Non-profits brace for impending strain on large gifts | Rochester Business Journal New York business news and information

Over the past five years, St. John Fisher College has made a lot out of its large gifts.

The college used an $8 million gift from the late Robert Wegman to build a 41,000-square-foot building for its nursing program, a $1.6 million gift from Joseph Skalny to build a welcome center and $3 million from the Polisseni Foundation to build a track and field facility.

These large gifts helped build St. John Fisher into what it is today, but William O'Connor, vice president for institutional advancement, fears for the future. Proposals to change the amount donors can deduct from their federal taxes have created an uncertain giving environment, one that has organizations bracing for an impact yet unknown.

"This would certainly have ramifications on those larger gifts, the ones that come only every few years," O'Connor says.

The proposal came as part of President Barack Obama's $447 billion jobs bill, and though the plan has met opposition in Congress and has little chance of passing as he proposed it, the possibility of such a change remains real for non-profit groups.

Obama called for limiting tax deductions in the past as well. Both his deficit reduction plan and his 2012 budget proposal would have reduced the value of itemized tax deductions for the top tax bracket by 30 percent. In the most recent proposal, the deduction rate for the top tax bracket would drop to 28 percent from 35 percent.

Though O'Connor and others say this would have the greatest impact on major gifts and less adverse effects on the typical annual campaign, all types and sizes of non-profit organizations are bracing for the change nonetheless. In the Rochester area, where the non-profit sector-colleges and hospitals in particular-is a substantial part of the economy, the proposals create an unusual level of fear.

Industry dread
Across the sector, many different non-profit groups have expressed worries about the implications of possible changes in tax laws. Leaders from several nationwide non-profit groups have taken a stance against any change, saying it would cut down on donations and force many groups to decide between reducing services or cutting jobs.

The Alliance for Charitable Reform, a nationwide group representing donors and grantmakers, says a reduction in the tax deductibility of major gifts would hurt the neediest people, who have already seen non-profit services reduced because of state and federal funding cutbacks.

A study conducted by the Indiana Center on Philanthropy on the proposed change found that if enacted, it probably would lead to a modest decline in charitable giving. The center calculated that in the first year the change could result in a decline of up to $820 million and, when coupled with the possible expiration of tax breaks for the wealthy, could reduce the total by up to $2.43 billion in the second year. This would represent a decrease of 1.3 percent in itemized giving.

Aside from a likely drop in donations, the change could also reduce the number of wealthy benefactors who start foundations, says Elizabeth Wilder, executive director of the Rochester-based Grantmakers Forum of New York.

"We believe we would see a drop in the number of foundations started," Wilder says. "As a supporter of philanthropy in general, our position is that the last thing the sector needs at a time when government spending to non-profits is already cut back is for them to impose regulations that restrict the amount of money they're likely to get in donations as well."

But even within the industry there is nuance to the issue. Some advocacy groups have argued that the greater economic stability and lower unemployment that would come from the jobs bill could itself bring charitable donations back up, making up for what would be lost. In its report, the Indiana Center on Philanthropy noted that "regardless of tax policy, restoring growth to the U.S. economy is critical to increasing philanthropic giving."

"If I talk to my funders from around the state, most of them still wanted the charitable deduction to not be limited, but a few thought it was not a bad sacrifice if they could get a jobs bill that would help the economy," Wilder says. "But in general, not just private foundations but community foundations and United Ways and other public charity grantmakers are universally opposed to limiting deductions to charity."

Looming uncertainty
For O'Connor, the ambiguity of just how and when changes could take place makes it difficult to begin accounting for the possible effects or crafting a different outreach strategy for donors.

Lisa Cauda, vice president for development and alumni relations at Rochester Institute of Technology, agrees that there is little non-profits can do to address the sense of uncertainty among donors, but there are some different approaches the university uses to coax wary these donors into giving. To ease the fears of donors who may be making gifts in the near future, RIT officials help them explore more non-traditional ways of giving.

"We have conversations with them about going beyond what's in their portfolios-perhaps if they have an IRA they're not using or an insurance policy they no longer need," Cauda says. "Overall we're having much more sophisticated conversations with our donors."

O'Connor holds out hope that donor habits may not change much. After all, he notes, those who give usually have a strong connection to the organizations that benefit and are not just looking for a tax break. The concern is still there, though.

"Like a lot of people in higher education, I share concerns about what would happen," O'Connor says. "Even though most people see the biggest impact on large giving, it could still have implications at other levels. Some studies estimate that changes to deductions could reduce annual giving by 6.2 percent, which is not a small number."

So far no donors have expressed worry about possible changes to O'Connor or his staff. Because proposed changes to tax rates or tax deductions are nothing new, many donors are used to the state of uncertainty, Cauda says.

"It's a topic of conversation, but right now it's not holding anyone off of their decisions," she says. "What I'm finding more frequently is the fluctuations in the stock market and the economy changing the way people give."

Cauda says some donors are holding off on estate planning to wait and see where estate taxes end up, but RIT is not too affected by this increase in concern. These donors are more concerned about long-term giving anyway, she observes, and the university's approach is to give those donors time and space and let them control the conversation about donations.

Even if tax changes occur, it could still take years to see how giving patterns would change because of it, Wilder says.

"This might have an effect on large endowment gifts, but it would probably take a while to tell what that effect is," she says. "They say people give for a lot of reasons, and the tax deduction is not the biggest one for people. That is partly true; in studies it shows that the deduction is one of the top 10 reasons people give, so this will definitely have some kind of impact."

Local impact
For the Jewish Community Federation of Greater Rochester, the change will likely mean a drop in total donations.

"There are certainly donors of various amounts to our annual campaign who have noted concern about the deductibility of contributions," says Larry Fine, the federation's executive director.

The fear that a deduction change would affect large gifts is supported by the Indiana Center on Philanthropy. In its report on tax changes, the center noted that high-earning households are "disproportionately responsible for individual charitable gifts compared to other taxpayers" and said changes to federal tax policy would hurt charities already strained by economic conditions.

Another study done by the center in 2010 found that in 2008 and 2009 the non-profit sector saw the largest drops in giving in more than four decades, mostly because of the economy.

"Disincentives for individuals to engage in charitable giving may place additional strain on the non-profit sector, which could in turn curtail the non-profit sector's ability to meet its social responsibilities in times of increased need," the report stated.

Fine says the proposed changes would hurt the small charities locally, ones that help people with the most basic of services.

"Our national organization of Jewish federations is part of a coalition of other national charities to advocate against these changes because uncertainty isn't good for organizations that are most helpful in economic times like these," he says. "At a time of a very challenging economic need in America, where more and more burden falls on charities, a change that makes it less likely that those who give continue to give makes it problematic."