The philanthropy boom.

The Philanthropy Boom

WASHINGTON, D.C.--Eight years ago, when Ronald Reagan first suggested that charitable giving could go a long way toward replacing parts of the federal budget, he was regarded as unrealistic at best, and heartless at worst. Yet, according to estimates reported recently by the American Association of Fund-Raising Counsel, gifts and bequests in 1988 topped the $100-billion mark, more than double what they were in 1981 and considerably more than the $83 billion the Federal Government spent to purchase non-defense goods and services. Adjusted for inflation, giving rose by a hearty 30 per cent during the 1980s, following a decade of hardly any growth at all. Indeed, the increase even exceeded the most frequently cited estimate of the amount that nonprofit organizations lost in federal grants and contracts because of budget cuts.

Still more remarkable, this explosion of generosity came at a time when many experts were predicting that changes in tax policy would reduce giving by as much as $10 billion annually. By raising the standard deduction and lowering tax rates, we reduced the financial incentive to give during the 1980s, since fewer taxpayers were likely to itemize and those who did stood to realize less in tax savings through their gifts.

Yet even after the 1986 tax reform, charitable giving from individuals--who account for more than 80 per cent of the total--has continued to grow. Indeed, last year, these gifts to help others rose at a faster rate than the amount people spent on themselves, suggesting that the incentive to give may be at least as strong as the desire to receive.

The October 1987 stock-market crash was also widely expected to cast a pall over philanthropy, especially that roughly 10 per cent which comes from corporations and foundations. And for a while it did. Corporate giving did not increase in 1987 and the growth rate of foundation grants declined as well. However, in 1988, corporate contributions rose again, and foundation giving continued to go up, though at a slower pace than the year before. In any case, the slowdown did not come close to bringing contributions back to their pre-1980 levels.

TO BE SURE, charitable gifts are not always interchangeable with public spending. Nearly half of all individual contributions, for example, go to religious institutions, including houses of worship, seminaries, denominational schools, and so on. (Regular church attendance is, in fact, the best predictor of whether or not a person will give.) As a result, many argue that this money is no substitute for federal grants, relatively few of which go to sectarian organizations.

However, religious groups often sponsor foster homes, hospitals, soup kitchens and other humanitarian activities that are open to all who need them. Indeed, in some cities, surveys have shown that religious organizations are more likely to be engaged in helping the poor than are secular agencies.

In general, private funders' approach to helping the poor is usually different from the public sector's. Rather than provide income subsidies, philanthropy attempts to attack the underlying causes of poverty, such as inadequate education and broken families, by funding risky pilot projects--many of which run counter to the received notions of government policy experts. Insofar as these succeed, the need for public assistance to the poor should eventually diminish.

These differences in emphasis and approach mean that ordinary citizens and politicians are making different decisions about how to deal with important public concerns. For example, in 1988, while public spending on education rose, charitable giving went down. Conversely, private support for the arts increased by 8 per cent last year while public assistance was declining. As a result, causes can flourish that otherwise might be too controversial, or even unconstitutional, for government to support. And if government officials feel that some needy projects are getting short shrift, they can always reorder their own priorities to pick up the slack.

But the fact is that private financing has several advantages over public financing. One is that those funding a project see themselves as having a direct stake in its success. Nonprofit organizations know that they must produce demonstrable results, or they may lose their support. Sadly, these conditions are rarely encountered in the public sector, where grants tend to increase to meet the amount an agency has budgeted and where they are terminated more commonly because of politics than because of performance.

Indeed, many nonprofit organizations may already be too dependent on government support. Since the mid 1970s, nonprofits have been receiving approximately 27 per cent of their funding from the public sector. (If religious groups were excluded, the fraction would be even higher.) While many in the nonprofit community have been bemoaning federal budget cutbacks, the facts reveal a different story. From 1982 to 1986, funding of the nonprofit sector by all levels of government grew from $57.4 billion to $81.2 billion. That's a faster rate even than private support, which over the same period increased from $155.3 billion to $218.7 billion. But since a large amount of federal money came in the form of grants to individuals (such as Medicare payments) rather than as direct organizational support, nonprofits are winding up the decade slightly more beholden to those they are supposed to serve than they were at the beginning.

Not surprisingly, professional fund-raisers are now doing a booming business, and in many large nonprofits, development officers are among the highest-paid employees. When gaining support becomes viewed as the market test that it is, a new discipline and responsiveness invariably surfaces. For if an organization must rely on voluntary gifts rather than on the generosity of government, it will strive harder to be productive.

Increasing reliance on private funds may also produce some other challenges to the nonprofit sector. Instead of believing that they do not have to "manage" because they are not tied to a "bottom line," nonprofits are now learning that they must be especially good at husbanding their resources if they are to thrive. The new, more competitive environment has already led many nonprofit organizations to establish profit-generating ventures as an additional source of funding, sometimes to the dismay of for-profit business in the same (or closely related) fields. Can we arrive at an equitable set of rules that would facilitate such money-raising without giving unfair advantages to nonprofits? The jury is still out, but Congress has already started looking at this issue in the context of the "Unrelated Business Income Tax" which nonprofits must pay on certain earnings in order to maintain their tax-exempt status.

Despite the boom in giving in this decade, it's unlikely that private philanthropy will ever--or should ever--fully replace public spending. There are some activities which, because of their cost or the authoritative backing they require, can only be provided by the government. But philanthropy can--and in the 1980s, it did--play a more vigorous and creative role in American life. For those who were skeptical when Ronald Reagan suggested this possibility, and joked when George Bush rhapsodized about a "thousand points of light," the magnitude of what Americans give to charity offers a powerful rejoinder.

Mr. Lenkowsky is president of the Institute for Educational Affairs, a nonprofit organization that provides assistance to grant-makers. Mr. Frumkin is a vice president of the Institute.