Three-Way Squeeze

Whether the Reagan era has been good for philanthropy and nonprofit organizations is widely debated.

Some leaders of nonprofit groups believe they are being boxed in by federal policies and left with few ways to increase revenues: Their federal funds have been cut, tax reform threatens donations, and attempts to find new sources of earned income have brought cries of "unfair competition" from small businesses.

"Our funding is a three-legged stool, and government is trying to pull all three legs out from under us," says Edward H. Able Jr., executive director of the American Association of Museums.

All told, federal financial support for nonprofit organizations has fallen by about 22.4 percent from 1980 levels, after adjusting for inflation and excluding increases in Medicare and Medicaid, according to Lester M. Salamon, director of the Institute for Policy Studies at Johns Hopkins University.

The increase in private giving has helped make up for some, but not all, of those lost funds, according to Mr. Salamon. In fact, he says, 1986 was the first year in which private giving exceeded the loss of federal funds. However, he adds, the bulk of private donations did not go to meet needs resulting from cutbacks in federal funds.

Some state governments, such as California, Illinois, Massachusetts, Minnesota, and New York, have helped to offset those cuts, but many others, especially those with lower tax rates, have not.

Nonprofit groups initially made up for three-fourths of the federal reductions by raising fees for the services they provide, according to Mr. Salamon. The cuts in government funds are part of the reason behind soaring health-care costs, college-tuition rates, museum-entrance fees, and symphony- and theater-ticket prices, he says.

Today, however, officials worry that if they raise their prices further, people will no longer be able to afford their services. And for some kinds of nonprofit groups, especially social-service agencies and others that serve the poor, raising fees and charges has never been a significant option.

Not everyone shares the gloomy view of philanthropy in the Reagan era.

"The state of philanthropy is good, right now," says Leslie Lenkowsky, president of the Institute for Educational Affairs and a leader of the Philanthropic Roundtable. "Charitable giving -- by individuals, corporations, and foundations -- has soared enormously in the past eight years. Every sign suggests that it will continue to grow."

Mr. Lenkowsky argues that putting nonprofit groups to the market test of finding private funds has forced many of them either to become better managed and more efficient or to go out of business.

He adds: "The nonprofit sector on the whole has been able to recoup whatever has been lost."

The effects of the Reagan revolution vary widely in different parts of the nonprofit world.

Hospitals, colleges and schools, and cultural groups, which account for more than 70 percent of the employment in the nonprofit sector and which have several sources of income, have weathered the storm fairly well.

Employment in health services, for example, rose to 3.3 million in 1986, up from 2.5 million in 1977. In education, employment rose to 1.7 million, up from 1.3 million in the same period. Religious organizations, by contrast, lost ground: They employed 620,000 people in 1986, down from 679,000 in 1977.

Environmental groups have done well for a different reason: Opponents of the administration's policies became members of such groups in droves. The Sierra Club has 480,000 members today, compared with 180,000 in 1980. The National Audubon Society has 510,000 members, up from 311,000 in 1980. (This year the society raised $8-million in private donations, up from $1.9-million in 1980.)

Some small organizations that never relied on government funds have also recorded steady growth through the decade. In Arlington, Va., for example the Citizens' Clearinghouse on Hazardous Wastes raised $60,000 in its first year, 1981, while other activist groups were scrambling to make up for lost federal funds.

"Watching these groups fall apart," says Lois M. Gibbs, the executive director, "we decided we weren't going to take federal dollars" or even accept grants more than $60,000 from any single foundation. As a result, the group now gets money from small contributors and 30 foundations. Its projected 1989 budget is $574,000.

Facing the greatest difficulties are groups that deal with housing, community development, social services, civil rights, the handicapped, and employment and job training.

For example, half of the 120 agencies that served poor Hispanics in 1980 had gone out of business two years later because of government cuts, according to Raul Yzaguirre, president of the National Council of La Raza, an umbrella organization. Today, about 100 such groups exist, financed by a patchwork of state, federal, and private support.

"We are about where we were in 1980," says Mr. Yzaguirre. "But we have lost momentum. The size of the problems has gotten bigger, so we have lost ground."

Groups that serve the handicapped have also had an uphill battle for funds.

The Disability Rights Education and Defense Fund, for example, saw its budget plunge from $1.3-million a year in 1980 to around $270,000 in 1986 after federal contracts evaporated. The group, once dependent on the federal government for 90 percent of its funds, now relies entirely on small gifts from individuals and corporations. Its budget has climbed back to about $300,000 a year, but the staff now numbers only 10, compared with 40 in 1980.

"For certain organizations, primarily those serving the most vulnerable, the Reagan Administration has primarily been a nightmare," says Brian O'Connell, president of Independent Sector, the national coalition of grant makers and nonprofit organizations.

Fund raising and giving have changed rapidly in the Reagan era. Some highlights:

Seeking funds from the rich. More and more fund-raising efforts are focusing on getting gifts from America's "super rich" -- those who rank in the top 0.5 percent in wealth and assets.

That group, which includes 35,875 Americans who have incomes of over $1-million and 475,000 who have assets of $1-million or more, contributes about 10.3 percent of all donations reported on tax returns, according to Internal Revenue Service estimates. And they have been getting steadily richer over the past 20 years. In 1986 they owned 24.4 percent of American individual wealth, up from 23.7 percent three years earlier. The top 10 percent of Americans hold nearly 65 percent of all the wealth in the country, according to estimates by the Federal Reserve Board.

The pursuit of gifts from such individuals has become a finely tuned science. Today, say sophisticated fund raisers, some 95 percent of the money raised in capital campaigns will come from 5 percent of the donors. Research at Yale University indicates that it takes an average of seven to nine personal visits by officials with a variety of connections to an organization over a two-year period to close each gift of $1-million or more.

However, a new Gallup survey shows that poor people are relatively more generous than wealthier people. The survey found that people with annual earnings under $10,000 gave 2.8 percent of their income to charity, while those with income over $100,000 gave 2.1 percent.

Corporate giving. Companies gave a lot more in the first part of the decade, partly in response to calls from the Reagan administration to help take up the slack created by federal budget cuts. By 1984, corporate giving had almost doubled, to $4.4-billion -- up from $2.4-billion in 1980.

Since then, however, it has stagnated. Hayden W. Smith, senior vice president of the Council for Aid to Education, says the double-digit growth was an "inherently unstable" situation that could be maintained.

In addition, he says, competition from abroad has cut into corporate profits, which were sluggish throughout the decade. Low profits, he says, ultimately limited the ability of corporations to increase their philanthropic budgets.

Mr. Smith notes that much of the increase in corporate giving between 1980 and 1985 was in the form of in-kind gifts. A 1981 change in the tax law encouraged such gifts by offering larger tax deductions for gifts of equipment for scientific research and training. About 45 companies that manufacture computers, electronics, and medical instruments accounted for the bulk of those gifts.

Corporate mergers, acquisitions, and restructuring also took their toll on giving. Such activities may have peaked in 1986, when more than 3,300 mergers and acquisitions worth $173.1-billion -- almost quadruple the value of such activity in 1980 -- were recorded in the United States. When corporations merge, the giving program that results is usually less than the sum of its parts, experts say.

As a result, corporate giving rose only 2 percent, to $4.5-billion, between 1985 and 1986. Last year it did not rise at all.

A new survey for the Council on Foundations shows that chief executive officers continue to believe that corporate philanthropy is important, but they say the cloudy economic picture makes future increases unlikely.

With traditional corporate giving leveling off, some charities have turned to "cause-related marketing," in which a company uses a nonprofit organization's name to sell a product and donates some of the profits to the charity. Cause-related marketing was invented by American Express in 1981, when the company increased the use of its credit card in California by giving California arts groups a sum equal to 1 percent of the sales charged to it.

Since then, "affinity cards," which bear the name of a nonprofit organization along with that of the card issuer, have become common, and other forms of "cause-related" marketing have been created as well. As a result, charities are far more integrated into corporate-marketing schemes than they were in 1981.

Some corporate critics say that too many cause-related marketing programs are poorly conceived and make affiliations with inappropriate causes. Officials of charities say some arrangements bring far more benefit to the sponsoring corporation than their philanthropic causes.

Foundations. Fewer foundations are being formed today than they were started in the 1950s and 1960s, primarily because of the 1969 tax law, which reduced incentives to create such organizations.

From 1980 through 1985, 446 foundations with assets of $1-million or more were established; five of them had assets of $100-million or more. That rate is far lower than that of the 1950s, when 1,593 new foundations were formed, or the 1960s, with 1,156. It does surpass the 1970s when only 627 foundations came into being.

Holdings have grown, however. In 1985, the value of foundation assets was $89.9-billion, up from $47.5-billion in 1980, surpassing, in inflation-adjusted dollars, their last high mark, set in 1972.

More foundations are forming partnerships with other grant makers and even, occasionally, with nonprofit groups and government agencies, as a way of "leveraging" the influence of their ideas and their grant dollars.

To help foster such relationships, foundations have formed some 20 "affinity groups" of grant makers concerned about a particular topic, up from one (on pre-college education) in 1980. Regional groups of grant makers have grown to 26 today, up from 16 in 1980.

Community foundations have also flourished. There are now 250 of these funds, up from 182 in 1980. Last year they had assets totaling about $4-billion, up from $2-billion in 1980, and awarded grants totaling $300-million, up from $140-million in 1980.

Such foundations are popular because they offer staff support and investment flexibility to donors, often newly wealthy people who have no history of family giving. Community foundations allow such donors to participate in organized philanthropy without establishing their own fund.

Many of the foundations are acting as arbiters in community disputes, bringing together groups representing several views on an issue and helping to formulate -- and later finance -- solutions.

Capital Campaigns. Far more nonprofit organizations than ever before have turned to capital campaigns in their efforts to finance everything from construction to current operations, endowments, and a host of other big-tickets items. In the process, the organizations are pursuing fund-raising goals that would have been unimaginable in 1980. In 1986, Stanford University redefined the outer limits of fund raising when it announced a capital campaign to raise $1.-billion.

New techniques. Soaring capital-campaign goals have led to the development of new fund-raising techniques.

Many fund raisers are now focusing on "ultimate" gifts -- ones that constitute a substantial portion of a donor's personal capital. In fact, "planned" gifts -- bequests, trusts, life-income contracts, and gifts of property and insurance -- are accounting for growing proportions of capital-campaign totals, often a third or more of the goal.

An insatiable demand for names and donors capable of making big gifts promoted advances in prospect research, philanthropy's answer to market research. Today researchers are checking potential donors' stock and real-estate holdings, divorces and probate records, and a host of other sources to locate the best prospective contributors to their causes.

Federated fund raising. Group fund-raising efforts, such as the United Way, the united Negro College Fund, and the United Jewish Appeal, have not grown as fast as the rest of the field. The United Way campaign, for example, raised $2.6-billion this year, up 70 percent from the $1.53-billion it raised in 1980. But that was less than the 92-percent increase in giving over all.

Such federated efforts are becoming less popular because donors are responding to more sophisticated fund-raising approaches. More and more donors are awarding larger, designated gifts to individual organizations.

Smaller alternative funds set up in the last decade have established a far stronger record, however. More than 35 local funds now support such causes as social action, women's rights, and environmental issues, compared with just 13 in 1980. Giving to those non-traditional funds increased 123 percent between 1982 and 1987.

Shortage of fund raisers. Demand for fund raisers has skyrocketed, and salaries and perquisites have soared along with demand.

Some chief development officers now are reporting salaries of more than $150,000, up from a high of $75,000 in 1983.

Along with the demand for fund raisers, membership in professional groups has boomed. The National Society of Fund Raising Executives, for example, this year has more than 9,000 members, compared to 2,500 in 1980. In the past two years, several new professional groups have formed, too. These groups address the needs of fund raisers who specialize in planned giving, prospect research, "direct response" fund raising, and the combined use of direct mail and telephone techniques.

And the fund-raising profession has become increasingly "feminized." Women made up 43 percent of the membership of the NSFRE in 1985 and are likely to outnumber men when the society publishes its newest survey next month.

Stephen T. Ast, president of Brakeley Recruiting, a fund-raising recruitment firm, says female fund raisers already outnumber their male colleagues in health and social-services agencies, cultural organizations, and environmental groups, and women far outnumber men among fund raisers under 34 years of age. However, only 17 percent of chief development officers at colleges and universities, and 28 percent at hospitals, are women,

The Reagan era has made philanthropy far more visible to the general public. Along with that visibility have come mounting pressures on charitable organizations to be more accountable.

Congress held prolonged hearings on private fund-raising activities in the Iran-Contra affair. As scandals swirled around television evangelists Jimmy Swaggart and Jim and Tammy Bakker, watchdog groups proliferated. Membership in the Evangelical Council for Financial Accountability, a group that presses for high standards of financial accountability among evangelical religious groups, has jumped to 520, up from 148 in 1980.

Two private groups, the Philanthropic Advisory Service of the Council of Better Business Bureaus and the National Charities Information Bureau, have tightened their guidelines for helping donors spot mismanaged causes, and each says that the number of public inquiries it receives has risen considerably in recent years.

Foundations, too, became subject to more scrutiny. In the 1980s, groups representing the interests of women, blacks, Hispanics, conservatives, and liberals were formed to monitor foundations' performance.

The National Association of Attorneys General drafted a model law that requires charities, and those who solicit funds on their behalf, to report their fund-raising costs to potential donors and to take other steps to become more accountable to the public. The law has been adapted in nine states. And many state legislatures are considering measures to control telephone solicitations.

The Supreme Court, however, in three successive test cases, has forbidden states to limit what charities can spend on fund raising.

In the 1980s, conservatives became more and more vocal in the nonprofit world. Right-leaning foundations, think-tanks, and campaigns actively promoted a conservative agenda that included opposing abortion, gun control, the use of certain texts in schools, and liberalism in the press. With the formation of the Philanthropic Roundtable, conservatives also created an alternative forum to the Council on Foundations, which they regard as predominately liberal.

Nonprofit groups of all persuasions have improved their ability to lobby on Capitol Hill. Some domestic programs, such as financial aid to students, have been increased in recent years, while concepts opposed by charities, such as a tax on endowments, have thus far gone nowhere.

"Nonprofit organizations are fast becoming an independent legislative voice," says Paul N. Ylvisaker, a professor of education at Harvard University who formerly directed antipoverty programs at the Ford Foundation. "If we rewrote the Constitution, we would have to think seriously about including them in it."

Governors, mayors, and college presidents have grown concerned that traditions of volunteer service are dying out. Since the federal government eliminated the Young Adult Conservation Corps, and gutted the budget of the Youth Conservation Corps, a service group created by President Carter, 50 service groups have formed around the country. These range form the California Conservation Corps, which includes 2,000 students in environmental clean-up activities, to New York Mayor Edward Koch's City Volunteer Corps, which involves 500 full-time city volunteers, ages 17 to 24, in painting Staten Island Ferries, performing household chores for the elderly, and helping grade-school teachers tutor young children.

Schools, too, are adding community-service components to their programs. In Atlanta, for example, all students must complete 75 hours of community service before graduating from high school. College presidents have organized two groups, Campus Compact and the Campus Outreach Opportunity League, to help students learn values of giving and volunteering.

In the presidential election campaign, Vice President Bush has proposed a new federal program to encourage young people to volunteer.

More scholars than ever before have begun to pay attention to philanthropy. Some 15 academic centers have been established to study philanthropy, and the number of research projects underway has soared to more than 1,000, up from 200 in 1982.

Critics say the Reagan administration may have overestimated philanthropy's ability to fill the gap left by the reduction of federal funds. The nonprofit sector, they note, is only about one-third the size of federal, state, and local governments.

Employment among nonprofit groups grew about 3 per cent a year between1977 and 1986 to 7.7 million -- more than the number employed by federal and state governments together.

Last year, business accounted for 78 percent of national income (salaries and fringe benefits); government for 15 percent; and nonprofit groups for 7 percent.

"The Reaganites honestly believed the voluntary sector could take over many programs," says Mr. O'Connell of Independent Sector. "They had absolutely no idea how small it was."

Reagan maintained a rhetoric of supporting private-sector initiatives while at the gut policy level he was taking actions that were hostile to them," says Mr. Salamon of Johns Hopkins. "Reliance on charity was rhetoric used to veil budget cuts."

But Mr. Lenkowsky argues that "the Reagan Administration has promoted the older view that the philanthropic world should think of itself as autonomous from government."

Mr. Salamon disagrees. "The message here," he says, "is that government and the nonprofit sector are profoundly and intimately interrelated."

Stephen G. Greene also contributed to this article.