Charities grapple with Washington’s fiscal chaos

NEW YORK – The fallout from the fiscal chaos gripping Washington in recent weeks – indeed, in recent years – will not pass over the American Jewish and nonprofit communities, according to key lobbyists for the nonprofit sector.

Washington’s budget battles pose several potentially severe risks for nonprofits that depend on charitable dollars. In particular, charities are concerned about the automatic budget cuts known as “sequestration” and possible changes to the federal charitable tax deduction that could significantly reduce the tax incentives for charitable giving, especially for the wealthiest donors.

What’s at stake with these changes? “Hundreds of thousands of vulnerable individuals would be affected,” according to William Daroff, vice president for public policy of the Jewish Federations of North America.

The looming “sequester,” or automatic budget cuts introduced into law in 2011 as a measure to force Congress to compromise on spending cuts, will go into effect March 1 if no agreement is reached. It will cut federal programs, including those on which many charities depend, by some $85 billion over the next seven months alone, with an additional $1.1 trillion in cuts over the next 10 years.

The projected cuts “will hurt our economic growth, add hundreds of thousands of Americans to the unemployment rolls, and threaten military readiness,” according to a statement released by the White House Tuesday, just 10 days before the cuts are set to go into effect.

Worse, charities have been unable to effectively prepare for the cuts, since the government has not offered details related to how it expects to implement them.

Asked Tuesday by The Times of Israel how badly Jewish federations and social service agencies will be affected by the cuts, Daroff replied, “The short answer is, we’re not entirely sure. The administration has tried not to focus on the mechanics because they don’t want it to look like [the cuts are] a fait accompli as far as the public conversation goes. We do know that at the highest levels of the administration they are working on contingency plans and discussing what would happen, but they are not publicizing what that will look like.”

Daroff’s office, which represents American Jewish federations in Washington, has spoken to White House officials, members of Congress, and officials from various federal agencies, all of whom “have been unable to articulate to us the specific ramifications of sequestration,” Daroff wrote in a memo to federation and other nonprofit leaders and officials last week.

Examples of federal programs on which Jewish agencies depend include grants for transporting vulnerable individuals to obtain medical care, delivering meals to the homebound, and programs for the disabled.

“We know [sequestration] is approximately a 5.2% cut [in relevant federal spending], and what some folks will do is extrapolate what a 5% across-the-board cut will mean for their program,” said Neal Denton, a senior vice president at YMCA of the USA in charge of advocacy and government relations for 2,700 YMCAs in the United States.

“But it will not be an across-the-board cut. The administration will make decisions.” And while it’s “premature” for the administration to indicate where the cuts may fall, “it will be much more targeted.” An organization or program that faces cuts could thus face a more severe crunch than the overall 5.2% cut.

“And it’s not just the nonprofit sector,” Denton was quick to note. “So many sectors that rely on government funds to meet their mission [will be affected]. Everyone is going to be holding their breath to see what the impact is going to be. It’s very difficult now for any organization, whether nonprofit or not, to make plans and strategies.”

If, as Denton termed it, “cooler heads prevail” and sequestration is averted, charities will still face a second long-term danger that could leave them reeling: a lowering of the federal charitable tax deduction.

As Congress struggles to cut federal spending, lawmakers are also looking at new sources of revenue, including capping the tax deductions for charitable donations.

But lowering the deduction could lead to a painful drop in fundraising for the neediest Americans, according to Daroff, Denton, and other nonprofit leaders.

“Any effort to curb tax deductions for charitable contributions would cripple charities and hurt the needy they serve,” Daroff said in testimony before the House Ways and Means Committee last week.

“We know that donors who take tax policy into consideration when they make their donation” — often the wealthiest of donors — “they’ll simply deduct the additional tax from their donation,” Steve Taylor, United Way Worldwide’s public policy counsel, warned in an interview with the Chronicle of Philanthropy in November.

“For the donor it will not make much difference out of pocket,” Taylor said. “Where it’s really going to be felt is where the smaller donation reduces our ability to help people at the bottom of the economic spectrum.”

Every budget proposal put forward so far by the White House has included some reduction in the charitable deduction.

The effect could be significant, according to Daroff. He cited a study from the Center on Philanthropy at Indiana University which calculated that the charitable deduction caps suggested by the White House could result in a decline in charitable giving in the US of some $3-7 billion each year. That’s a decline of roughly 1 to 2% of the estimated $298 billion in US charitable donations in 2011.

“For an economist it’s not a lot of money because the denominator is so large, because [Americans are] the most generous people who ever lived,” Daroff acknowledged. But even at the low end of that estimate, or $3 billion, the human cost would be dramatic.

“An average kosher Meal-on-Wheels” – a federally-funded program that prepares and delivers meals to the needy and immobile – “costs $42 per meal. [A $3 billion drop] is 71 million meals. A flu vaccine costs $20. That’s 140 million flu shots. We judge these issues not as an economist would in some ivory tower, but based on the impact on real people every day,” said Daroff.

“It’s bad public policy,” added Denton. “If you’re going to be looking for places to tighten your belt, this is the worst place to look. The opportunity for Americans and others to give to charities that are doing the work government isn’t able to do – it’s a bad way to be invested in the future of the country,” he said.

Daroff testified before the House Ways and Means Committee last week on the potential impact of a reduction in the charitable deduction to US charities. While charities are concerned about the immediate effects of changes to the charitable deduction in the next federal budget due by the end of March, the House hearing was about a broader reform of the tax code that Congress is expected to undertake in the fall.

Nonprofit leaders understand that whatever changes Congress contemplates this spring could set the terms for those long-term reforms. Washington’s short-term fiscal battles could have a profound influence on the long-term well-being of the American nonprofit sector.

“The charities at last week’s hearing, big or small, east-coast or west-coast, were unanimous,” Daroff recalled Tuesday. “Given the challenge and the decrease in governmental funding, now is not the time to put another stumbling block before charities trying to do more with less.”