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Charities: Using Your Head and Your Heart

Fallout from the continuing tough economy has created plenty of questions as to where your charitable donations should go. Not only have thousands of charities lost their tax-exempt status, but also effective smaller organizations are being pushed aside in favor of national campaigns.

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Physicist Neils Bohr and New York Yankee catcher Yogi Berra both are credited with saying something like, “Prediction is very difficult, especially if it’s about the future.” That sums up what experts foresee for charitable giving and investment in 2012 and 2013.

Even as the economy pulls slowly out of the depths of the recession, it will take even more time—if it occurs at all—for economic conditions to favor charitable giving. R. Ruth Linden, who is a consultant for charities, voices what many observers in the nonprofit sector feel: From charities’ perspective, the United States still is in a recession, not emerging from it.

As federal, state and municipal governments continue to face revenue constraints and budget cutbacks, charities experts tell Consumers Digest that less funding is expected to come to charities from governments, which support charitable-service providers through service contracts, says Ronna Brown of Philanthropy New York, which is an organization of philanthropic foundations.

The funding from that source will be smaller for years to come, because the Budget Control Act of 2011 mandates $2 trillion in cuts to the federal deficit over the next 10 years. A survey that was published in January 2012 by Bridgespan, which is a consultancy for charities and philanthropists, shows that two-thirds of government-funded service providers expect to see their funding cut over the next 3 years, and 9 out of 10 providers expect that reduction to impair their operations and the beneficiaries who rely on their services and support. With less government money for charity coffers, some charities are in nothing less than survival mode.

Consequently, you can expect more competition from charities that seek your donation than ever before, says youth-charity advocate Saras Chung. But considering the stakes, some charities might not be forthcoming about their future. The collapse of the iconic Hull House, which was founded by Jane Addams in Chicago, and YWCA of the Greater Triangle Area in Raleigh, N.C., both of which went out of business in early 2012, shocked supporters and donors. Of course, if you donate to a charity that goes under, your charitable gift will have been wasted.

Still, charitable giving posted a slight uptick for 2011—about 4 percent in nominal dollars, or 1 percent in inflation-adjusted dollars—according to the annual Giving USA Foundation report by University of Indiana’s Center for Philanthropy. That’s such a slow rate that it would take 10 years to return to prerecession giving levels, according to Patrick Rooney, who is the lead author of the Giving USA report. Rooney describes the 4 percent growth in charitable giving in the soft economy of 2011 as great news but admits that the rebound will continue at a slow rate.

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Rob Collier, who leads Council of Michigan Foundations, which is an association of more than 350 grant-making organizations, says donors who want to do the most good should target charities that help groups of people who have the least political clout. In other words, these people are the most likely to suffer when government tightens its belt, because legislators believe that they can cut funding to these groups most easily without suffering any political consequences. Bridgespan predicts that the groups that need charitable donations the most will be the ones that serve the frail elderly, the homeless, the people who have alcohol- and drug-abuse problems and the victims of domestic violence.

SIZE IT UP. Tom Pollak of Urban Institute, which researches social and economic issues, says that from 2010 to 2011, large charities received more donations than did small charities. For instance, 29 percent of large charities (those that have at least $10 million in revenue) showed a revenue increase, compared with 25 percent for smaller charities (those that have revenues between $250,000 and $1 million).

Pollak predicts tough times ahead for small charities. Indeed, although charities of all sizes must slog through the same tough economy, thousands of the smallest organizations recently lost their tax-exempt status. That means that you won’t get tax credit for your donation to one of those charities—a disincentive that further will hurt small charities.

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