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Doing More with Less: Tax-Exempt Organizations Continue to Face Challenges in a Time of Turmoil

As the world continues to recover from the COVD-19 pandemic, the challenges that tax-exempt organizations face continue unabated. Almost all employers are having difficulty retaining employees and providing core services at the same level and quality as they had pre-pandemic. Additionally, continued inflation and rising interest rates have made the cost of doing business even more problematic.

At the beginning of the pandemic, many organizations implemented emergency cost cutting measures including layoffs, furloughs, curtailed retirement plan contributions, and wage freezes or reductions. Now, more than two years later, the question for many employers is no longer how much money can be cut from payroll costs, but instead how much more are we going to have to spend just to maintain the workforce that is needed to provide services?

In October 2022, the U.S. Bureau of Labor Statistics (BLS) reported that the unemployment rate was at 3.5% and that average hourly wages had risen 5.0% from a year ago. Additionally, it is estimated that the mismatch between job supply and worker demand has resulted in approximately 1.7 job openings per unemployed worker. This has declined from the high of 2.0 earlier in 2022 but is still significantly higher than the pre-pandemic norm of 1.5.

All of this data points to the power that employees wield at the moment. In addition to the labor supply and demand issue, employees now have more options in how and where they work. In many cases, jobs are available remotely and employees are no longer confined to working in the area where they live. With all labor indicators pointing favorably in the average worker’s direction, one would think that this is a great deal for them, right? Think again.

In October 2022, the BLS reported that the Consumer Price Index (CPI) for all items rose 8.2% for the 12 months ending in September 2022, which was a slight decline from the 8.3% increase for the period ending in August and down significantly from June’s high of 9.1%. When certain highly volatile sectors of CPI (such as energy and food) are removed, CPI still rose 6.6%. The inflation rate remains near a 40-year high despite efforts from the Federal Reserve to cool inflation by repeatedly hiking interest rates.

Now we get to the crux of the matter. Even though the labor force has all the leverage and wages are being driven ever higher, the stubbornly persistent inflation means the buying power of the average worker’s take-home pay is actually declining. Yes, that is correct – according to the BLS, average hourly earnings fell 3.0%, adjusted for inflation, from September 2021 to September 2022. With those facts in hand, it is easy to understand why there is so much turnover in the workforce. This is not an issue of workers not being loyal or not believing in the mission of your organization. With the workforce shortage, many workers are being asked to do more by their employer. In the end, no one wants to do more work for less real money. This also helps fuel turnover.

Of course, the economic woes that tax-exempt organizations are facing don’t end with the workforce shortage and rising wages. The high inflation rate is also driving most other costs up as well. Professional services, utilities, supplies – all these costs are rising, and are very difficult to control. Tax-exempt organizations need to accomplish their mission and in order to do that, they need to have the utilities working, the necessary supplies and supporting services. For organizations that are looking to refinance debt or borrow money to fund initiatives, the years of cheap money are over. The Federal Reserve rate is currently at 3.25%, and it is expected to continue to rise as current inflation has yet to be tamed. The increase in debt service is yet another financial burden.

Most tax-exempt organizations do not have the ability to “pass along the added costs” to customers like a grocery store or gas station. In many cases the payor is the government, and the contracts have fixed rates attached to them that are not quickly adjusted for inflation. In the situations where a consumer does pay an organization directly, fierce competition among providers may make it very difficult to increase the price of services.

We have had several economic crises in modern times and eventually they always pass. While things may look grim now, it is important to remember that the pendulum will eventually swing. How and when that happens is not something that can be predicted with any accuracy, but it is important to come out of this turmoil poised for success. This means that tax-exempt organizations must strive to continue to provide quality services to consumers while maintaining compliance with laws and regulations with oversight agencies. In order to do so, organizations must retain the best and brightest throughout your workforce. While most, if not all, organizations have had key employees leave in the past year, it is important to take a step back and think about the employees that have chosen to stay with your organization. It is likely that many of them could have left for more money but chose to stay. Maybe they enjoy your corporate culture, mission, non-monetary perks or see opportunities for future advancement. Rather than focusing on the negative of employee turnover, take some time to analyze your organization and the positives that have helped you with retention. How can you focus more efforts on strengthening those positive results?

If you need further guidance or have any questions on this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.