A political chill for charities?

A new Congress could cut tax deductions and funds for charities. States are also starting to clamp down on compensation for executives of charities.

In the United States, charities and governments have long held a unique and often symbiotic relationship, but some nonprofit executives are increasingly concerned that their longtime allies might be turning out to be a lot less friendly.

Municipal, state, and federal officials are struggling to balance dire budgets, and all options are on the table for trimming. This saga is playing itself out from the halls of Congress to the food pantries here in San Francisco.

Perhaps the greatest threat is to a charity's finances. Nonprofits are increasingly facing a one-two punch: Government agencies are cutting back on direct funding and both major political parties are seriously considering killing the charitable tax deductions for donors. Some lawmakers are calling for limits on that deduction or its elimination altogether.

A change in charitable deductions could have serious – if not grave – implications, many charity executives say. "Americans are turning to nonprofits more than ever for help," says Tim Delaney, president of the National Council of Nonprofits, a Washington-based advocacy group for the nonprofit industry.

Individual donations certainly account for a significant part of charity revenues. According to Giving USA, donors gave $217 billion to charities last year. But when it comes to legislative lobbying, charities may have to move beyond their "shrinking violet" reputation.

"By their nature, charities don't want to offend. Their funders come from all walks of life, and they can't afford to alienate anyone," says Ken Berger, head of Charity Navigator, a Glen Rock, N.J., outfit that rates nonprofit groups. "But there's a real worry now and [the nonprofit sector] is getting very serious."

The Charitable Giving Coalition is teaming up to defend against, or at least blunt, any potential congressional attack on charitable tax deductions. Its members include heavyweights like the Salvation Army, Goodwill Industries, and the United Way. A letter the group sent to President Obama last month said: "If the charitable deduction is capped, reduced or eliminated, wealthy Americans will not bear the brunt of any changes made to itemized deductions that negatively impact charitable giving – those who are most in need will."

In December, the coalition plans to boost its visibility and send hundreds of executives to lobby Capitol Hill.

"Most donors don't give because of the tax break, but they do give more because of it," says Daniel Borochoff, who runs CharityWatch, a Chicago-based industry watchdog. "If donors pull back, it could have an enormous impact."

Charities argue that Congress might prove penny-wise and pound-foolish. Nonprofits employed 13.5 million individuals, approximately 10 percent of the nation's workforce, in 2009, according to the Charitable Giving Coalition. Those workers in the charity sector earned roughly 9 percent of wages paid in the US, or about $668 billion.

Government is getting a good deal, says Mr. Delaney of the National Council of Nonprofits. "Nonprofits are more efficient and more effective than government."

Government typically spends $100 billion on human services, only about 75 percent of what's needed, he adds. "No other industry is asked to run bake sales and carwashes to fund programs, but we do it happily."

"The real problem is that people are ignorant and don't know all that we do," says Delaney. "We're the invisible sector."

Congress isn't charities' only concern. High-profile nonprofit scandals, accounts of cushy executive pay packages, and excessive spending have left some state lawmakers saying, "Enough is enough."

In response to a Chicago Tribune report, Illinois lawmakers are advancing a bill to require more disclosure of nonprofit executive pay for state-funded groups. The reports suggest that some nonprofits are funneling pay through for-profit contractors and avoiding disclosure.

In New York, Gov. Andrew Cuomo issued an order limiting charities from using state funds to pay salaries in excess of $199,000. The move comes after reports that New York-based YAI Network, which helps people with disabilities, was paying its two top executives $1 million each. Several other states, including New Jersey and Florida, are considering similar moves.

At the local level, Paul Ash, the executive director of the San Francisco Food Bank, is also concerned about government funding. Last month, his group unexpectedly learned the Federal Emergency Management Agency wouldn't send an expected check for $161,000.

"We're seeing wholesale cuts to programs, not just shaving off some funds," says Mr. Ash. "It really caught us off guard and doesn't give us much chance to adjust."

The cuts were a result of Congress's reducing funding for the Emergency Food and Shelter Program by 40 percent.

Not all is grim. Battered by years of slumping donations and sky-rocketing demand for their services, the country's top 400 charities saw donations increase 7.5 percent last year and executives expect 2012 to be flat, according to The Chronicle of Philanthropy, an industry publication that surveyed the 400 largest charities. Giving to disaster-related charities may get a boost from donations to the victims of superstorm Sandy, which hit the US East Coast in late October. (See box below for how to help storm victims.)

Another group, the Charity Defense Council, says the nonprofit sector's problems are more profound and represent a disconnect between do-gooders and the public. Its president, Dan Pallotta, in a message to members, says he wants to "change the way people think about changing the world." The group plans to launch a number of initiatives, including advertising campaigns and promoting legislation to protect nonprofits. "Cure the general public of its hallucinations, really, about charity and about how change actually gets made," Mr. Pallotta adds.

"Ultimately, we'd like to see donors not think they're giving money away but instead seeing it as an investment," says Charity Navigator's Mr. Berger.