My fellow JUST CAUSE blogger Susan Janvrin emailed me yesterday to tip me off about an article in the New York Times called Exemptions for Charities Face New Challenges. The article describes a number of recent events in which courts, federal agencies, and even a committee of the U.S. Congress are scrutinizing various nonprofit organizations to figure out whether they can continue to claim nonprofit status.

As I said in my first post here at JUST CAUSE, nonprofit doesn't just mean a business that can't seem to make any money. Nonprofit organizations are formed under a specific section of the federal tax code, and with nonprofit status comes certain responsibilities. Nonprofit organizations are supposed to provide public goods and services. "Provide" does not mean the same thing as "sell." There are plenty of businesses in the world who sell things that obviously increase the well being of the public, such as ice cream and cute baby overalls, but they're not nonprofits.

In Minnesota, as reported in the New York Times article, a December state Supreme Court case involved a child care center that charged for its services, and did not offer discounts to anyone. Its rates weren't lower than the rates charged by for-profit competitors. The court found that the child care center didn't give anything away; it did not provide any public benefit since all of its services were paid for at market rates by either parents or local governments who contracted with the center for services. So the center lost its exemption from property taxes.

Why do nonprofits charge anything for their services? Shouldn't they just give everything away for free?

In an ideal world, yes, and many do. Our local food bank gives away food, organizations providing disaster relief don't sell people materials to build shelter, and many nonprofits offer everything from tutoring to support groups to homebuyer education classes for free.

Rock, Meet Hard Place

However, nonprofits also face a variety of challenges on the financial front. Many nonprofits have extensive contracts with federal, state, county, and local governments to provide a wide array of costly services, such as health care, nursing home care, and education. These contracts pay rates that are sometimes even below what it costs the organization to provide the services.

Nonprofits have also been under significant pressure in the past few years to become "sustainable." Large donors don't want to fund a program at a nonprofit organization unless that organization can prove they have the resources to continue the program when the donation runs out. When they apply for grants from foundations and government sources, nonprofits are often asked to describe in detail how they will support the proposed program after the end of the grant period.

There are only two ways to make up the difference: get someone to give you more money, or charge for your services.

The latter is often easier than the former. The NYT article reports that "88 percent of overall nonprofit revenues in 2005, the most recent year for which figures are available, came from fees for services, sales and sources other than charitable contributions."
Universities, for example, provide education, but very few of them give away free tuition to all of their students. The tuition paid for by the rest of the students, whether directly or with loan or grant dollars, falls into that 88 percent. Museums charge a small amount for admissions, but many also run gift shops. And I have a stack of paper to prove that the nonprofit hospital where I had a baby last year got their money from both the insurance company and my bank account.

The CEO of a Minneapolis nonprofit center that serves disabled people summarizes the current situation that nonprofits find themselves in:

The nonprofit sector is being pressed to be more business-like and to find new ways to fill the gaps between what government will pay and what services cost, but then assessors want to treat us like businesses, which pay taxes.

Know Your Nonprofit

As a donor, if you're concerned about whether the nonprofits you support are doing what they should, you can always do a little research:

• GuideStar is one source of information about nonprofits, though you have to create a free account to access most of the data.
• Charity Navigator is another good source, and they have a number of helpful guides about how to research organizations, how to make non-monetary donations (such as cars), and more.
• The Better Business Bureau allows you to look up information about nonprofits as well as businesses. They also have a voluntary accreditation program that charities can enroll in.

Very few nonprofits are deliberately breaking the rules. Most are just doing what they can to survive in tough economic times. If you have any questions about your favorite nonprofit, chances are they'll be glad to answer them.

[Image by scol22.]