We’ve long known that record-high inflation put unprecedented stress on nonprofits last year—but new data exposes just how deep that damage was. In 2022, nearly half (48%) of nonprofit organizations saw a drop in net income—revenue generated through charitable giving, memberships, events, and fees—as they grappled with the consequences of skyrocketing material and labor costs and reduced purchasing power.
The 2023 State of the Nonprofit Sector Survey, conducted by accounting and advisory firm FORVIS between November and December 2022, shines a light on the still ongoing economic fallout of the pandemic—and raises concerns about the financial health of nonprofit organizations in 2023.
Inflation-induced escalations in overhead cost and calls to increase staff compensation, an increase in demand for programming, and a decrease in state appropriations and pandemic emergency funds, were each significant factors that dug into organizations’ budgets. Together, they created a perfect storm of financial stress that cut into the bottom line of nearly half of charitable organizations in the United States (U.S).
According to FORVIS’ 2023 State of the Nonprofit Sector Survey:
- 93% of nonprofits spent more on employee salaries and benefits in 2022
- 68% saw increased demands for their programs and services
- 50% had difficulty delivering programs and services due to staffing shortages
- 43% identified rising operating expenses as the most significant challenge facing them
“Similar challenges and new worries have appeared since last year’s report for nonprofits,” said Dan Prater, Senior Managing Consultant with FORVIS and author of the report. “Although talent acquisition and retention issues remain, concerns surrounding the economic fallout and its impact on program delivery are top of mind.”
Here’s what you need to know:
Employee compensation increases were non-negotiable in 2022
As inflation rose in 2022, so too did employee demands for higher wages. Historic inflation levels caused the buying power of paychecks to shrink—with real (inflation-adjusted) average hourly earnings dropping by 2.8% from October 2021 to October 2022. In the face of a historically tight labor market, employers who weren’t able to keep up with cost-of-living increases—or at least attempt to—risked losing their employees to those who could. In fact, American workers cited low pay as one of the top reasons why they quit their jobs in 2021, according to a February 2022 survey by the Pew Research Center.
Throughout 2022, FORVIS’ survey found that 93% of nonprofit employers had to stretch their budgets and spend more on employee salaries and benefits in order to mitigate the cost-of-living increases and strengthen their chances of retaining their workforce throughout the Great Resignation. 57% of organizations said that employee compensation costs went up “somewhat,” while 36% said they went up “significantly.”
FORVIS’s survey makes clear that employers are feeling the heat of the competitive labor market. When asked to identify the reasons behind their struggles to recruit and retain employees, 69% of organizations cited a lack of competitive salaries and benefits and an inability to compete with corporate salary and benefits packages.
Operational cost increases are existential for nonprofit organizations
From gas costs to food prices, raw materials, and electricity—few supply chains were untouched by inflation in 2022. In a cruel one-two-punch, nonprofit organizations were forced to absorb these steep operational cost increases and shell out unprecedented funds on overhead costs while also serving an increased population of people in need of their services.
According to FORVIS’ survey:
- Fees for professional services (including marketing, legal, accounting, financial, IT, and other types of consulting) climbed by 68.22%
- Utility costs (including rent, mortgage, electricity, and gas) increased by 56.44%
For many organizations, inflation is an existential problem: 43% of survey respondents identified rising operating expenses as the most significant challenge that their organization faces. Case studies of the increased operational cost crises are abound:
- In Routt County, Colorado, LiftUp Food Bank saw a 30% increase in food bank clients from January 2022 to January 2022, as local families grappled with cost-of-living increases and became in need of food assistance. At the same time—food donations, food drives, and grocery store rescue volumes decreased by 28% overall. The organization’s planned 2022 food budget was $84,000—but in reality, it spent almost $180,000 due to the increase in food costs.
- In Texas, Ability Connection, an organization specializing in care for adults and children with intellectual and developmental disabilities, saw overhead costs—which cover food, utilities, and housing, among other costs—rise by 17% between February 2022 and 2023. That’s in addition to a 50% increase in overtime pay for staff due to ongoing worker shortages.
An end to pandemic emergency relief measures
Just as inflation began to really soar in 2022, pandemic emergency funding ceased. A decrease in state appropriations and an end to American Rescue Plan and other COVID-19 relief funds, including forgivable grant programs, tax credits, and loans, took the rug out from under nonprofits during a time of existential financial stress.
For example, the CARES Act allowed nonprofits with 500 or fewer employees to borrow forgivable loans of 2.5 times their monthly payroll expenses and encouraged charitable giving among donors by lifting the limitations on charitable contributions by corporations and individuals. It also provided refundable payroll tax credits of up to $5,000 per employee for nonprofits where operations were fully or partially suspended due to COVID-19.
What steps did organizations take to reduce expenses in 2022?
In order to stay afloat during the inflation tidal wave of 2022, organizations had to continually look for ways to consolidate services and cut costs. According to FORVIS’ survey, organizations took the following measures to reduce expenses:
- 2% of organizations eliminated or decreased staff positions
- 4% eliminated or decreased staff hours
- 69% eliminated or decreased programs or services
How can nonprofit organizations cut costs during times of inflation?
If your organization is feeling the impacts of inflation—there are strategic ways to help save on your bottom line without cutting staff or programming.
Nearly 86% of 501(c)(3) nonprofits are overpaying on their State Unemployment Insurance (SUI) taxes meaning that every month, they pay more in taxes and Unemployment Insurance (UI) benefits than they ever cost the state in unemployment claims. Put another way, this means that 86% of charitable organizations are unwittingly funding the UI benefits of other organizations in their state, including for-profit businesses and corporations.
501(c)(3)s do not have to pay state unemployment insurance taxes and can save as much as 40% on their unemployment costs by opting out of the unemployment insurance tax system.
When nonprofit organizations become reimbursing employers, they skip paying into a government pool of UI taxes, avoid UI tax increases, and pay only for their own unemployment charges, allowing more financial control and a clearer picture of their yearly budget.
501(c) Services can help you safely opt out of your state’s UI program and build a reserve account that you own, and that earns interest through sound conservative investing. 501 monitors and handles all your unemployment claims and reimburses the state for any paid claims. Our program has almost 1,500 participants and saves them an estimated $20 million in UI taxes annually.
Lia Tabackman is a freelance journalist, copywriter, and social media strategist based in Richmond, Virginia. Her writing has appeared in the Washington Post, CBS 6 News, the Los Angeles Times, and Arlington Magazine, among others. She writes nonprofit-specific content for 501c.com.