holding the Center", p.25). Senator Tom Daschle sought to widen the scope of the 1997 campaign fund-raising hearings to include an investigation of the political activities of nonprofits. As Minority Leader, he got his way. In addition to their apparent distaste for certain elements of the nonprofit world, these men have one other thing in common: they are Democrats.

Among the many conservative Republicans who have introduced pro-nonprofit legislation are Senators Abraham, Coats, and Smith. Senator Coats’ Project for American Renewal includes 18 separate bills that would expand the role of and resources given to nonprofit organizations. Senator Ashcroft of Missouri proposed the Charitable Choice Program, which would empower states to divert 10% of their welfare budgets to nonprofit agencies (Snow, p.A10). Congressmen Camp, Souder, and Crane have dropped bills that would expand charitable deductions, permit stock transfers to foundations, and allow non-itemizers to deduct charitable donations. If anything, this should put to rest the idea that political party or philosophy predetermines one’s view of the nonprofit world.

Three Sectors or Two?

In many ways, the Crisis of 1995 was of the sector’s own making. Were it not so dependent upon government funding, the nonprofit sector would be relatively unaffected by the shifting sands of politics or the occasional budget crunches in Washington. At the beginning of this decade, state, federal and local governments accounted for 31% of nonprofit income (Lenkowsky, "Essays", p.1). Perhaps even more revealing is the percentage of nonprofits that receive some portion of their funding from government: a whopping 60% (Salamon, "Partners", p.63).

As Salamon’s speech underscores, the state and nonprofit sectors are no longer concerned about separation; they are concerned about resources (Lenkowsky in" "Novak, p.91). As a consequence, the sector’s celebrated independence has all but vanished. "[M]aintaining good government relations has become at least as important to many nonprofits as developing good programs" (Lenkowsky in "Essays", p.4). The mere existence of Independent Sector and OMB Watch underscores this point. Hence, Dr. Salamon is compelled to sound the alarm in October of 1995, as the state--the nonprofit sector’s main supplier--is overhauled. Nonprofit organizations have so intertwined themselves with government that a change in the political winds creates a "fundamental crisis."

After succumbing to "government’s fatal embrace," the larger nonprofits have steadily become funding-focused rather than mission-focused (Besharov, pp.73, 81). "Once government funding begins, political pressures make it almost impossible to end" (Besharov, p.74). The result is a Third Sector dependent on government, entangled in bureaucratic red tape, and placed at the mercy of the public sector.

Although Salamon adamantly contends this is nothing new, his historical examples of government-nonprofit cooperation are limited to the formation of just a handful of colleges and hospitals. Indeed, the depth and breadth of today’s nonprofit dependence on government is truly unprecedented, which Salamon himself concedes (Salamon, "Partners", p.86). Salamon never calls the nonprofit sector independent; he does not think it is or should be (Salamon, "Partners", pp.83- 86). Central to his outlook is the idea that nonprofits and government are "partners in public service"--not independent parts of society. Salamon calls this system of nonprofit-government entanglement "third-party government," and in his estimation it has served both sectors well throughout American history, at least as long as government funding continued to climb (Salamon, "Partners", p.68).

Salamon does admit that third-party government "arrangements are not without their strains. Nonprofit organizations complain about excessive paperwork, insufficient provision for overhead costs, and burdensome regulatory requirements" (Salamon, "Partners", p.68). Third- party government is government from a distance. It obviously affects the nonprofit world. Through it, nonprofits gain revenue, but at the expense of their independence and flexibility. However, this public-nonprofit co-dependence also affects the rest of society. "It builds a politically connected constituency for continued spending" (Besharov, p.81). As these built-in constituencies push for more funding, government collects more tax revenue, which necessarily increases the size of the state. As such, third-party government is one of the main causes of the "state" sector’s expansion.

The Real Crisis

Decades ago, when this cycle of co-dependence began, some wondered if the nonprofit sector of the future would simply be an "auxiliary to the state, a kind of willing but not very resourceful handmaiden" (Pifer in O’Connell, p.273). That question has been answered, at least in part. The sector is dependent on the state, and as a consequence it is an auxiliary to the state--in practice as well as name, according to Dr. Salamon. Even as the number of nonprofit organizations increases, so too does their dependence on government, resulting in the contraction of the buffer space between the individual and government. It is difficult to win back that buffer space. As Richard Cornuelle warned in the early hours of the government’s coopting of the independent sector, "if a three-sector society becomes a two-sector society, it will soon become a one-sector society," and that is tyranny (Cornuelle in O’Connell, p.283). This will happen, he went on to say, "only if government becomes the sole manager of change" (Cornuelle in O’Connell, p.283).

If anything, the Crisis of 1995 illustrated that the Third Sector is beholden to the federal government. Once committed to change and reform, the sector now tenaciously holds on to the status quo. The sector has become completely reactive as the government sets about the task of "managing change." If Salamon’s speech is any indication, the nonprofit sector has chosen co-dependence over independence and has effectively surrendered to the state, thus allowing government to reach beyond its proper political sphere. To paraphrase Dr. Salamon, that may sound like an unduly alarmist message, but it may in fact be the real crisis facing this sector and this nation.