The United States is currently experiencing the highest measured inflation rate since the early ’80s, although it may have moderated a bit recently. We see this in our business—all of our many software-as-a-service (“SaaS” in tech nomenclature) subscriptions have gone up by at least 10% in the past six months, our costs for consumable supplies and equipment have also risen, and anyone who’s been to the used car lot, supermarket, etc., sees it in their daily lives. Still, while there are many articles on inflation in the media, I’ve yet to read one that discusses the significant and deleterious impact of inflation on nonprofits. I was the Executive Director of the Hollywood-Wilshire Fair Housing Council in the late ’70s, and then a full-time grant writer, so I experienced first-hand hyper inflation. Back then, we learned quickly that budgets had to account for inflation, and inflation expectations affected everything we did.
As we’ve written many times, most nonprofits depend on only four revenue streams, no matter how big or small the nonprofit: grants, fee-for-service contracts / third-party reimbursements, fund raising / donations, and, for a few, membership dues. A tiny number of nonprofits have endowments, but, if you’re Princeton or the Met, you don’t really have the problems and challenges normal nonprofits do. Inflation will negatively all of these streams:
- Grants: Inflation will have the biggest impact on grants. When a nonprofit gets a grant award, the award is based on the proposed budget, and the proposed budget may be modified somewhat during the contract negotiation process. Still, the grant will be a fixed amount, either annually or for the budget period, and grant contracts rarely, if ever, include a Cost of Living Adjustment (COLA) provision. If the grant is, for example, $500,000 annually for five years, and inflation runs at 5% per year, the last year of the grant is going to be much harder to implement than the first.* While it’s usually possible to get approval to move money among budget line items, you can’t go to your program officer and say, “Hey, we now have to pay our Outreach Workers $20/hour because they can make $18/hour at McDonalds” or “our rent went up by $500/month” to get relief. You’re stuck (or a similar, six-letter word that starts with “f” and ends with “ed”). Because inflation has been low, most nonprofit Executive Directors and Boards have never experienced rapid inflation. Not much can be done with existing grants, but in writing future grants, it’ll be critical to propose budgets and services taking into account anticipated inflation. Since an estimated 10% of the American economy is conducted by nonprofits, multiply the impact of inflationary thinking by thousands of nonprofits. The Federal Reserve had to raise interest rates to 20% in the early ’80s to break the inflationary cycle, and that could happen again.
- Fee-for-Service Contracts and Third-Party Reimbursements: Unlike grants, fee-for-service contracts for things like foster care, home healthcare, some substance abuse treatment, etc., typically reimburse nonprofits at a specific rate for services rendered, which are often capitated (“per head”) or a fixed price for a unit of service rendered. Like grants, such contracts will not usually have built-in COLA provisions. If the contract is based a capitated rate or unit of service provided, inflation will quickly screw this up. A nonprofit may be able to renegotiate contract rates, since in cases where specialized services are provided (e.g., foster care), the contracting agency may need the nonprofit more than the nonprofit needs the contract. Third-party reimbursements, like Medicaid for FQHCs, are even more problematic, as these cannot not be renegotiated and there will be a lag before rates catch up with inflation, if they ever do.
- Fund Raising / Donations: Let’s say tickets for your nonprofit’s annual “Gala” have been $100 for the last five years. Due to inflation (e.g. venue rent, food, celebrity honorariums/goody bags, etc., cost increases), you may need to charge $150 to net enough money to make the exercise worthwhile. Some number of your supporters will be priced out, if their own wages or investment income aren’t keeping up. Back in my Fair Housing days, most of our fund raising involved overpriced tickets to plays and concerts, Christmas card sales, etc., and, as inflation went up, we netted less and less money. The same is true for donations; as folks’ real incomes are depressed due to inflation, they’re likely to donate less and the amount they donate will be worth less to the nonprofit. Essentially, this becomes a downward spiral, which caused me to start writing more grants to keep the Fair Housing staff on board and the lights on.
- Membership Dues: A few nonprofits like environmental organizations or Boys and Girls Clubs, are able to charge membership dues. Like with fund raising and donations, however, inflation will make these agencies need to raise their dues to preserve their “buying power,” but dues increases will likely run into resistance from their members. Many members also likely cancelled during the pandemic; Jake had a YMCA gym membership that he cancelled in April 2020 and never restarted. Inflation erodes real incomes as people’s salaries buy less stuff and wage increases typically lag inflation increases. So, membership dues are easier to cut from a family’s budget that say new school clothes for the kids.
Nimble nonprofits will plan for inflation now, just as smart countries planned for pandemics before the pandemic hit. A good strategy is to seek grants that offer “walking around money.” These are grants for nebulous, rather than specific, services and in effect can be used to support other staff and indirect costs. It’s also important to get a Federally Approved Indirect Cost Rate or include a de minimus indirect rate (10%) in your grant budget, if the RFP allows this. Nonprofits will want and need grant revenue that isn’t tied to providing specific services.
Nonprofits that don’t realize the world is quickly changing due to inflation will be in for a rude awakening. As Bette Davis says in the wonderful 1950 comedy All About Eve, “Fasten your seatbelts, it’s going to be a bumpy night.”
* While one can include COLA increases in grant budgets (e.g., 3% annual salary increases), this doesn’t help, because the maximum grant amount is usually fixed. Furthermore, complex budgets violate Seliger + Associates’ basic advice to use the KISS (Keep it Simple Stupid—or “Sally” if you want to be nice) method in grant writing when possible.