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Tough year ahead for charities

While many firms are emerging from recession, nonprofits say 2011 could be worse than 2010.

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"With ballooning deficits, everything is on the table and those nonprofits whose charitable value is low are prime targets," says Daniel Borochoff, president of the American Institute of Philanthropy, based in Chicago. Many states will look to tiered systems where taxes are ranked based on the service provided, he predicts. "Homeless organizations might be taxed far lower than, say, a polo club."

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Scrutiny at the federal level isn't looking much better. Mr. Borochoff predicts heightened inquiries from Washington stemming from the role of nonprofits in the recent election.

One such nonprofit, the Commission on Hope, Growth & Opportunity in Washington was heavily scrutinized by media outlets for supporting largely Republican issues without disclosing its donor base as traditional political action groups do.

"Nonprofits are intended to be social welfare organizations, not ones that simply allow you to hide your identity," says Borochoff. He hopes the Federal Trade Commission will take a greater role in policing nonprofits, which has traditionally been left to the Internal Revenue Service. "There needs to be greater disclosure of where your money is going and how much is being spent to get your donation."

In the face of all this adversity, nonprofits are getting creative. The American Cancer Society's division that represents most of northern California undertook an aggressive restructuring that left the group more nimble, more reliant on volunteers, and still able to support a 20 percent increase in demand for services, according to Michael Chae, the group's regional vice president. "We've found that volunteers actually provide better service and are far less costly [than employees in] providing vouchers" to the charity's clients, he says.

Still Charity Navigator's Berger worries that nonprofits – especially those that rely heavily on state and local government funding – aren't prepared for the year ahead.

"States were buoyed by the stimulus bill, but as that dries up, state governments will need to find ways to shore up their balance sheets and charitable programs will be prime targets," he says. "The disaster delayed by the stimulus will be the disaster that is. Charities just aren't ready for what's to come."

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