Independent Sector


The State of the Independent Sector: Overview and Highlights

Update of The Nonprofit Almanac: Dimensions of the Independent Sector.
by Virginia Hodgkinson and Murray Weitzman

The purpose of The Nonprofit Almanac series is to provide a statistical profile of the independent sector and its place in the United States economy and society. The Almanac is published every three years by Jossey-Bass Publishers and Independent Sector. This interim update provides statistics on changing trends in the finances of the independent sector and its major subsectors. The 1996-1997 edition presented estimates of the size, scope and dimensions of the independent sector through 1994, with detailed data through 1992. This interim update provides estimates through 1996. Included are financial statistics and summary statistics from the 1996 editions of Giving and Volunteering in the United States and Volunteering and Giving Among American Teenagers 12 to 17 Years of Age. The data from these surveys were not yet available at the time the 1996-1997 edition of The Nonprofit Almanac was published. These statistics for the nonprofit, voluntary or independent sector will be updated annually on-line and in short written reports between the published editions of The Nonprofit Almanac.

The tables presented here focus on changes in finances in the independent sector between 1987 and 1992 and between 1992 and 1996. During 1995 and 1996 Congress worked to get a balanced budget, there was a temporary government shutdown, and many domestic programs were funded by continuing appropriations. To estimate the possible effects of these events, this trend analysis focuses on changes in the rate of growth of sources of revenue in the last four years compared with the previous five years.

The Independent Sector and Its Place in the National Economy
Beginning with 1977 estimates, Independent Sector has been tracking national income for the independent (nonprofit), business (for-profit) and government sectors for various time periods. Estimates for the most recent time period, 1992 to 1996, show for the first time that the growth rate for the independent sector was less than that of business (Figure 1). From 1992 to 1996 the annual rate of increase in the national income accounts was 3.1 percent when the assigned value of volunteer time was included, and 3.2 percent when excluded. The annual rates of change in the national income account for the business sector were 3.5 percent including volunteer time, and 3.6 percent excluding volunteer time. The independent sector’s national income account grew at an average annual rate of 2.6 percent when volunteer time was included, and 3.2 percent when volunteer time was excluded. In comparison, between 1987 and 1992 the independent sector’s component of national income increased at an average annual rate of 4.2 percent, including volunteer time, and at 6.0 percent, excluding volunteer time. During the same period, business experienced an annual rate of increase of 2.3 percent whether or not volunteer time was included.

In 1996, the most recent year, the independent sector included 1.13 million institutions— 4.4 percent of all entities in the United States (Table 1). Approximately 6.2 percent of national income was generated in the independent sector, slightly lower than the 6.3 percent in 1992, but up from the 5.8 percent in 1987. The sector employed 15.9 million people— 10.2 million full and part-time employees and 5.7 million full-time equivalent volunteers. From 1992 to 1996 the annual rate of growth in paid employment was 2.9 percent, a decline from an annual rate of increase of 4.3 percent between 1987 and 1992. A combination of paid employees and full-time equivalent volunteers represented nearly 11 percent of total employment in the U.S. economy in 1996 and 1992. In 1987 the sector’s share of total employment was 9.6 percent. Between 1992 and 1996 the sector generally grew at a slower rate in both paid employment and total funds when compared with the prior five years.

Trends in Annual Sources of Funds
The composition of the major sources of funding for the independent sector changed significantly from 1987 to 1996, and particularly between 1987 and 1992. The combination of private contributions, private payments, and government grants and payments constituted 89 percent of the total sources of funds in the independent sector in 1996. The most remarkable change between 1987 and 1996 was the decline in share of total annual funds from private contributions and the increase in the share represented by government sources. In 1996, private contributions were 19 percent of total funds, down from 23 percent in 1987. Government payments represented 28 percent of total annual funds in 1987 and 32 percent in 1996. In 1996, private payments, primarily in the form of dues, fees and charges constituted 39 percent of the annual funds, down from 41 percent in 1987 (Figure 2).

Changes in the proportion of funding among the different sources are a result of the differing rates of change for specific periods. Private contributions, on average, grew annually at a rate of 3.3 percent between 1992 and 1996, compared to 1.4 percent between 1987 and 1992. This increased annual growth in private contributions reversed the decline from 1987 to 1992 in private contributions as a share of total annual funds. Private payments increased annually at a rate of 5.0 percent between 1987 and 1992, and experienced an average annual increase of only 2.3 percent between 1992 and 1996. The annual increase in government payments was 2.9 percent from 1992 to 1996, compared with 8.4 percent between 1987 and 1992. As a result, the share of total annual funds represented by private payments declined slightly between 1992 and 1996. In summary, while the annual rate of increase in total annual funds for the independent sector was 4.4 percent between 1987 and 1996, the annual rates of growth by sources of funds varied throughout the period (Figure 3).

Much of the growth rate in private contributions between 1992 and 1996 can be traced to rising individual incomes and strong growth in the stock market. Changes in tax policy were also made during these years which increased the tax rates for affluent taxpayers and restored the full market value for gifts of art and other appreciated property. Altogether, these changes have contributed to an increase in total charitable contributions. The decline in the rate of growth in government payments could be the result of lower growth in appropriations in many domestic policy programs during the 1995-1996 Congressional budget negotiations; a healthier economy leading to more employment; and increased stringency to contain hospital and health care costs.

Trends Among the Major Subsectors of the Independent Sector
Among the various subsectors, the most significant change that occurred for the independent sector between the 1987 to 1992 and 1992 to 1996 time periods was the precipitous drop in the growth rate for health services. From 1987 to 1992 it was 7.5 percent per year, while from 1992 to 1996 the growth rate dropped to 1.8 percent per year. If health services were excluded from the independent sector for the 1987 to 1992 period, the whole sector’s growth rate would have declined to 4.4 percent, as compared to 5.9 percent when health services are included. In contrast, the growth rate in health services from 1992 to 1996 lowered the growth rate for the entire sector from 3.4 percent when health services are excluded to 2.6 percent including health services (Figure 4).

While there were small variations in the shares of other subsectors between 1992 and 1996, the social and legal services subsector experienced the largest increase in its share of total annual funds, growing from 10.9 in 1992 to 12.0 percent in 1996. Despite a decline in annual funds, the health services subsector still remained atop the independent sector in 1996 in people employed, total funds and current operating expenditures (Figure 5).

Between 1987-1992 and 1992-1996, each major subsector grew at remarkably different rates. The social and legal services subsector had the highest annual increase— 7.6 percent between 1987 and 1992, compared to 4.9 percent between 1992 and 1996. The health services subsector showed the greatest decline in annual rates of change, from an average annual increase of 7.5 percent between 1987 and 1992 to 1.8 percent between 1992 and 1996. The education/research and the arts and culture sub-sectors showed some increase in their average annual rates of growth while the religious and civic, social and fraternal subsectors experienced declines.

Health Services
The health services sub-sector, which is dominated by hospitals, but includes nursing and personal care facilities, home health care, kidney dialysis services, and outpatient alcohol and drug treatment, grew at a high rate over the last three decades for a variety of reasons: an aging population; an increase in persons, especially children, in poverty; and the general increases in the cost of health care. The annual rate of change in funds from government— 10.0 percent from 1987 to 1992— declined to an annual rate of increase of 2.0 percent between 1992 and 1996.

It appears that there is a variety of reasons contributing to the decline in the growth rate of payments from government to the independent sector component of health services. Recently, both the Medicare and Medicaid programs have been the focus of a series of administrative regulations that have served both to dampen increases in the delivery of health services and to restrict the number of allowable charges. At the same time, the decline in payments from government to the independent sector portion of health services also may be due to the rapid growth in both for-profit Health Maintenance Organizations (HMOs) and hospitals. During this same period, private contributions to this subsector showed an average annual rate of change of 1.4 percent from 1987 to 1992, but a rate of 3.3 percent between 1992 and 1996.

Social and Legal Services
The social and legal services sub-sector includes the major components of legal services, individual and family services, job training and related services, child daycare services, residential care, and social services not elsewhere classified (n.e.c.). This sub-sector experienced an average annual increase in total revenues of 7.6 percent per year from 1987 to 1992, but only an average annual increase to 4.9 percent between 1992 and 1996.

The composition of sources of funding for the social and legal services sub-sector has also changed. From 1987 to 1992, the average annual percentage increase in government funds was 8.5 percent, compared with 6.6 percent between 1992 and 1996. However, private contributions showed an average annual increase of 4.8 percent between 1992 and 1996, compared with 3.1 percent between 1987 and 1992. Much of the growth in federal funding to this subsector in recent years is attributed to a proliferation of Medicaid funding. This growth is expected to decline in the future due to both stricter eligibility rules for Medicaid and a slowing of the increase in funding for Medicaid as a result of the Balanced Budget Act.

Education/Research
The education/research subsector includes higher education, elementary and secondary schools, correspondence schools, libraries, other educational services and research institutes. From 1987 to 1992, compared with the rest of the independent sector, growth in total revenues was the slowest in the education/research subsector. The annual percentage change in total revenues was 2.3 percent during this period. From 1992 to 1996, however, the average annual rate of increase for this subsector was higher— 3.2 percent. The rate of growth in government payments to this sub-sector declined from an average annual increase of 4.2 percent between 1987 and 1992, to 2.6 percent between 1992 and 1996. During these two time periods, the average annual rate of growth in private contributions increased from 1.8 percent to 3.2 percent.

Religious Organizations
The religion subsector showed a lower annual percentage change in total funds from 1987 to 1992 than many of the other subsectors. The annual rate of change in total revenues was 2.9 percent from 1987 to 1992, but declined to an average annual rate of increase of 1.7 percent between 1992 and 1996. Private contributions also grew at a slower rate than in most other sub-sectors. From 1987 to 1992 private contributions increased at an average annual rate of 1.0 percent. They increased to 2.2 percent between 1992 and 1996, still well below the average annual increase of 3.3 percent for the whole sector during this time period.

Arts and Cultural Organizations
Arts and cultural organizations showed an increase in the annual rate of growth of total revenues between 1992 and 1996. All sources of income including private contributions, government support and private payments experienced similar growth. During this four year period, the annual rate of change in total revenues was 3.8 percent, compared with 2.6 percent between 1987 and 1992 (Figure 4). The annual rates of increase by major sources of funds between 1992 and 1996 were: private contributions, 3.7 percent; private payments, 3.2 percent; and government payments, 3.2 percent (note that due to small dollar amounts and rounding, the sum is not equal to the parts). This recent trend reversed several years of downturn in the arts and culture sub-sector.

Future Prospects
Using detailed information up until 1992, The Nonprofit Almanac 1996-1997 described the growth of overall revenues and employment in the independent sector as slowing. These trends continued as predicted through 1996. The greatest change in revenue came in government funding. Growth in government funding changed from an average annual increase of 8.4 percent between 1987 and 1992 to 2.9 percent between 1992 and 1996. While charitable contributions showed growth, this growth rate was small when compared to the decline in the growth rate of funding from government. Thus, the decreased funding by government is not being offset by an equivalent increase in charitable contributions.

Recent balanced budget and welfare reform legislation passed by Congress and signed by the President dictates a slowdown in growth in most government funding. These programs include slowing the growth in federal funding of both non-defense domestic programs and entitlement programs, such as food stamps, Medicare and Medicaid. In programs, such as community and regional development, the cuts proposed by both the President and Congress are in nominal and real terms; yet, some increases in federal programs for child care, medical assistance for children without health insurance, and education exist. Depending upon what proposals are enacted in welfare programs at the state level, major changes could occur in both the health services sector and in support programs for people in poverty. The locus of administration for many of these programs will continue to be shifted to state and local governments; consequently, there will be greater opportunities for citizens to participate in the decision-making process affecting their communities. Inventive, community-based solutions may emerge if adequate funding is available. While many new and efficient programs could result, it may take many years to determine under which different programs and in what areas low income individuals are best served.

Cuts in federal funding will affect all nonprofit organizations, but particularly in the areas of community and regional development, international affairs, and health (Abramson and Salamon, 1997). In their recent estimates of the projected funding from federal sources in "The Nonprofit Sector and the Federal Budget: Updates as of September 1997" by Alan J. Abramson and Lester M. Salamon estimated that nonprofits will lose, cumulatively, $50 billion after inflation when compared to 1995 support levels. These figures represent a total decline of 9 percent in the growth of government funding between 1997 and 2002. These figures, however, do not include estimates of increased need for services by individuals who may lose eligibility for welfare or food stamps as required in the Welfare Reform legislation. Federal legislation and reduced growth rates in funding assumed a consistently growing economy, which so far seems to be the case. If a serious economic recession should occur, there is little room in these budgets to account for worker dislocation or severe unemployment. In such a scenario, governments at all levels and charitable organizations would not have the capacity to meet major increases in need.

Current trends of providing waivers to states to experiment with new service delivery plans for welfare benefits, Medicare and Medicaid funding structures could lead to new efficiencies in the delivery of welfare and health services. Evidence from some states that are currently experimenting, such as Hawaii and Tennessee, reveals that more uninsured people can receive access to health care in innovative plans. Programs that move retirees and Medicaid recipients to health maintenance plans may also lead to increased efficiencies. Should these trends continue, it is expected that the nonprofit health subsector, and part of the human services sub-sector will shrink over time. Many of these services will be provided by the for-profit sector. The question remains, however, how much real need will be met and how much pressure will be placed on nonprofits to meet the needs of individuals no longer eligible for welfare. Such data may not be available for a few years.

Additional Information

For even more information see:
Overview and Executive Summary: The State of the Independent Sector.

REFERENCES

OVERVIEW AND EXECUTIVE SUMMARY Abramson, Alan J. and Lester M. Salamon, "The Nonprofit Sector and the Federal Budget: Update as of September 1997." A report prepared for Independent Sector, Washington, DC, September 1997.

Hodgkinson, Virginia A., Weitzman, Murray S., and associates, The Nonprofit Almanac: 1996-1997: Dimensions of the Independent Sector. San Francisco, CA: Jossey-Bass Publishers, Inc., 1997.