Fiscal Cliff Impact on Nonprofits in America

Winston Henry
Non Profit Fiscal
Management
Social Work
3/23/13

The throughout the 2000s the United States have been faced with serious economic
decline leading the country in a enormous amount of debt that seems virtually impossible to pay
off. The United States Congress has debated on numerous strategies about tackling the national
deficit including tax increases on the wealthy. It wasnt until December 31, 2012 when the fiscal
cliff officially went into effect leading to the reduction of tax rates on the wealthy while limiting
government spending. The issue regarding the fiscal cliff didnt become a hot button topic until
many Americans began to realize the long-term effects of the proposal; the idea behind the fiscal
cliff involves returning the nations weak economy to its previous state when it entered the 2008
recession which doesnt appear to be good because of the high unemployment rates and massive
layoffs but its better than the situation the United States currently faces. While the fiscal cliff
presents itself as a progressive proposal to reduce the national deficit a majority of the upper
class Americans support the idea reduced federal spending while middle & working class
families are solemnly against the idea because of the increased hardship it brings upon them.
The general outlook of the fiscal cliff appears grim for a majority of people who make up
the lower to middle class in America because it proposes that America operates under a
regressive tax system where the middle class pays more contrary to a progressive tax system
where the wealthy is expected to contribute more. Despite, the logic of raising taxes on the
middle class instead of the wealthy many conservative supporters of the fiscal cliff suggests that
the United States would be taking steps towards the right direction in dealing with the national
deficit but it wouldnt necessarily eliminate the problem instead the country will witness higher
unemployment rates over time and states across the nation will be impacted in terms of budget
cuts.

It wasnt until March 2nd of this year were President Obama was forced to sign the
Sequester Bill officially requiring federal spending cuts across the board in areas including
defense spending and education programs which are both considered vital to America. It was
reported that $85 billion will be erased from the current federal budget with cuts in education
leading to thousands of jobs being lost around the nation.[1] The cuts to federal spending will
also dramatically impact a majority of non-profit organizations across the country since they are
generally funded by federal and state government; small business and entrepreneurs of health
and education programs will be severely affected by the sequester cuts more since they make up
a majority of the working middle class and because many officials in Congress mutually agree
that the federal deficit is much bigger issue in the United States that must be addressed.
It may be good news that Congress developed an effective proposal to deal with the
national deficit, but in reality some state officials including Connecticut has expressed their
disapproval over the idea of slashing federal funding towards programs regarding higher
education; the cuts made towards the education will most likely contribute to many employees
possibly losing their jobs since their salaries are generally one of the key expenses within any
nonprofit budget and could also lead to a shortage of learning resources including computer
technology to help children learn and reduce the youth recreation programs for entertainment
purposes. The cuts in federal spending also affect Connecticut because nonprofit organizations
and educational institutions will eventually become more reliant on the state for grant funding for
their future projects; the main problem with this scenario is that Connecticut has many other
items in the state budget including correctional facilities, human services, and health & hospitals.
1.

Siddiqui, Sabrina. Obama Calls Sequester Cuts Dumb and Arbitrary, Blames GOP for Inflexibility Huffington Post (Mar 1, 2013)

The demands for funding from nonprofits towards higher education already make up the
largest percentage of the Connecticut State budget and additional state and local funding could
possibly cause the state cut several other programs in other areas that are vitally important
including defense spending. The sequester cuts of 2013 creates a more difficult dilemma for
nonprofits than before because Connecticut already had a deficit before the beginning of the
year; The sequester cuts have resulted in private and public sectors facing a total estimated loss
of $56 million while Governor Dannel P. Malloy and his administration are faced with a
$ 131 million deficit in this years current fiscal year; Malloy has specified that state agencies are
expected to cope with discontinued funding without the supplemental help of the state budget.[2]
The lack of government funding can eventually cause nonprofits to become dependent primarily
on donations, in-kind contributions and partnerships with other organizations for revenue sources
and would also affect the goals and objectives of many nonprofits if they are still in business.
However, many small businesses will be faced with various alternative options when
dealing with capital budgeting issues including borrowing funds from banking institutions by
using lines of credit; the dangers of obtaining funds from banking institutions is that nonprofit
organizations must always meet the deadlines of their payments otherwise they will place
themselves at risk of having their assets seized by the bank themselves. The other alternatives
includes acquiring mortgages and loans for capital improvement projects and becoming
dependant on financing and operating leases will ultimately but organizations in debt while bond
financing which is considered ineffective in capital projects unless they seek state or local
assistance.
2.

Phaneuf, M. Kenith Connecticut to lose $56M in sequestration, with education, social services to be hit the hardest
The Ct Mirror (March 1, 2013)

The excessive shortage of large capital projects are very likely to occur in the years ahead
because the alternatives of borrowing money from banking institutions are too risky; besides
making the gamble of borrowing money and facing the possibility of drowning in debt many
nonprofits also must deal with personnel issues within their company. The discontinuation in
federal and state funding can cause nonprofits to drastically alter their annual budget by cutting
key expenses including employee salaries, benefits and other vital budget items which is
problematic on a business level because it could affect the cash flow of many organizations
unless more time is directed towards fundraising and other activities that will generate more
revenue. Since the goals and objectives of many nonprofits serve educational & inspirational
purposes it would safe to argue in favor of their services towards higher education since the
Connecticut State budget already features education as the second largest item.
According to the Connecticut State biennial budget the breakdown for state funding
includes investment towards the categories of human services by 30.3 percent, education by 22.7
percent, non-functional by 11.8 percent, debt service by 9.7%, health & hospitals by 9.5%,
corrections by 7.5 percent, general government by 3.2%, judicial functions by 2.8%, regulation
and protection by 1.3%, construction & development by 0.7 percent and legislative functions by
0.4 percent for the fiscal year of 2013 developed by the Democratic members of the legislatures
Appropriations Committee.[3] Human services is the largest item in the Connecticut budget for
the current year in terms of funding despite the sequester cuts because its the most essential
service provided by the state along with education; the issues regarding project funding are
severe for nonprofits in Connecticut since they are left with limited options regarding funding.
3.

Connecticut Senate Democrats Guide to Connecticut State Budget www.senatedems.ct.gov/Budget.php., (2013)

The Connecticut State Governor Dan Malloy had anticipated scenario small businesses
could possibly face without state government funding and had taken action towards providing
relief to nonprofit organization within the state. It was revealed back in February that Malloy
had developed a biennial budget plan that would establish a new state bond pool that would
earmark $20 million for the nonprofit community based caregivers that provide human services
through contracts and state agencies allowing them to invest in projects and giving them the
opportunity to lower administrative costs and improve the quality of their services The bond pool
legislation would also allow the establishment of infrastructure projects. The governors office
had reported that proposals under $1 million will receive priority within each bonding cycle to
maintain the abundance of funds available for community organizations. [4] Small businesses in
Connecticut that are currently in good condition can capitalize on employing opportunity
budgeting more effectively to not only expand their functions but to revitalize their companies
by raising their goals and objective to higher standards by maintaining a balanced budget or
developing surpluses.
Despite, state officials managing to provide financial relief to community and health
nonprofits they have issues in relation to overspending and balancing the state budget during the
previous fiscal years leading into 2013; during the beginning of year the state government were
already faced with making costly cuts to several programs in Connecticut in 2012 due to the
budget deficit. These cuts resulted in approximately $70 million to health care programs and
social service agencies along with $25 million to public colleges and universities with a shortfall
of $365 million in 2012 and a $1.1 billion shortfall leading into the 2013-2014 fiscal year.
4.

Malloy committing $20M to help care nonprofits innovate Hartford Business Journal (January 30, 2013)

5.

Applebome, Peter. Connecticut Aims to Cut $170 million in spending The New York Times (November 28, 2012)

The proposed budget cut made by the state government leaves both social service
employees and low income college students in very tough financial situations in the near
future. Malloys short-term plan to establish a $20 million bond pool in Connecticut places
limits on how much financial assistance nonprofits can receive while many social service
programs are faced with the options of cutting expenses or implementing a new budgeting
strategy for more effective management. If the executive directors in social service
organizations in Connecticut decided to layoff staff members to decrease their expenses to
maintain positive cash flow patterns throughout the fiscal year then the climate in many
nonprofits & small businesses can become volatile leading to employees utilizing bumping
tactics maintain employment. However, individuals who have seniority status or married
with families have the advantage while giving younger low income workers with college
degrees in social work greater possibilities of being laid off. College students across America
are going to be severely affected by the sequester cuts because it not only slashes education
spending it will also contribute to high unemployment rates during the next decade
contributing to more fierce competition and painful loses to students, teachers and social
workers.
The cuts in education and social services nationwide and could contribute could
contribute to gaps in college graduation on both graduate and undergraduate and increased
mortality rates among individuals with disabilities. Recently, The Department of Education
had developed a report that would reveal the figures regarding the impact of the sequester bill
on education involving funding on both elementary and college levels.

The data gathered by the Department of Education projected that cuts made to funding
sources such as Title I would be very cost effective while student borrowing is expected to
increase over time. They had reported federal work study grants would be cut by $49
million, which would force approximately 70,000 college students to borrow money from
alternative sources; elementary school children and their families will also be affected
because the cuts in Title I funding estimates to roughly around $725 million nationwide
which means that programs such as Head Start will have they services discontinued and
many low income families will be faced with greater hardships in the near future dealing
with education. [6] The issue regarding the lack of educational funding is serious in America
but it should be misinterpreted for a grave situation since education remains one of the
Connecticuts largest budget items next to social services. The nationwide spending cuts in
education promises that thousands of teachers will face unemployment but low income
handicapped students will also face adversity since the Individuals with Disabilities Act is
expected to see $1 billion cut in financial funding. [6]
The effects of the fiscal cliff on nonprofits and social services in various states across the
nation are excruciating and will be expected to run its course for next few years. However,
effects of the fiscal cliff have impacted some Americans more than others depending on
specific variables including household income, location, and social class; the fiscal cliff had
guaranteed tax increases across the board but the reality is more than two-thirds of Americans
who make up both the middle and working class are subject to these increases and are also
the same individuals who are substantially affected by government spending cuts.
6.

Forman, Jeffery. Sequestration 2013: Will Hurt Education, Low Income Students Policymic, (March 17, 2013)

The individuals who are affected by the tax increases includes teachers, students, and
social workers who must pay more on federal taxes because of programs including Uncle
Sam; the addition of state and local taxes depending upon the financial condition in different
states makes life more gruesome because while some states including Connecticut resorts to
raising taxes for state services or balancing its deficit many people are punished financially
based on their household income but regardless of what state Americans reside in the middle
and working class are more affected by the sequester than any other class in the nation and
the fiscal cliff was virtually impossible for large percentage of Americans in this country to
avoid. The fiscal cliff projects that tax rates will permanently increase for families with
combined household incomes that make $450,000 and individuals who make $400,000 per
year forcing entrepreneurs of small business to pay higher taxes while the Bush-era taxes cuts
remain in effect for the rest of the brackets.[7] The idea that the entrepreneurs of small
business and low income citizens are being taxed more would be considered awkward by
critics of the fiscal cliff because the development of small businesses would be considered
progressive in the job creation.
But since the reduction of the national deficit is a more substantial priority in America
small businesses and nonprofits are faced with numerous variables that would affect not only
their companies and employees but also the entrepreneurs themselves on financial and
personal levels. If small business owners are faced with reduced federal or state funding they
could be forced to make substantial changes to their businesses and would give them
opportunity to employ different budgeting methods or cutting the benefits of their employees.
7.

Harrison J.D., How the fiscal cliff deal affects entrepreneurs and small business The Washington Post. (January 2, 2013)

Most recently the Head Start program had to undergo dramatic changes due to the
sequester budget cuts causing the program to discontinue its services to low-income families
across the nation; The Washington County Head Start program lost 30,000 hours worth of
service and was required to make a cut of $150,000 from its operating budget by September
and other states such as Indiana and Kentucky had to remove dozens of preschool children
from their programs; Illinois Head Start program was faced with a $72,000 shortfall and the
Pennsylvania program had to contend with a $142,000 shortfall while the Massachusetts
program was forced to drop two months of programming for this year.[8] The shortage of
services from the nationwide Head Start program may present several counties in different
states with a unique opportunity to employ different strategies to deal with discontinued
services resulting from the national budget cuts; if the Head Start programs in some states are
in better condition than others they could utilize zero-based budgeting which would be
helpful in giving mangers more freedom to determine the make effective financial decisions
regarding organization.
However, zero-based budgeting requires an extensive in-depth evaluation of the
organization to determine its best course of direction depending on the changes made; both
managers and staff members could be faced with reduced salaries and fringe benefits while
program cuts could leave teachers of various Head Start programs unemployed depending on
the direction of the organization. The zero-based strategy requires excessive time and
through evaluation of an organization but it usually remains uncommon since it threatens to
make dramatic changes that affect everyone involved.
8. Stein, Sam., Head Start Programs Gutted By Sequestration Cuts The Huffington Post. (March 21, 2013)

The economic decline that occurred in the late 2000s has left America in a recession
during 2008 and created an enormous national deficit that has only increased over time. The
adverse economic conditions have contributed to higher unemployment rates and the fiscal cliff
of 2012, which promises tax increases, and federal budget cuts is going to make the lives of
entrepreneurs, nonprofits, small businesses, college students and low-income Americans more
difficult in the future. The sequester bill passed in 2013 has only made matters worse insuring
federal spending cuts to nonprofit organizations and education programs like Head Start.
The fiscal cliff has placed many nonprofits & small businesses in positions where they have to
carefully estimate their future earnings and the cost of their expenses because the decline in
federal funding. The federal spending cuts place a greater burden on state government officials
concerning dependency on funding especially if their state is already dealing with a deficit.
In Connecticut, governor Dan Malloy had recently taken action to create a $20 billion bond pool
for funding purposes because of discontinued state funding; state government officials
understand the significance of social service programs and education since they the largest items
on the Connecticut budget.
However, the Department of Education had revealed that spending cuts on national
education would leave many college students dependent borrowing money while Title I is forced
to make enormous cuts to their programs which greatly effects Head Start; the cuts in Head Start
will discontinue services to thousands economically disadvantaged children and the Individuals
with Disabilities Act is expected to take a critical blow in federal funding. Overall, the economic
climate presented by the fiscal cliff and the sequester cuts leaves nonprofits with endless
possibilities of numerous budgeting strategies to utilize in the face of failure.

References:
Applebome, Peter. Connecticut Aims to Cut $170 million in spending
The New York Times. November 28, 2012. http://www.nytimes.com
Connecticut Senate Democrats Guide to Connecticut State Budget 2013.
www.senatedems.ct.gov/Budget.php
Forman, Jeffery. Sequestration 2013: Will Hurt Education, Low Income Students
Policymic. March 17, 2013. http://www.policy.com
Harrison J.D., How the fiscal cliff deal affects entrepreneurs and small business
The Washington Post. January 2, 2013. http://www.http//aritcles.washtingpost.com
Malloy committing $20M to help care nonprofits innovate
Hartford Business Journal. January 30, 2013. http://www.hartfordbusiness.com
Phaneuf, M. Kenith Connecticut to lose $56M in sequestration, with education, social
services to be hit the hardest The Ct Mirror March 1, 2013. http://www.ctmirror.org
Siddiqui, Sabrina. Obama Calls Sequester Cuts Dumb and Arbitrary, Blames GOP for
Inflexibility Huffington Post. Mar 1, 2013. http://www.huffingtonpost.com
Stein, Sam., Head Start Programs Gutted By Sequestration Cuts The Huffington Post.
March 21, 2013. http://www.huffingtonpost.com