The Non-Profit Bubble -- Hi-Ed and Healthcare
The tipping point of accountability and a new model.....
Nonprofits have too much influence and not enough accountability. In the United States alone, there are over 1.9M registered nonprofit organizations. They employ over 10% of the US workforce and pull in close to $3T in revenue per year. If the nonprofit industry was a country, it would be larger than France’s GDP and in the top 10 in the world. The majority of nonprofits in the US are tax exempt(501c3) which make them ripe for abuse with ill-fated agendas, political influence and cancerous greed.
Non-profits have been around since the biblical times. Global inflection points have helped cultivate the need to support and help communities thrive. Whether through humanitarian assistance, economic development, reach of modern healthcare, or rebuilding after disasters. Many centered around lifting individuals, countries and regions in positive outreach. In most countries around the world, non-profits hold monetary benefits for the givers. The US is no exception. In fact, like many things, the US takes this to new heights.
Are nonprofits doing what they intended or are they just an organized form of corruption in the developed world? Are they sources of money laundering for emerging markets, individuals and/or organizations? Do they provide misguided perceptions of good, while creating chaos? Does too much government money make organizations lazy in creating self-sustaining sources of income which hold accountability in check? What would happen if large universities had to pay taxes? Has the gig economy driven the nontraditional employment in nonprofit organizations?
According to the National Center for Charitable Statistics, there were approximately 1.8 million nonprofit organizations registered in the United States as of 2020. This number has been steadily increasing over the last 50 years. According to a report by the Urban Institute, the number of nonprofits in the US has grown from approximately 125,000 in 1965 to over 1.8 million in 2020.
Let’s take a look at a few datapoints and industry examples….
There are 1.5 million nonprofit organizations in the United States.
Nonprofits employ 10% of the U.S. workforce.
Nonprofits employ 7.4% of the worldwide workforce.
70% of the staff at international nonprofits are paid workers, while 29% are volunteers.
5.7% of the United States GDP comes from nonprofits.
The total U.S. nonprofit annual revenue is $2.62 trillion.
The majority are classified as 501(c)(3)s…….
The largest sources of income for US non-profits in the last 35 years comes from tuition, private gifts/grants, hospitals and investment income. Prior to this, Federal grants were the second largest source of income. Over 60% of the income in the last 35 years for US nonprofits comes from non-government sources with the majority of being universities and hospitals. Ironically, education and healthcare are some of the largest expenses for communities in the US. In other parts of world, higher education is free for citizens and healthcare is dramatically cheaper with similar quality.
Nonprofit vs Profit vs Not for Profit
Healthcare and Hospitals
Non-profit hospitals and healthcare systems are typically run by organizations that are exempt from paying federal income taxes. These organizations use their income and resources to provide healthcare services and improve patient care, rather than distributing profits to shareholders. For-profit hospitals and healthcare are run by companies that aim to make a profit from providing healthcare services. They use their income and resources to pay shareholders and investors, as well as to cover the costs of providing care. While both types of organizations provide essential healthcare services, non-profit hospitals and healthcare systems tend to focus more on serving the community and providing care to those who cannot afford it, while for-profit organizations tend to focus more on generating profits for their investors.
It’s complex……maybe we clean up the org chart….
Non-profit community hospitals represent almost 60% of the total in the US. By definition, you would think the non-profits focus more on community interests vs how to make a buck. So, the question remains, are the nonprofits leveraging the tax-exempt status to serve more in the community or are they misallocating the dollars and taking advantage of the tax breaks.
Universities
An endowment is a sum of money that is invested to generate income. The income generated can then be used to support a cause or organization. Endowments are typically tax-exempt, meaning the income generated by the investments isn't subject to taxes. With this, more money can go towards the causes you care about, and less money goes to the taxman.
Endowments can also provide estate tax benefits. When you create an endowment, you can transfer assets to it, which can reduce the size of your estate and lower your estate tax liability. It's like having your cake, eating it too, getting a tax break, and then passing on your wealth to future generations with a nice tax discount. Endowments have been around for centuries and have been used by some of the wealthiest, most philanthropic individuals and families to make a lasting impact on the world.
There are generally no restrictions on foreign citizens creating endowments in the United States, as long as they are legally allowed to make charitable contributions in the country. The IRS has specific rules and regulations for foreign donors who make charitable contributions to U.S. organizations.
Where do we go from here?
While nonprofits play key roles in reaching the community, the meteoric rise in the last 50 years of nonprofits have created a ripe environment for unproductive, bloated organizations which are impacting US global competitiveness. As a result, countries, organizations and individuals are taking advantage of hard-earned tax dollars. The solution should be swift and far reaching. Maybe we start with the universities and hospitals, restructuring tax exempt status that aligns with national interests, local impact and global excellence. Or maybe we restructure the ability of foreign national organizations to create, invest and take advantage of tax-exempt status. Advantage should be to the citizens of the country. Maybe these actions will return accountability, accessibility, and affordability to missions they represent. The current model is broken, and we are in need of a new model. Fortitude in leadership and strength in mental clarity will get the new model working.
TJ