Category Archives: Finance

Alliance publishes new report on nonprofits and the economy

Almost three-quarters of local nonprofits saw demand for their services climb in FY 2011 and almost half cannot meet their current level of demand. Among safety net organizations—those that provide food, shelter, health care and other lifeline services—96 percent experienced higher levels of demand this year and 63 percent cannot meet their demand.

According to the Alliance’s new report on Mid-South nonprofits and the economy, local organizations have yet to see any of the upswing that financial analysts say is underway. Charitable giving is still depressed, poverty and unemployment are high, and the public finance crisis has cut millions of dollars from nonprofit programs.

Downstream and In Demand III is based on a survey of 116 local nonprofit leaders about how their organizations and operating environment were affected by the recession in FY 2011. As in past years, rising poverty and another wave of funding cuts have strapped nonprofit budgets. More than one-third of respondents told us they reduced or eliminated services this year, and thirty percent ended the year with an operating deficit.

Our research shows that Mid-South nonprofits are tenacious and innovative in dealing with tough times. Their leaders have taken bold steps to analyze program costs and make strategic budget decisions. They’ve invested in staff and technology, honed their marketing and fundraising functions, and sought out partnerships and collaborations that cut costs and increase impact. Nonetheless, most are worried about how they’ll continue to serve their clients under current conditions, and how the Mid-South community will contend with persistent poverty and a frayed safety net.

Key findings from Downstream III include:

  • 60% of respondents lost a major funding source this year.
  • 50% of participants experienced reduced funding from a long-time funding source this year.
  • Most funding cuts in FY 2011 were from Federal grants and contracts and United Way.
  • 66% of participants have less than six months of cash reserves available, and almost one-third of these have less than one month of reserves.
  • More nonprofits are turning to earned income to compensate for shrinking funding. 35% of participants reported that earned income  increased as a proportion of total revenues in FY 2011.
  • Only 24% of respondents developed a contingency plan in FY 2011, suggesting that many others have not prepared for an uncertain future.
  • Government contracts pose an increasing challenge for organizations that rely on them. More than 80% of participants with government contracts were not fully reimbursed for the cost of services they provide, and many others say late reimbursement and mid-stream cuts significantly affected their operations.
  • Staff raises and benefits were reported as a crucial means of maintaining service quality, but the ability to invest in these is strongly correlated with size. Small organizations were much less likely to have given raises or hired new positions, and significantly more likely to have reduced or frozen salaries.

Want to know more about how the recession has affected local nonprofits? Check out Downstream and In Demand III to learn more about funding trends in the Mid-South and their implications for our community. Find out how nonprofits are working to secure their missions, preserve critical programs, and serve more people, and what’s needed from funders, public officials, and others to sustain their work. We welcome your thoughts and questions on the report and we’d love to hear about your own experiences with recession-era challenges and strategies.

Wishing you and your loved ones very happy holidays,  from the Alliance for Nonprofit Excellence.

It could be a while: nonprofits and state funding crises

Nonprofits should expect a long wait for state governments to boost spending for social programs, according to a new report.

With continued high unemployment and the end of Federal stimulus programs, states will have cut a total of $38.5 billion from only three programs—social services, Medicaid, and education—in FY 2011 and 2012.

Even when employment rebounds, it will take several years for state budgets to recover, say the authors of The Public Finance Crisis: Can Philanthropy Shoulder the Burden? It will take at least a year for the benefits to translate to more taxes for state budgets, and another year or more for them to be reflected in state expenditures.

The report, developed by international fundraising and philanthropy consulting firm Changing Our World, Inc., analyzes the dramatic changes in public funding affecting the nonprofit sector in the recent years of the recession.

In the Mid-South, Tennessee had a total budget gap of $1 billion and Mississippi had a $716 million budget gap in FY 2011. Arkansas is one of only a handful of states in the country not experiencing budget shortfalls.

To make up for the economic loss from state budgets, private giving to nonprofits would have had to increase by 30 percent in 2011 and by 60 percent in 2012. Clearly private grants and donations haven’t compensated for state budget crises. Between 2008 and 2010, annual private giving fell by $13 billion. Foundations, whose assets and revenues are largely tied to investment portfolios, lost $150 billion in assets and reduced giving by 13 percent during the recession.

The report provides an excellent timeline of the recession’s impact on nonprofits and an in-depth analysis of the various government effects on nonprofit revenue flows and strategies. It discusses the drying up of the Federal financial stimulus, how budget cutbacks affect various nonprofit sectors, and what it would take to relieve the shortages through private giving.

We’d like to think this research could raise awareness among government leaders about the nonprofit effects of state budget problems, given that nonprofits comprise eight to ten percent of the workforce in most states. The effects of the downturn on the sector are unprecedented, and the authors make a convincing case that major shifts in nonprofit funding are unavoidable.

Unfortunately they only offer the same old advice to nonprofit managers to diversify funding sources, measure impact, and hire volunteers. It’d be nice to see an overlay of state and Federal tax structure revision strategies on the state-nonprofit finance matrix, especially since so much nonprofit advocacy is now focused on maintaining tax breaks for the wealthy to preserve charitable deductions.

The Alliance has just released Downstream and In Demand III, our updated report on how the recession has affected Mid-South nonprofits. We’d love to hear your comments on The Public Finance Crisis: Can Philanthropy Shoulder the Burden? and your own experiences with government funding.

Program cost analysis…everyone’s doing it (or should be)

Among the strongest themes to emerge in our annual surveys on nonprofits and the recession are the need for and value of program cost analysis.

Most nonprofits have functional accounting systems that break out indirect costs (administration, marketing, facilities operation, etc.) And most nonprofit executives can easily identify the direct costs incurred by each of their agency’s programs. But connecting indirect organizational costs to programs—and consequently, to mission—is a trickier proposition.

The true cost of programs includes the allocation of indirect costs to each of your program or service streams. Understanding this allocation is essential to making clear decisions about your portfolio of programs and services.  Yet most nonprofits have a pretty cloudy picture of true costs, preventing them from truly understanding the financial health of each program area.

Program cost analysis includes calculating how costs like occupancy, technology, communications, fundraising, accounting,  HR, and administrative support are distributed across your programs, as well as direct costs. The true costs of each program are almost always higher than what is stated in program budgets, service contracts, and grant proposals. Usually this difference is subsidized through general operating funds, earned income, or other sources.

How a nonprofit allocates this subsidy is one of the most critical financial management decisions it can make. In addition to a rigorous economic analysis, the process involves a careful evaluation of mission, impact, and strategy. It’s hard work, but time after time, we see the process directly result in financial stability, a sustainable set of programs, and a sound future for our members.

  • Do you know the true program cost of core programs and services?
  • Do you know your essential “per unit” service delivery costs?
  • Do you have adequate subsidy dollars available to support all your programs and services?
  • Have you justified the subsidy you provide each program by its mission fit?
  • Have you connected the subsidy you provide each program to its proven effectiveness?

We’d love to hear from you about how you’ve analyzed programs and what you learned and changed. And if you’re looking for a consultant to help guide the program analysis process, let us know–our management consulting program will help you find a good fit for expert advice and guidance.

Farm Bill gets fast-tracked

Advocates for small farms, rural community development, and sustainable food systems were dismayed to learn last week that prospects for substantially reforming the next Farm Bill may have dimmed.

Reauthorization of the 2012 Farm Bill was not expected until late next year or early 2013, but the House and Senate Agriculture Committees suddenly announced the entire bill would get written by next week at the latest. The bill is now expected to be much smaller than anticipated, and omit proposed funding for conservation, small farms, and local food systems.

Passage of the Farm Bill occurs every five years, usually involving a lengthy process of lobbying and debate. The bill has traditionally been seen as responsive to large agribusiness corporations rather than environmental, public health, animal welfare, and community interests. In recent years, activists for these interests have begun to see the bill as an opportunity for change, calling for more funding for conservation practices, organic farms, farmers markets, and fresher, healthier school food.

The fast-tracked bill isn’t likely to have much input from these interests given the timeline and the fact that it will also be much smaller than expected. The decision comes as part of the deal cut by Congress to have a plan for reducing the deficit by $1.2 trillion before Thanksgiving. Twenty three billion dollars will be cut from the USDA budget.

Traditional farm interests are working to maintain the $18 billion in annual subsidies currently given to the country’s largest commercial farm operations, which produce corn, soy, and other commodities. Subsidies are distributed via direct payments based on acreage and yield, and are seen by opponents as maintaining concentration in agriculture and fostering environmentally unsustainable production methods. The subsidy proposal circulating would alter the structure of the subsidy program but offer the same basic protections and guarantees to big commercial operations. Critics of the proposal also say it will prevent payments from being tracked and the public from knowing which farms receive payments.

What programs are likely to be sacrificed? Experts are speculating that food safety enforcement is on the chopping block, even though consolidation and vertical integration in food processing have led to increased outbreaks of foodborne illness. Land and watershed conservation initiatives are also threatened, such as those that provide incentives for farmers to leave buffer strips to minimize chemical leaching into groundwater and keep erosion-prone land out of production. The “Know Your Farmer, Know Your Food” effort, a group of programs that connect local farmers with schools and communities, may also be eliminated.

Given the power of the corporate farm and food lobby, getting community-oriented food and farming efforts into the Farm Bill has never been easy.  Those pushing for more progressive, publicly accountable legislation were expecting to have months to build momentum and support for change among taxpayers and public officials. As Congress puts its finishing touches on the bill, activists have stepped up the pressure, calling for the following legislation:

•                A Local Farms, Food, and Jobs Act. Among other provisions, this bill would double funding for the Community Food Projects competitive grants program, expand access to local and regional food in school meals, level the playing field for farmers markets and other local food enterprises to serve Ffederal nutrition program participants, and build local and regional food infrastructure.

•                The Community Agriculture Development and Jobs Act, which would create an Office of Community Agriculture, specifically tasked with the responsibility of ensuring that existing USDA programs address the root causes of food deserts and food insecurity.

•                The Expanding Access to Farmers Markets Act, designed to help Supplemental Nutrition Assistance Program participants use their benefits to purchase fresh fruits and vegetables by providing wireless EBT technology to farmers markets and other local food enterprises.

Given the short timeline and closed door environment, it’s uncertain how much play these proposals will get amid the corporate agenda.  Many people are concerned about the lack of transparency and public engagement in the process. No details are public yet, although final recommendations are expected later this week. We’ll keep you posted as the bill develops. In the meantime a great analysis of how the lack of regulation in the poultry industry has led to poverty and the gutting of rural communities in Arkansas is here.

Jobs bill could help some nonprofits, hurt others

President Obama’s $447 billion package of Federal spending and tax cuts designed to stimulate hiring includes specific efforts to help nonprofits. The American Jobs Act would reduce nonprofit payroll taxes and eliminate them if nonprofits add new staff or increase wages. The plan also would provide a tax credit for nonprofits to hire veterans and long-term unemployed workers.

The White House issued a statement recognizing the importance of the sector in economic recovery, citing the President’s awareness that one in twelve workers in the U.S. are employed by nonprofits. The legislation would provide funding to state and local governments that could also be passed down to nonprofits and/or benefit their constituencies, such as financial assistance for local schools and funding for home rebuilding.

Nonprofit advocates have called for the President to specifically recognize nonprofits as a source of job creation, and for policymakers at all levels to include nonprofits in job growth strategies and policies. Nonprofits employ more than 13 million people and pay more than $500 billion in wages annually.

To pay for the package, the President seeks to limit itemized deductions claimed for charity by upper-income taxpayers. Obama suggested changing the limit for write-offs for itemized deductions from 35 to 28 percent. (For example, a donation of $100,000 would save the donor $28,000 in taxes rather than $35,000 in taxes.) The plan would only apply to the wealthiest taxpayers—an individual with an adjusted gross income of at least $200,000 or a married couple with an adjusted gross income of at least $250,000. It would provide the Federal government roughly $400 billion over ten years.

Many nonprofit advocates say the legislation would reduce giving to charities and force them to lay off workers or cut services to those in need, a counterproductive strategy in a plan to boost employment and help struggling nonprofits better serve their communities. Others suggest that only the largest and wealthiest nonprofits, such as museums and universities, are likely to be affected, as these are the main recipients of large grants from wealthy donors looking for tax write-offs.

Several other nonprofit-related jobs bills are already pending in the White House, although they show little sign of being supported by the Republican House. These include Sen. Kirsten Gillibrand’s Urban Jobs Act (S. 922/ H.R. 683), which would make competitive grants to nonprofit community-based organizations to provide job training, education, and support services and activities for eligible urban youth to provide them with a “pathway to employment, or education leading to employment” and require the creation of “local jobs council advisory committees” to demonstrate community-based support for the nonprofits’ strategies. Rep. Keith Ellison’s Put America to Work Act (H.R. 2368) would help local governments “create employment opportunities for unemployed and underemployed residents of distressed communities” through “fast-track jobs” and fund public and nonprofit entities to create employment opportunities in construction/rehabilitation, remediation/demolition, human services, and youth programs.

You can read more about the American Jobs Act at Thomas.gov or on the White House website. With regard to nonprofits, the Jobs Act would:

  • Reduce nonprofit payroll taxes;
  • Extend the expansion of unemployment benefits through January 2, 2013;
  • Eliminate the payroll taxes if a nonprofit adds new staff or increases wages;
  • Provide a tax credit (applicable to nonprofit payroll taxes and withholdings) to nonprofit employers that hire veterans and long-term unemployed workers;
  • Provide financial assistance to states or nonprofits to help unemployed and low-income individuals to find job-related opportunities or skills; and
  • Provide financial assistance for state and local governments, school construction and money to rebuild and refurbish homes.

Federal budget uncertainty puts social services funding at risk

With the Federal fiscal year beginning in just weeks, Congress will be working on a stopgap continuing resolution to stave off a government shutdown in October. When legislators return to session, a number of key budgetary conflicts are expected to emerge, despite the recent debt ceiling deal that reportedly reconciles Democratic and Republican spending priorities.

Last month, the debt ceiling deal created a “Super Committee” charged with releasing a massive $1.2 trillion deficit reduction package by Thanksgiving.  The deal has brought anxiety to cash-strapped nonprofits due to uncertainty around how mandatory cuts to discretionary funding will play out.  The bill didn’t spell out where savings should come from, although it’s pretty clear various social services funding streams will wind up on the chopping block. Elements of President Obama’s new jobs bill may be incorporated into the package, requiring even further cuts.

Setting a recent record, the House passed six of 12 appropriations bills before its summer recess.  House appropriators are said to be waiting for an omnibus bill from the Senate that would combine the other six bills. The Senate, which passed one bill before the recess and three since, is expected to start work on these six in the coming weeks.

The House budget slashed $30 billion, and conservatives are calling for the Senate to do the same, although the debt ceiling deal sets an overall spending cap for FY 2012 at a level only slightly less than that of the current fiscal year. House leadership is publicly supporting the budget levels set out in the debt ceiling deal.

Cuts to non-defense spending are much smaller in the Senate than in the House because the House significantly increased defense spending, forcing drastic cuts in other areas. Defense spending levels are expected to be a major point of contention and cause of delay in the coming months. Short-term extensions of both the surface transportation bill and the reauthorization of the Federal Aviation Administration (FAA) were also in dispute until last weekend, when Congressional leaders agreed to set both issues aside until 2012.

Because of recent natural disasters, disaster relief is also a pressing issue. The Federal Emergency Management Agency (FEMA) is running out of funding and the White House is seeking more than $5 billion in disaster aid for the next two fiscal years. Republicans in the House are insisting that new funds for disaster relief be offset by other cuts.  House Appropriations Committee Chair Hal Rogers (R-KY) announced Monday that disaster relief will be part of the continuing resolution.

Adding to many nonprofits’ concerns is the requirement that across-the-board cuts be made if the Super Committee doesn’t pass the called-for cuts by Thanksgiving. These automatic cuts, totaling $1.2 trillion, would begin in 2013. Many believe this long-term scenario is likely given the fact that the 12-member Super Committee is bipartisan, and likely to disagree on where to cut spending.

According to recent articles in Stateline and the Nonprofit Quarterly, the news for nonprofits isn’t entirely grim, at least for the short term. The projected decrease in discretionary funding is adjusted for inflation, and according to Stateline, discretionary levels would actually rise slightly over the ten-year period. Immediate spending cuts wouldn’t affect mandatory programs such as Medicaid, Medicare, and Social Security. The Children’s Health Insurance Program (CHIP), Temporary Assistance for Needy Families (TANF), and food stamps are also exempt from the automatic cuts. Nonprofits dependent on health-related Federal programs are more likely to see stable funding for the near future, while the outlook for education, Head Start, affordable housing assistance, child care, and other human services funding looks considerably more dire.

We’ll keep you posted on Congressional developments that may affect local nonprofit funding. Please let us know if you have questions about particular programs and funding streams.

Are unsustainable financial models impeding nonprofit recovery?

Last week we described a new study exploring the impact of the recession on the predicted wave of nonprofit executive turnovers.  According to Daring to Lead, many nonprofit leaders held on to jobs they’d planned to leave before the financial crisis, but projected turnover remains high and few organizations are prepared to manage a leadership transition.

The problem is bigger than the position, says Daring to Lead. The authors warn that in addition to the looming leadership gap, we should be concerned with the endemic problem of unsustainable nonprofit financial models. The recession, they say, has shed light on an old problem: nonprofits hold up our country’s social safety net without adequate financing.

The study, which is focused on leadership and the experience of nonprofit executives, suggest there is a direct link between ED success and happiness and the financial state of their organizations. And given that the vast majority of nonprofits suffered major funding cuts in the recession, it’s no secret that anxiety and burnout are through the roof.

Sector leaders have long been calling attention to the problem, and Daring to Lead makes a point to connect its financial and leadership dimensions. With half of nonprofit leaders reporting less than three months of cash in reserve, how can we expect even the most talented among them to create impact and lead strategic growth? Chronic financial instability frustrates leaders and leaves organizations without the resources to “take risks, underwrite growth, or invest in their own capacity beyond what they can get existing funding streams to pay for.”

Unfortunately, Daring to Lead doesn’t explore alternatives to the unsustainable models the authors blame for burnout. But elsewhere in the sector, efforts are underway to demonstrate how “philanthropic equity” is needed to run sound businesses, grow to meet changing community demands, and invest in new programs and services.

The problem, say many in the field, is that under the current model, nonprofits are expected to operate without growth capital, making sound financial practices nearly impossible. The current system makes nonprofits supplicants to their funders, surviving year after year with minimal cash reserves and no capital to diversify and build their operations.

The Nonprofit Finance Fund (NFF) has long been at the helm of trying to shift perceptions about effective financial models.  Working with the Edna McConnell Clark and other foundations and partners, NFF is now piloting philanthropic equity projects that support nonprofits in running equity campaigns and creating more sustainable revenue models. To help support the equity model, NFF developed a new accounting methodology that tracks growth capital separately and doesn’t count it toward general revenue. As capital is used, the funds shift back into the revenue line, allowing money going to build the organization’s platform to be separately accounted for.

You can read about the model and NFF nonprofit equity projects in the NFF Capital Partners 2010 Performance Report, or learn more about how nonprofit leaders are coping with financial strain in Daring to Lead.