Fiscal crises in dozens of states should drive foundations and nonprofits to pay close attention to what their state governments are doing, and try to influence it where possible.  In a recent report, “Beyond California: States in Peril,” the Pew Center for the States found that all but two states are contending with budget shortfalls, that the shortfall across all states is a staggering $178 billion, and identified 10 states in the most critical condition: California, Arizona, Rhode Island, Michigan, Oregon, Nevada, Florida, New Jersey, Illinois and Wisconsin. 

Declining to participate in budget and governance reform debates may be the cautious approach legally, and it even may be the right one for a particular foundation or nonprofit philosophically, but there should be no doubt about the risks that we run by staying on the sidelines.

Consider the case of children’s health coverage in California. This year we may see just how quickly many millions of dollars in private philanthropic achievements – in expanding enrollment, pushing for reauthorization of the federal Children’s Health Insurance Program, promoting county-level insurance programs to cover kids not eligible for Medi-Cal or Healthy Families, and more – can be wiped out.

California’s Healthy Families Program provides low-cost insurance to children whose parents work, but can’t afford insurance on the private market.  It has been experiencing record demand as more and more families lose employer-based health coverage in an ailing economy.  State budget cuts threatened to cut off coverage to half a million children late last summer.  In August, First 5 California, an independent foundation dedicated to the needs of children 0-5, albeit one created by a state initiative, put up $81 million.  This was First 5 California’s second round of emergency funding for the program in nine months (in December 2008 they put up another $17 million). To put this in perspective, if private philanthropy had to make a similar commitment across our 50 states, the figure would be a staggering $653 million. 

Now here’s the kicker: this extraordinary $81 million grant still might not have prevented up to 800,000 children from low income working families being kicked off health coverage.  The legislature followed First 5’s lead and passed AB 1422, a bill to provide approximately $97 million in fee revenue to fill the gap. The Governor signed it into law.  This confluence of a large contribution from First 5 and a fee hike is a one-time fix, expiring at the end of 2010.

And sadly, it may only have postponed the damage. On January 8, Governor Schwarzenegger proposed a budget that places the Healthy Families Program on a “trigger list” of programs to be eliminated unless federal funds can be obtained to save it. According to the Governor, if we don’t receive a “trigger” threshold level of additional federal funding for California ($6.9 billion, specifically), the Healthy Families Program would be eliminated.  Even in the best case, in the unlikely event those federal funds do come forward, 204,000 children will still lose their coverage under the Healthy Families program as his proposal would cut eligibility and benefits and increase cost-sharing for Healthy Families.

This situation dramatically makes a point we’ve all known all along – that there is no way private philanthropy can pick up the slack when government retreats.  (That doesn’t mean government won’t ask, of course.  Last year, in addition to looking to First 5 California and local First 5s to step in and save HFP, legislative leaders in Sacramento approached several private foundations and asked them to pitch in tens of millions to save Healthy Families, among other programs.)

Foundations and nonprofit cause organizations need to carefully consider the relationship between their focused strategies and the merits of pushing for long-term change in the broader policy environment. Concerns about dry issues like governance reform or the mechanics of budgeting and accounting can seem far afield from a strategic program focus on, for example, reducing childhood obesity or improving early childhood development.  But the current California budget debacle shows that even the best designed and executed privately-funded initiatives can be washed away quickly by steep cuts to public programs.  And as the Pew Center for the State’s report shows,  California is only one of many states that are facing fiscal crises that will only worsen over the next 12-18 months. 

So what could foundations and nonprofit cause organizations do? They certainly can’t plug such enormous gaps, nor could they have prevented state budgets from tanking.  They could, though, look into what makes deep cuts to programs like health insurance for children the preferred response.  California has other options; legislators could cut other things, and could try to raise revenue to fill the gap.  As yet they have not, largely for structural reasons (supermajority requirements) and political (poor children do not make campaign contributions and their parents aren’t a strong voting block).  Funders may want to join the search for ways to change those incentives.

Much to their credit, funders like The James Irvine Foundation, The California Endowment, The David and Lucile Packard Foundation, the William & Flora Hewlett Foundation and the Evelyn and Walter Haas, Jr. Fund, among others, have been working the past two years to try to address California’s larger governance reform questions, through California Forward. It will become increasingly hard for other philanthropies, here and in other states, to avoid concluding that they will be unable to achieve their philanthropic goals until their state’s government functions again.  As Bob Hertzberg, president of California Forward and former Speaker of the Assembly, recently encouraged a group of grantmaking public charities to do, in such situations we all need to“get in the fight.”