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How Vermont’s Nonprofit Sector Became a $6.8 Billion Industry

Paul Heintz Jun 20, 2018 10:00 AM
Thomas James

When Christine Graham joined the nonprofit world in 1969, "The vast majority of community organizations that we have now simply didn't exist," she recalled.

Churches, Grange halls and fire companies had long brought Vermonters together to help one another. But it would be years before the Vermont Land Trust, the Vermont Foodbank and the Vermont Community Foundation would spring up and begin to reshape the state.

"In the old days," said Graham, a fundraising consultant who has spent most of her career in the field, "there was a general sense that 'nonprofit' means nobody gets paid to work there and the budget is by definition scarcity and disaster all the time."

In the half century since, the nonprofit world didn't just expand; "it grew up," said Ellen McCulloch-Lovell, who joined the Vermont Arts Council staff in 1970 and has since led or advised many more nonprofits. "There's been a healthy professionalization of the sector." No longer just networks of neighbors, nonprofits are often complex organizations with experienced staff and engaged boards, tackling some of the state's most vexing problems.

And though they are, by definition, designed to make a difference — not a profit — they have become an enormous part of Vermont's economy. According to their most recent Internal Revenue Service filings — mostly from 2015 and 2016 — the state's 6,044 federally recognized nonprofits reported annual revenue of $6.8 billion and assets of $13.2 billion. As recently as 2012, according to the federal Bureau of Labor Statistics, the state's 501c3s employed nearly 18 percent of Vermont's workforce.

By some estimates, Vermont boasts more nonprofits per capita than any other state in the union.

"Nonprofits are a big part of the economy anywhere you go," said Andy Robinson, an industry consultant who lives in Plainfield and advises clients throughout the country. "But it's even bigger in Vermont."

According to Graham and McCulloch-Lovell, that's a legacy of the demographic changes Vermont experienced in the 1970s and '80s, when artists and idealists flooded the state. "I think people came to Vermont looking for a lifestyle," Graham said. "They made their communities the kind of places they wanted to live in."

In the years since, the nonprofit sector has been remarkably resilient. During the Great Recession, when for-profits and the public sector pulled back, Vermont nonprofits expanded, according to Brice McKeever, a research associate at the Washington, D.C.-based Urban Institute's Center on Nonprofits and Philanthropy. From 2005 to 2015, revenue at Vermont nonprofits grew by nearly 48 percent, compared to 39 percent nationally.

"When giving was tough overall, Vermont was seeing pretty stable growth during that period," McKeever said.

These public-private hybrids, funded by the wealthy and the state, have in recent decades become a sort of shadow government. They educate the young, treat the ill, conserve the environment, and feed and house the poor. "Nonprofits are essentially paid, or underpaid, to do work that the government has decided to delegate," said Lauren-Glenn Davitian, executive director of the nonprofit advocacy group Common Good Vermont.

And yet, Robinson complains, government officials rarely go to bat for the sector the way they do for the dairy, ski and captive insurance industries. "Why are nonprofits seen as the stepchild?" he asked. "Why aren't we taken more seriously?"

Unlike Connecticut, which boasts a cabinet-level position focused on nonprofits, Vermont has no such point person. Asked who in state government was in charge of advocating for nonprofit interests, Secretary of Commerce Mike Schirling confessed, "I don't know!"

There's a similar lack of oversight. Vermont nonprofits must register with the Secretary of State's Office and, to attain tax-exempt status, the IRS. (See story.) But the Vermont Attorney General's Office employs just one lawyer charged with ensuring their compliance with state law, and the IRS rarely conducts audits.

Journalists, too, tend to give the sector short shrift, even though some of the state's top news organizations are themselves nonprofits. Reporters cover the occasional capital campaign, organizational implosion or embezzlement case, but rarely do they provide the sustained attention — and scrutiny — that nonprofits merit, given the public dollars they receive and the tax advantages they enjoy.

Seven Days aims to address that with a new series on Vermont's nonprofit economy called "Give and Take." Aided by a searchable, sortable database of IRS filings that the newspaper built for the project, our reporters have combed through the Form 990s that many tax-exempt charitable organizations must submit each year. Within those filings is a wealth of information that, until recently, was not easily accessed by journalists and the public.

In the coming weeks, Seven Days will use that data to take readers inside Vermont nonprofits, with stories examining their impact, challenges, leadership, compensation, power, tactics and funding. These stories examine the "give and take" of public policies that advantage certain organizations charged with advancing the greater good.

"My experience in Vermont is that most organizations are well run, they're functional and they're effective. There are some that are dysfunctional and a lot that are operating below capacity," Robinson said. "To me, that's the headline: We have a large group of nonprofits that are, by and large, good at what they do. But they could be better."

'God Bless the Wealthiest Vermonters'

The breadth of Vermont's nonprofit ecosystem is so great that it's difficult to make generalizations about its denizens.

"The nonprofit sector is almost an artificial construct," said Vermont Community Foundation president and CEO Dan Smith, whose organization advises philanthropists and steers $12 million a year to charitable endeavors. "You can find institutional nonprofits like colleges and universities that have very different challenges than the two-person nonprofit that's hosting an after-school program in Sharon."

At one end of the spectrum is the University of Vermont Medical Center, which reported $1.29 billion in revenue in its latest IRS filing, more than 7,800 employees and 21 execs making more than half a million dollars a year. (See story.) At the other are groups like the Friends of West Rutland Town Hall, which claimed $1,156 in revenue and zero employees.

In the middle of the spectrum is an array of organizations that entertain us (Weston Playhouse Theatre), inform us (Vermont Public Radio), educate us (Montshire Museum of Science), rescue us (Caledonia-Essex Area Ambulance Service), care for us (Brattleboro Area Hospice), inspire us (Special Olympics Vermont) and remind us (Vermont Folklife Center).

So what do they all have in common? Each is a "public benefit corporation," defined in Vermont statute as one "organized for a public or charitable purpose" — educational, religious, horticultural or one of a number of other listed categories. The Secretary of State's Office counts 7,317 registered public benefit or mutual benefit corporations based in Vermont. (There are 11,244 domestic for-profit corporations.) Some of these have also been granted 501c3 status by the federal government. That means they are tax-exempt charitable organizations designed to benefit the public interest, not individual shareholders.

According to Seven Days' database of IRS filings, 4,550 Vermont entities were designated 501c3s. Those included 303 private foundations, which are typically endowed by wealthy families or corporations and distribute investment income to other nonprofits. Among them? The Stiller Family Foundation, the Ben & Jerry's Foundation, and the Pizzagalli Foundation.

In addition to 501c3s, Vermont hosts another 1,494 federally recognized nonprofits that receive fewer tax benefits. Those include 501c4 social welfare organizations, such as the Vermont Right to Life Committee; 501c5 labor groups, such as the Vermont State Employees' Association; and 501c6 business leagues, such as the Vermont Ski Areas Association.

While these other nonprofits enjoy some tax advantages, 501c3s benefit from the most. They are exempt from the federal corporate income tax and a host of state taxes, including, for the most part, those on income, property, sales and use. According to a 2017 report by the legislature's Joint Fiscal Office and the Department of Taxes, Vermont nonprofits avoided $18.6 million in state income tax payments in 2014 and roughly $73 million in state property taxes in 2016. The latter included a nearly $12 million state property tax exemption for the University of Vermont and another $12 million for religious institutions.

State lawmakers have occasionally attempted to rein in these giveaways, but they've succeeded only once in recent years — when, in 2016, they eliminated a property tax break for college fraternities and sororities. (See story.)

Now the same politicians are tinkering with the tax breaks nonprofit donors enjoy. Since 1917, Americans have been able to deduct charitable contributions from their federal tax bills, thereby reducing their taxable income. Because higher income is taxed at higher rates, the deduction benefits the wealthy far more than the middle class.

In 2016, according to the Vermont Department of Taxes, only 28 percent of taxpayers itemized their deductions; the rest were better off taking the fixed, standard deduction option. According to the IRS, those who do itemize contributed $289 million to nonprofits in 2015. More than half of that, $157 million, came from those who earned more than $200,000.

Just 450 ultra-rich Vermonters, who made more than $1 million apiece, contributed $81 million to nonprofits. Some gifts are off the charts.

In the past five years, according to the Chronicle of Philanthropy, Vermont organizations received at least 30 donations worth a million dollars or more, totaling $159 million. Among them was a trio of eight-figure contributions: Robert and Helen Larner gave $66 million to the UVM College of Medicine and $19.7 million to the university itself. Barry and Wendy Rowland contributed $20 million to Burr and Burton Academy, an independent high school in Manchester.

"God bless the wealthiest Vermonters," said fundraising consultant Tere Gade. "They are being very generous to the nonprofit community."

'Let's Not Destabilize the Shelters'

Andrea Suozzo

As Vermont nonprofits have "grown up," they've encountered new and unexpected challenges that threaten their finances and, sometimes, their ability to carry out their missions.

The most recent of these are changes to the federal and state tax codes that nonprofit leaders fear could curb the generosity of the wealthiest donors — and deprive their organizations of critical funding.

The Tax Cuts and Jobs Act of 2017, which President Donald Trump signed into law last December, nearly doubled the standard deduction, from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married couples. Analysts expect that many taxpayers who used to itemize their deductions — particularly in the upper-middle class — will now opt for the standard deduction, thereby reducing their incentive to donate to nonprofits.

In Vermont, according to Tax Commissioner Kaj Samsom, the number of itemizers could drop from 28 percent to 9 percent.

"That's a dramatic reduction," he said. "Maybe you have less reason to give to charity now, at both the federal and state level."

To restore the incentive to give, in February Samsom proposed the creation of a 5 percent charitable tax credit. Unlike the current approach, which only benefits itemizers, the credit would be available to all Vermonters, and it would be worth the same — dollar for dollar — for those in the lowest tax bracket as those in the highest. Filers who gave $100 to charity would receive a $5 state tax credit, while those who gave $100,000 would get a $5,000 credit.

"On its own, a credit is always more progressive in nature than a deduction," Samsom said. "This will open up a tax incentive for everyone to give a little bit."

State legislators generally supported the proposal, but the Vermont House proposed capping the credit at $500 — which is 5 percent of $10,000 in charitable donations.

Rep. Janet Ancel (D-Calais), who chairs the House Ways and Means Committee, argued that the money saved would be better spent reducing the tax burden on Social Security recipients and increasing the Earned Income Tax Credit.

"That is a tremendous boon to working families," she said of the latter. "It's the best anti-poverty program we have."

The House later compromised with the Senate and settled on a $1,000 limit, meaning that those who give more than $20,000 per year would still only receive a $1,000 tax credit. Samsom and his boss, Gov. Phil Scott, opposed the cap but said they could live with it.

The nonprofit community has not been so sanguine. In an April letter to legislators, industry leaders said the move would "fundamentally change the nature of charitable giving in Vermont" and "hurt our communities."

University of Vermont Foundation president and CEO Shane Jacobson penned the letter. He said that roughly 100 Vermonters donate more than $20,000 a year to the university — and some are now reconsidering doing so.

"The message [legislators] are sending to those who are generous is that gifts above that cap are not wanted, or at least not valued at that level," Jacobson said. "That's the wrong message to give to the donor community."

The ramifications could be felt even at the smallest nonprofits, warned John Killacky, the outgoing executive director and CEO of the Flynn Center for the Performing Arts. "Let's not destabilize the food banks right now," he said. "Let's not destabilize the shelters."

Sen. Ann Cummings (D-Washington), Ancel's counterpart on the Senate Finance Committee, said she understands the anxiety and thinks it's "reasonable." But she cautions that it's too soon to say how all the adjustments to the federal and state tax codes could affect philanthropic giving.

"There will be a change in behavior, in all probability," Cummings said. "Which way it'll go for the charities we don't know. A year from now, we'll have a better idea."

'The Multimillion Dollar Question'

Changes to the tax code aren't the only existential threat nonprofits face. As Seven Days will further explore in its "Give and Take" series, the very success of the sector has brought about new challenges, from financing to governance.

A decline in volunteerism has forced some nonprofits to hire more staff, which increases costs and requires more fundraising. Even public libraries have to consider capital campaigns, consultants and development budgets.

"Funding is so tight that it gets in the way of doing your mission," said Robinson, the Plainfield consultant, "because you have to spend so much time on fundraising, versus trying to do what you're in business to do."

The proliferation of nonprofits has led to overlap and duplication. Some nonprofit leaders quietly wonder whether there are too many organizations serving the homeless and the hungry — each competing for donors and dollars. "Sometimes it gets turfy, and sometimes it gets territorial," Robinson said.

Bill Schubart, who has chaired 10 Vermont boards and served on a few more, said he has no patience for sharp-elbowed nonprofit leaders. He believes they should instead be looking for ways to collaborate with one another.

"Competition is terrific in the business sector. It has absolutely no place in the not-for-profit sector," he said. "If you as a nonprofit are competing with another nonprofit, you're making a horrendous mistake."

Traditional sources of funding are also in flux. Younger donors are more inclined to donate directly to a cause — sometimes through an online GoFundMe campaign — than they are to organizations that aggregate contributions.

"There's a higher degree of skepticism toward institutions," said Smith, the Vermont Community Foundation chief.

That's resulted in declining revenue at organizations such as the United Way of Northwest Vermont, which last month announced it would no longer fund many nonprofits that had long relied on its grants.

Individual donors aren't the only ones whose habits are changing. In recent years, government austerity has threatened funding for many Vermont institutions.

When Mark Redmond took over Spectrum Youth & Family Services in 2003, 97 percent of the Burlington organization's budget came from state and federal coffers. These days, only 40 percent does. Private donors have more than made up the difference, upping their support from 2 percent of Spectrum's budget to 52 percent.

"So we're all doing bake sales and sleep-outs and runs and walks, not only to do something new and different but to backfill the money the state isn't giving," Redmond said.

Even as the government provides less money to nonprofits, it's expecting more from them.

"When the public sector steps away from adequately addressing needs, where does the need fall? It often falls to the private, nonprofit sector," said Gaye Symington, president of the High Meadows Fund. "So whether it's health care or opiates or land conservation or water quality or clean energy, the needs don't go away just because the public funding is not adequate."

Asked whether he feels like an unfunded arm of the government, Redmond said, "That's the multimillion-dollar question! What is the government's responsibility, and what is philanthropy's responsibility?"

Graham, the longtime fundraising consultant, looks at the situation differently. It's not that the public and for-profit sectors have abdicated their responsibilities, she argues. It's that nonprofits "are doing the work that just wasn't done before."

"When I was younger, there was no such thing as a senior center. There was no such thing as a food shelf. There was no such thing as an arts organization," she said. "I think our expectations of society and what society can take care of have expanded a great deal. It's not a transfer of responsibilities. It's an expectation that we can do more than we used to do."

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