Social Currency

Earlier this month, Nonprofit Finance Fund (NFF) released a new analysis featuring the responses from the leaders of 919 arts and culture organizations who took our 2014 survey of nonprofit business health. The State of the Arts and Culture Sector report captures the challenges and triumphs of nonprofits grappling with financial pressures, changing demographics, new technologies, and opportunities to expand the reach of their programs. (The full data can be filtered by artistic discipline, geography and budget size through our online survey analyzer, available here).

NFF’s report identifies some of the systemic barriers that impede cultural organizations from building financial structures supportive of art-making and community engagement. One of these barriers is the missing dialogue between grantmakers and grantees: cultural organizations report significant discomfort engaging their funders in meaningful, candid conversations about their need for flexible capital to support liquidity, risk-taking and change.

Given this lack of open, honest dialogue, it’s unsurprising that our survey data also reveal a second systemic barrier within the arts funding system: an inability of cultural groups to secure the kinds of flexible capital resources that buttress their artistic ambitions. Only 11% of arts groups taking our survey reported receiving funding to help manage cash flow; just 8% raised flexible funds for growth and change; and a mere 5% secured money for reserves to invest in artistic risk taking.

Organizations such as NFF and Grantmakers in the Arts continue to educate funding communities around the country about how to make investments that pave the way for long-term artistic success. We know from experience that organizations cannot easily withstand economic pressures, respond to community needs, and create innovative programs if the funding system does not evolve in ways that broaden access to flexible capital.

While there have been modest improvements in the grantee/funder dialogue, we continue to ask: why isn’t the sector engaging in conversations about the full spectrum of capital needs? Why is funding so often misaligned with organizational needs?  

There are many institutional and cultural reasons. Not to blame, however, is a lack of knowledge on the part of arts executives. By and large, NFF’s work with these leaders confirms time and again that they understand the importance of flexible, long-term money and the relationship between stable finances and dynamic art. At a focus group that brought together ten cultural groups in Philadelphia to discuss the data, one museum executive told us: “You have to know what your business is…you can create great art, but if you're not operating like a business, then you're not going to make it.”

Here, we’ve identified some of the real reasons why open conversations about capitalization aren’t taking place – and why funding flows, therefore, don’t address true, full needs. We also offer some suggestions for actions cultural grantmakers and organization can take to address these issues.

Reason #1: A major hindrance to genuine two-way conversations about business health is fear. Cultural organizations worry that if they speak candidly about what they really need, rather than what they think funders want to hear, they risk being passed over for alternative, sexier investments. So instead, they put forward ideas that stretch their human and institutional capacity – ideas that frequently take them astray from their mission. (Consider how many cultural groups, for example, suddenly assert that they do ‘creative placemaking.’) One youth-serving cultural organization in a Boston-based convening told us: “Our current strategic plan doesn’t focus on growth. It focuses on getting better at what we do and going deeper into what we do. It’s hard to get funders excited about this message.”

  • Action: Given the power dynamic inherent in the grantor-grantee relationship, it is the role of the funder to penetrate the trust barrier by creating a space for honest dialogue about true business dynamics and needs.

Reason #2: Another obstacle to transparent conversations – and more rational funding flows – is a lack of integrated strategic and financial planning by nonprofits themselves. Grantmakers who have taken a leadership role in making capital grants often tell us that organizations frequently come to them with sizeable requests for support without having developed the rigorous, multi-year financial roadmaps that shows how the market for earned and contributed revenue will ultimately pay for their artistic ambitions. Encouragingly, funders are subsidizing comprehensive planning efforts more and more, giving them greater confidence that their investments will play out as intended. (A word of caution: unless these plans are backed by adequate infusions of capital, they will quickly gather dust -- or worse, lead to unfunded mandates for growth).

  • Action: Cultural organizations should be encouraged to integrate revenue and capitalization goals -- informed by an assessment of resources available from audiences and donors -- into their strategic plans. Then, grantmakers who can should be willing to put sufficient, multi-year infusions of capital into these plans.  

Reason #3: Ongoing confusion about what distinguishes flexible capital from flexible revenue also gets in the way of the effective flow of money to mission.  Both kinds of funding are essential to nonprofit health and program impact, but each has a different purpose. Revenue is money (from earned and contributed sources) to pay for what an organization already does. Capital is saved, spent and replenished as a source of short-term liquidity or longer term funds for adaptation. Unfortunately, many nonprofit supporters give revenue, cloaked in capital expectations. A classic example is the gift of general operating support (revenue) that arrives alongside a list of expected outcomes for organizational change or growth. Or, the innovation grant (again, revenue) that encourages organizational risk-taking but that is overly restrictive about use, late in coming, or sized inappropriately to the opportunity at hand. In such situations, one can easily see where the grantor-grantee dialogue goes awry: Funders believe they are having candid conversations about risk and change, whereas cultural groups perceive they are recipients to just another grant with oversized expectations.  

  • Action:  Funders can be clearer about whether they are a source of ongoing revenue (supporting current programs and business operations) or periodic capital (investing in structural change). They can play one or both of these necessary roles, but one kind of money cannot substitute for the other. Cultural nonprofits need to do a better job articulating what they need and are asking for, within the context of their artistic strategy and organizational goals.

Reason #4: Finally, we hear from cultural organizations and supporters alike that capitalization is simply too expensive -- the purview of national funders who make sizeable investments in large, anchor institutions. In fact, nothing could be farther than the truth. Even the smallest of organizations can be encouraged to save for a rainy day, and capitalizing community-based organizations needn’t break the bank. (For example, seeding a cash reserve at three months of expenses for a nonprofit with a budget of $150,000 costs just $37,500.) Some funders may find it a more cost effective strategy to meet the complete capital goals of a handful of small organizations, rather than to address a fraction of the capitalization needs of a few large groups.

  • Action: Cultural groups should be encouraged to set surplus and savings goals each year as part of the budgeting process. Grantmakers who aren’t able to make capital investments can still support healthy capitalization by paying for planning, collaborating with other funders, or simply employing funding practices that support long-term financial health (for example, by providing full cost project funding or recurring general operating revenue.) 

Overcoming these obstacles will not happen overnight. It will require cultural grantmakers and organizations alike to establish trust, embrace data-driven planning, educate themselves about the different roles money can play in advancing artistic goals, and accept that capitalization is not a fad, but a way of life – for every cultural organization. 

What else gets in the way of candid dialogue about true, full capital needs?  Please send us your feedback.

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If you are interested in learning more about Arts, Culture & Humanities results from NFF’s 2014 State of the Sector Survey, join a free webinar this Thursday, September 25th at 3:00 pm EST. Click here to register.

Thursday, September 25th from 3:00-4:00 pm EST

 

Nonprofit Finance Fund (NFF) is pleased to share with you a special report that features the State of the Arts and Culture Sector. Over 5000 organizations completed NFF's 2014 State of the Sector Survey, and this new report focuses closely on what we found among the 919 arts and culture organizations that responded. At the highest level, results show that, while many organizations have developed new ways to engage audiences, visitors and supporters, those strategies have not necessarily led to greater financial resilience. 

We invite you to join our staff in a free webinar September 25th from 3:00-4:00 pm EDT as we discuss how this report can be used to create a case for support driven by data. Beyond exploring core findings, themes and trends from the data, the webinar will engage participants on the following topics:

  • What are the systemic barriers to success?
  • What are organizations doing to work around those barriers?
  • What can the field do collectively to break these barriers?
  • What targeted changes can arts supporters make to help the sector thrive?

By widely sharing these results and ideas for what nonprofits and funders can do in response, we can bolster important conversations about how to promote systemic change. We look forward to having a dialogue with you during the webinar, and would like to thank the Doris Duke Charitable Foundation for supporting our efforts to build a conversation with the cultural community around the survey's findings. 

NFF'S Fall Webinar Series: The Spectrum of Nonprofit Financing Options

Starting September 30th for six consecutive Tuesdays at 3:00 pm EST

Traditional financing tools, such as loans and lines of credit, are an integral part of doing business for many nonprofits across the country. Our State of the Sector Survey finds that organizations rely on debt to manage cash flow; advance IT capabilities; expand, renovate, and purchase facilities; and invest in programing. Increasingly, however, these traditional financing tools are not enough; while they remain a cornerstone of how many nonprofits operate, the sector is also progressively turning to innovative strategies as it adapts to a shifting landscape. These new opportunities—such as social impact bonds, impact investments, and New Markets Tax Credits—have captured the sector’s imagination. But how do we keep tabs on this ever-increasing gamut of financing options? And, once we understand the possibilities, how do we determine the best course of action for a particular nonprofit?

"Thank you for [the] timely topic. Our organization has been interested in taking this approach to strategic growth and this webinar provided the information to get us started" - Webinar Attendee

As both a nonprofit and a lender, NFF is keenly aware of these challenges, and we’re working to offer our expertise in the sector in the most accessible manner possible: online, hour-long trainings for those seeking to unpack details and definitions around nonprofit financing. We first offered our six-webinar series The Spectrum of Nonprofit Financing Options last fall, when nonprofit and philanthropic professionals across the country joined us for what became an incredible experience of learning and insight.For those who couldn’t join us last year, we’re now offering the series again, with six refreshed sessions that can be taken as a course or selected a la carte:

  • An Introduction to Debt and Financing for Nonprofits
  • The How and Why of PRIs: A Guide to Program- and Mission-Related Investments
"This webinar was fantastic! It opened up all kinds of ideas about how philanthropic equity could change the way that my org works with funders." - Webinar Attendee
  • Philanthropic Equity: Bringing Programs to Scale
  • Understanding New Markets Tax Credits
  • The Emergence of Pay for Success Funding
  • Impact Investing: From Conventional to Cutting Edge

You can find more information and register here. All registrations include on-demand access to the recorded webinar, as well as a downloadable pdf of the presentation itself. Hope to see you there!

We wanted to share with our readers a re-post the following blog, which originally appeared on Mixing It Up, a website by Sarah Murray dedicated to sharing 'thought-provoking views on business, society and the environment.'  

 

The past six months have seen corporate merger and acquisition activity reach its most feverish levels since 2007. Not so in the non-profit sector. Despite funding difficulties and the benefits of sharing knowledge and back-office expenses, the sector continues to grow, with US non-profits now outnumbering lawyers. So what’s holding back the marriages?

The arguments for consolidation are certainly compelling. First, there’s the opportunity to make cost savings, particularly in a sector where tight budgets remain a worry for many.

Some 56 per cent of organisations said they were unable to meet demand last year, according to the 2014 State of the Nonprofit Sector survey, the worst shortfall in the history of the survey, which is conducted by the New York-based Nonprofit Finance Fund.

The figure is even higher in some places. In a recent survey of more than 300 Southern California non-profits, 76 per cent said demand for their services continued to outpace their capacity. In the survey, conducted by the Center for Nonprofit Management almost half said limited funding made it difficult to attract the talent they needed to meet this demand.

Yet when two organisations come together, they can cut costs by sharing everything from IT, human resources and financial systems to donor records.

“It’s not that we have too many services in the non-profit sector but that there’s all this duplicated infrastructure,” says Peter Kramer, manager of national advisory services at the Nonprofit Finance Fund.

With fewer back office expenses, more philanthropic dollars could be spent on programmes helping communities and causes and advancing non-profit missions.

But cost savings are not the only reason for a non-profit merger or acquisition. Consolidation is a way of rapidly spreading know-how and experience. “This is really important,” says Katie Smith Milway, head of the knowledge unit at Bridgespan, a consulting group for non-profits.

She cites a hypothetical example – a large organisation with a 1,000-strong team of social workers helping at-risk youth. If it were to merge with or acquire a smaller non-profit working in early education, the smaller organisation could teach the social workers to identify early signs of trouble among the younger siblings of the teens.

“You can stop the next generation falling into the same pattern,” she says. “So the potential for knowledge transfer through a merger is tremendous.”

As well as increasing non-profit expertise, merging with or acquiring another organisation also helps groups expand geographically, add to their expertise and deepen their client base.

An acquisition strategy can also be an alternative to developing a new programme from scratch in-house. “There’s a lot of potential for some of these larger non-profits to buy versus make,” says Milway.

Yet, despite these benefits, there is no evidence of a rush to merge. In an analysis of legal mergers in several US states, Bridgespan found little rise in activity in recent years. And while in some places the number of mergers increased, it was offset by the rate at which new non-profits were being formed.

That’s because a number of barriers exist to consolidation in the sector. First, while ultimately costs may be saved, the price of consolidation is not trivial. “It’s a tremendous amount of change, needing additional dollars, time and expertise,” says Kramer.

Staff cuts may also be part of the equation, something that is more painful for non-profits than it is for corporations, which can usually afford to provide former employees with outplacement support.

And while two organisations may share a mission, their motives may be very different. “They each might have a different philosophical bent or sometimes religion is involved,” says Gene Tempel, founding dean of the School of Philanthropy at Indiana University. “So these things are not easy.”

Inevitably, joining forces with another organisation involves some loss of control over governance and decision-making. “That’s a difficult thing for any leader to think about, especially where there is emotion and passion tied into the mission,” says Kramer.

But although the internal hurdles are substantial, one of the biggest barriers is lack of support infrastructure. While the profit sector can turn to intermediaries such as banks to carry out due diligence and broker deals, non-profits lack the matchmakers that can help them identify potential partners.

This is starting to change. Donors are increasingly playing the middleman role between non-profits working on similar issues.

And a new fund – itself a joint venture between two organisations, The Lodestar Foundation and SeaChange Capital Partners – has emerged to support joint arrangements.

The Sea Change-Lodestar Fund for Nonprofit Collaboration offers exploratory grants allowing non-profits to evaluate potential collaborations as well as grants covering some of the costs needed to implement a collaborative venture.

As the fund’s name suggests, an acquisition or full merger of two non-profits is not the only option for organisations wanting to expand their reach and increase their efficiencies.

“You can have three or four organisations located in a single building,” says Tempel. “They might have a single accountant, copying centre or payroll processor and thereby operate more efficiently than if they were located separately.”

The challenge for non-profits is how to find the best match for the sharing of resources. Here, too, help is emerging. Nonprofit-share, a US, a start-up is using technology to help organisations connect, share resources, exchange knowledge and experience and form new relationships.

“Right now, we’re working on a new project focusing on matchmaking and building an algorithm that helps connect social entrepreneurs with the right people,” says Susmita De, co-founder and chief operating officer at nonprofit-share.

In fact, short of marriage, there are plenty of collaborative options for non-profits, from sharing spaces or procurement of services and supplies to joint ventures to work on specific programmes.

Milway sees great potential in these kinds of partnerships. “The merger rate should go up and I hope it will,” she says. “But I also think collaborations should go up even more.”

 

Sarah Murray writes about corporate responsibility, the environment and philanthropy. A long-time Financial Times contributor and former FT staff journalist, she also writes research reports and white papers for the Economist Group, as well as for universities, companies and foundations.


This blog was written by NFF staff members Kristine Alvarez, Associate Director, and Brian Kellaway, Senior Associate. 

On Thursday, May 29th, a group of NFF staff spent the afternoon at Children’s Village (CV) with Executive Director Mary Graham, the CV staff, and children served by the center. Our relationship with CV began back in 2006, and has evolved from client to thought-partner in the early childhood education sector.

Children's Village is a non-profit organization that provides early childhood education and educational enrichment to children for families of all economic levels and diverse backgrounds. Not surprisingly, providing quality programming for all children served within CV’s walls is no easy feat. Given the high cost of truly quality programming (high teacher-to-child ratios and ongoing facility investments for regulatory and accreditation purposes), leadership must manage around the insufficiencies of key revenue sources, especially government subsidies for low- income children. 

Despite these challenges, CV’s leadership and staff pursue quality programming for all 430 children (of which 80% are from low-income households). As there is little business or financial reward associated with providing in-depth programs, the decision to provide quality care for low-income children is deeply personal.  Mary and her staff pursue quality programs not only because “it is the right thing to do,” but also because of a fundamental belief in the short- and long-term impact that the program makes on some of Philadelphia’s most vulnerable children, their families, the surrounding community and, ultimately, the regional economy. 

The importance of Mary’s outstanding leadership—in terms of personal conviction, deep sector knowledge, and business, financial, and political savvy—is strikingly obvious:

  • Since government and private funding sources typically do not cover the full cost of care and typically pays for a portion of a “particular child,” Mary plays a continuous “game of Tetris” and is creative in identifying and blending a variety of government, private foundation, and donor funds. 
  • Mary is also creative in the use of facility space, and leverages in-kind services of volunteers and post-secondary students to optimize the ratio of children to caring adults. 
  • Lastly, Mary’s community and political network has been instrumental to working through the inevitable gridlock that can disrupt programming.  In one example, she directly contacted Mayor Nutter to expedite a delayed construction permit for renovations to the kitchen (which serves 260,000 meals per year); Mayor Nutter issued the permit to Mary within an hour of her phone call.

The end result of all of these things is a cohesive program that provides invaluable early care and education services for all children within CV’s walls. One NFF staff member reflected on the overall experience of walking through CV's halls: “Their commitment to quality is clear: from the look and feel of the space/classrooms and talking with teachers, you don’t walk away with the impression that this is a program for a ‘subsidized’ population–this is a program that could just as easily be serving a fully private pay population.”

Children’s Village’s example, however, raises questions about the sustainability of a field that over relies on individual heroes such as Mary. It also raises questions for NFF in terms of:

  1. How do we better serve organizations like Children’s Village in our trusted advisor role and as a financial consultant/coach?
  2. What is NFF’s role in shining a light on exemplary programs and leaders like CV/Mary and advancing the public dialogue about the existing systems in which nonprofits are funded and financed? For example, what is NFF’s role in shedding light on the deficiencies of the current funding system, e.g. low state reimbursement rates and conflicting goals of the agencies (workforce and education) that source child care subsidy payments?

Next Steps for the Field

Getting to the full cost of operations and complete capital is an ongoing challenge during a time when the Commonwealth of Pennsylvania is publicly calling for the expansion of quality Early Childhood Education (ECE) statewide. In the context of this public dialogue, the time is ripe for legislators and electorates to revisit the existing funding infrastructure for quality ECE: what is a fair and reasonable subsidy rate for varying levels of quality programming? How do we weigh the short- and long-term economic/societal costs versus the gains of quality ECE?

One NFF staffer, who previously worked with educational services to transition-age youth, reflected:  “Children's Village understands (both empirically and anecdotally) what it means to design, implement and--most importantly--to maintain a quality ECE program … I can empathize with the frustration that they feel in regards to identifying consistent, logical, and complete funding for what they would envision to be their perfect model … you know what works, however, some compromises are having to be made in the provision of services, the maintenance of facilities/educational resources, and/or the compensation for staff and executives due to the realities of inadequate funding.”

Mary and team are not waiting for the system to change in their favor, and will continue to make it work in service of CV’s children through boot-strapping and fearless optimism that the system will someday incentivize quality care in the larger ECE field. 

NFF is pleased to share this recent post by Kathleen Murphy, featured on the Donors Forum Blog about data from the 2014 State of the Nonprofit Sector Survey on some of the most important trends affecting the Illinois nonprofit sector this year. We are also grateful to Donors Forum for helping promote participation in the survey among Illinois nonprofits. 

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By Kathleen Murphy

Leaders from more than 5,000 nonprofits nationwide (266 in Illinois) participated in this sixth annual survey. Respondents collectively paint a picture of a sector that cannot keep up with high demand for its services, while struggling to find the balance between meeting short-term needs and long-term sustainability. Many Illinois nonprofits reported daunting financial situations, and said they are looking at new ways to secure the future of their organizations for the benefit of the people they serve.

 The economic recovery is leaving behind many nonprofits and communities in need:

  • In Illinois, 76% of respondents reported an increase in demand for services, the 6th straight year of increased demand. 83% of Illinois nonprofits expect that demand will continue to increase through 2014.
  • 52% of Illinois nonprofits were unable to meet demand in 2013 -- the highest reported in the survey’s history.
  • Only 11% expect 2014 to be easier than 2013 for the people they serve.

Illinois nonprofits are owed a backlog of payments by the state

For many nonprofits, the funding landscape is changing. Of respondents who receive government funding, nearly half have seen support decline over the past five years. Not surprisingly (especially to those who attended Donors Forum’s recent State Budget Forum),  38% of Illinois respondents reported state government payments as coming in greater than 90 days late (only 11% of the full set of respondents reported their state government payments coming in this late).

 Survey Analyzer Graph with Illinois Filter

Nonprofits are working to bring in new money. In the next 12 months:

  • 30% of Illinois nonprofits will change the main ways in which they raise and spend money.
  • 29% plan to pursue an earned income venture.
  • 23% will seek funding other than grants and contracts, such as loans or other investments.

Celena Roldan-MorenoAs a local example, the Chicago community service agency Erie Neighborhood House, which has a budget of roughly $7.5 million, had $1.5 million worth of unpaid state bills as of last month. The service agency is 70 percent government funded, with over 50 percent of its funding coming from the state. At Donors Forum’s recent State Budget Forum, Executive Director Celena Roldan-Moreno (pictured) suggested that going forward, her organization will be looking to switch its funding approach by placing more of a focus on pulling in additional federal dollars. Federal funding is often available for various service providers, Roldan-Moreno said, but it tends to be hard to get because the application process is so "daunting." 

39% of IL nonprofits cited “achieving long-term financial stability” as a top challenge, yet:

  • More than half of Illinois nonprofits (54%) have 3 months or less cash-on-hand.
  • 28% ended their 2013 fiscal year with a deficit.
  • Only 8% of Illinois nonprofits feel they can have an open dialogue with their funders about developing reserves for operating needs, and only 3% about developing reserves for long-term facility needs. On par with the national survey results, only 30% of IL nonprofits feel comfortable having an open dialogue with their funders about general operating expenses.

Survey Analyzer Graph with Illinois Filter

 Nonprofits are taking wide-ranging steps to survive and succeed. In the past 12 months:

  • 46% of Illinois nonprofits collaborated with another organization to improve or increase services.
  • 49% invested money or time in professional development.
  • 41% upgraded hardware or software to improve organizational efficiency.
  • 36% of Illinois respondents conducted long-term strategic or financial planning and 50% plan to do so in the next 12 months.

For the first time, the annual survey delved into impact measurement, a core component of some emerging funding models such as pay-for-success:

  • Illinois respondents said that more than 75% of their funders requested impact or program metrics.
  • 77% agreed that the metrics funders ask for are helpful in assessing impact.
  • Not one Illinois nonprofit reported that their funders “always cover the costs of impact measurement;” in fact, 70% said costs were rarely or never covered.
  • Illinois nonprofits reported top barriers to impact measurement as not having enough staff or time or the right staff expertise (66%) and not having the resources to hire outside consultants to help collect data (27%).

Explore the data for yourself!

Full survey results, along with an interactive survey analyzer and a look at trends over the past six years, are available on the Nonprofit Finance Fund website.

New this year, the Survey Analyzer features querying that make the data more usable for local areas. It includes more options to filter the data by sub-sectors, budget size, geography and other dimensions, as well as the ability to compare any filters you select against the national results. You can download any of the individual charts by clicking the ‘download’ button in the upper right hand corner of any chart -- making it easy to drop graphs into PowerPoint presentations, reports, and more.

Explore the data -- we invite you to share what you discover in the comments below and on social media. If you'd like to find out what additional slices of the survey data are available, please email Nonprofit Finance Fund at research@nffusa.org. 

NFF welcomes guest blogger Beth Bowsky, who serves as a Policy Specialist for Government-Nonprofit Contracting at the National Council of Nonprofits

 

Faced with overwhelming data from NFF and others that government-nonprofit contracting systems are creating costly and unnecessary challenges throughout the country, a number of state associations of nonprofits, in partnership with their respective governments, are working to fix these problems. These efforts seek to eliminate waste and streamline processes while still maintaining, and even increasing, accountability. The results, while still evolving, are an impressive array of common-sense solutions that can be replicated at the local, state, and federal levels.

Streamlining Processes to Improve Efficiency

Already, we are seeing a variety of strategies being implemented, all developed through joint efforts between nonprofits and government, and all designed to eliminate the problems that the data demonstrate exist. These fixes are not difficult and many are inexpensive. They include:

  • standardized contracts: to reduce the need for reinventing the same wheel over and over again
  • the creation of document vaults:  that allow nonprofits to submit common supporting documents once, rather than re-file the same things repeatedly, and allow taxpayers to pay for storage in one spot rather than dozens of places
  • consolidation of monitoring and audits: one audit to look at everything instead of five audits to look at the same documents, again)
  • centralized contracting and grant offices: which promotes consistency

While most of the action is in the states, there is also progress at the federal level to remedy these issues. In late December 2013, the federal Office of Management and Budget (OMB) released new Uniform Guidance for federal grants. The Uniform Guidance is designed to streamline grant processes and practices—and help organizations better cover their costs.

Getting Closer to Helping Nonprofits Cover the Cost of Doing Business

Year after year, NFF’s data have shown how far short government and others fall from truly covering the full costs of the programs they support. Unfortunately, government is the furthest behind the curve, with 40% or more of respondents saying that government funding never covers full costs.

funders cover full costs 2014 survey

The Uniform Guidance released in December 2013 mandated–for the first time ever–that federal agencies (and non-federal entities using federal money to pay for services) negotiate indirect cost rates based on the nonprofit’s real costs or, at the nonprofit’s election, reimburse nonprofits a minimum of 10 percent of their modified total direct costs. In essence, the new Uniform Guidance recognizes the legitimacy and importance of indirect costs for organizations to be effective, as well as the government's responsibility to cover the costs of services it purchases.

As I stated in my previous blog posting , the data validate the depth of the contracting problems and give momentum to efforts to reform government contracting and grant systems.  The data are informing the decision-making process by helping to ensure that the identified solutions are developed based on actual, rather than perceived, problems. 

Yet data defining the problems and solutions addressing them are not enough. The key, and often lacking, ingredients are nonprofit awareness and engagement. Nonprofits that perform services on behalf of governments through contracts and grants frequently accept the status quo, thinking that the problems are of their own making or have concerns about rocking the boat. As shown, gathering collective data demonstrate that these problems are not isolated instances, and actions by state associations of nonprofits and others are showing that solutions are at hand. Yet we can only create positive change when nonprofits work together with their government partners to turn data and ideas into actions. Stay informed about the progress of these efforts or get involved and strengthen the case for reform by sharing your nonprofit’s stories with your state association of nonprofits.

Beth Bowsky is Policy Specialist - Government-Nonprofit Contracting for the National Council of Nonprofits, a trusted resource and advocate for America’s nonprofits.

NFF welcomes guest blogger Beth Bowsky, who serves as a Policy Specialist for Government-Nonprofit Contracting at the National Council of Nonprofits

 

BRINGING DATA TO THE GOVERNMENT-NONPROFIT CONTRACTING DEBATE

By Beth Bowsky

Despite what we’d like to think, things aren’t getting much better for the nonprofit sector. That’s what the findings from the recently-released 2014 Nonprofit Finance Fund (NFF) State of the Sector Survey revealed.

For decades, issues related to outdated, redundant, and cumbersome government-nonprofit contracting and grant processes, and their effect on nonprofit organizations, have been anecdotal. Those with government contracts and grants know the reality all too well—contracting and grant practices are fraught with unnecessary costs for both governments and nonprofits, diverting resources from mission. Duplicative application and reporting requirements, such as multiple audits of the same records, continue to strain the nonprofit infrastructure. These redundant processes create added costs for nonprofits to respond, and costs to taxpayers for duplicative reviews.

For too long, the extent of the problems and their impact remained undocumented and uncertain, with the stories from nonprofit leaders often believed to be exaggerated or merely anecdotal. It’s only in the past few years that we have actual data to prove the problems. The annual State of the Sector surveys conducted by NFF and data from the Urban Institute’s research measure and document the negative impact that broken government-nonprofit contracting systems have on the nonprofit sector. These are no longer just anecdotes, but undeniable trends that demand attention.

A Closer Look at the NFF Survey

Consistent with experiences of those working day in and day out in their communities, the 2014 NFF Survey reveals that demand for services continues to increase, while the ability of nonprofits to meet growing needs continues to decline. Fifty-six percent of nonprofits responding to the survey say they are not able to meet the growing demand for services, the highest level ever reported in this survey. Even more startling is that 87 percent of lifeline organizations — those nonprofits helping the most vulnerable in our communities with their most basic needs — report the need for services is still growing. What’s more, they expect the demand, as well as their financial challenges, to be even more difficult to meet in 2014.

Many of the problems nonprofits are experiencing relate to government-nonprofit contracting and grant practices. While demand for services is increasing, almost half of those surveyed said that federal and state government funds they receive for providing services have declined over the past five years. Three out of four reported that government funds have remained the same or declined.

Twenty-four percent say reimbursements for indirect costs have declined during these same five years. Almost two-thirds rarely or never receive enough to cover their actual costs. Further adding to the difficulties, more than half of nonprofits surveyed said that payments from all levels of government are late. Practices that force nonprofits to continually operate in this “survival mode” compromise their ability to be effective and efficient in serving their communities.

The data from NFF and the Urban Institute measure and document the effects of government-nonprofit contracting systems that have become increasingly dysfunctional over the years, resulting in processes that now contain unnecessary and burdensome requirements that add to costs for both nonprofits and governments.

Although there is still a great deal of work to do, this substantive data is providing the impetus for several states to begin reforming their contracting and grant systems. In the next blog, I’ll discuss solutions and progress that states have made to work toward better processes for government, nonprofits, and communities. Stay informed about the progress of these efforts or get involved and strength the case for reform by sharing your nonprofit’s stories with your state association of nonprofits.

Beth Bowsky is Policy Specialist - Government-Nonprofit Contracting for the National Council of Nonprofits, a trusted resource and advocate for America’s nonprofits

2014 STATE OF THE SECTOR SURVEY

By NFF’s Knowledge and Impact Team: Jennifer Talansky, Anjali Deshmukh, and Tessa Borelli

 

 On the day we opened this survey, a water main burst beneath an intersection near our New York office, snarling traffic, shutting down public transit, flooding the adjacent streets, drying up taps in thousands of homes, and creating widespread frustration.[i] A critical piece of our city’s infrastructure had failed, creating a domino effect felt by those even miles away. Later that day, we learned of another threat to our city’s infrastructure: a Human Services organization that responded to our survey, with hundreds of employees and exclusively serving a low income community, reported just one month of cash in the bank. To make ends meet, they were in a precarious balancing act of managing loans and delaying paying their bills. On top of that, community need for their services had increased significantly, and they weren’t able to keep up with it.

 Today we release the results of our 2014 State of the Sector Survey, chronicling the shared opportunities, challenges and financial realities from over 5,000 respondents in all 50 states. Findings from our sixth annual survey present several clear messages:

 The economic recovery is leaving behind many nonprofits and communities in need:

  • 80% of respondents reported an increase in demand for services, the 6th straight year of increased demand. 
  • 56% were unable to meet demand in 2013—the highest reported in the survey’s history.
  • Only 11% expect 2014 to be easier than 2013 for the people they serve.

 Nonprofits are working to bring in new money; in the next 12 months:

  • 31% will change the main ways in which they raise and spend money.
  • 26% will pursue an earned income venture.
  • 20% will seek funding other than grants & contracts, such as loans or other investments.

 41% of nonprofits named “achieving long-term financial stability” as a top challenge, yet:

  • More than half of nonprofits (55%) have 3 months or less cash-on-hand.
  • 28% ended their 2013 fiscal year with a deficit.
  • Only 9% can have an open dialogue with funders about developing reserves for operating needs, and only 6% about developing reserves for long-term facility needs.
Nonprofits are taking wide-ranging steps to survive and succeed.

 In the past 12 months:

  • 49% collaborated with another organization to improve or increase services.
  • 48% invested money or time in professional development.
  • 40% upgraded hardware or software to improve organizational efficiency.
  • 39% conducted long-term strategic or financial planning.

 Respondents said that more than 70% of their funders requested impact or program metrics.

  • 77% agreed that the metrics funders ask for are helpful in assessing impact.
  • Only 1% reported that funders always cover the costs of impact measurement; 71% said costs were rarely or never covered.

 “We provide Community Based Adult Services primarily to low income adults in a very poor area. The population is aging, concurrent with service cuts in related fields in our area, particularly in mental health programs. We are getting close to being the "last man standing" for a number of our participants. We see increasing needs, with more difficulty in getting people approved for services. Our funding contracts are primarily fee-for-service contracts through Medi-Cal and the VA.”

   -Healthcare NPO, CA

 Nonprofits like this one make up our country’s hidden infrastructure, the social safety fabric that is as crucial as our water mains, transit systems, and roads. This fabric is “built capacity”—often representing years or even decades of investment by taxpayers, foundations, and consumers. It educates us, keeps us healthy, and catches us when we are most at risk.  And it has been pulled taut over the years in deference to other priorities, frayed, and is on the verge of tearing.

 NFF’s survey calls out some of the targeted investments we can start to agree on as a society—whether we represent government, philanthropists, individual donors, investors, banks or intermediaries—that can salvage the already considerable investment we have collectively made in our social infrastructure.  It is infrastructure we cannot simply walk away from, and we believe that a coordinated intervention now will not only better prepare us for inevitable future economic crises; it can lead to a happier, healthier community for us all.

 Visit our online Survey Analyzer at survey.nff.org to explore the results yourself, and visit nff.org/survey for additional resources, including an in-depth look at the national results and a promotion toolkit to help share these results with others who are advocating for change. 

 


[i] http://www.nydailynews.com/new-york/overnight-water-main-break-union-squ...

This post originally appeared on Bridgespan’s Knowledge Hopper on March 27, 2014. It is part of Mergers that Made a Difference, a blog and case study series curated by Bridgespan, The Catalyst Fund, La Piana Consulting, and Lodestar Foundation. This is the second Catalyst Fund contribution to the Mergers that Made a Difference series, and comes from Rebecca Haag who has been CEO of AIDS Action Committee for 11 years. She will be stepping down from her position this spring as a part of the process of integrating with AIDS Action Committee’s new partner, Fenway Health. Please enjoy Rebecca’s firsthand account of the vision for and lessons from their recent merger.

How to Check Your Ego and Three Other Keys to a Successful Nonprofit Merger

By Rebecca Haag, AIDS Action Committee

In 1985, legendary music producer Quincy Jones pulled off a triumph that no one thought possible: he convinced the mega music stars of the day to give their time and talent gratis to record the song “We Are the World.” Sales of the single eventually raised millions of dollars to fight famine in Ethiopia. When asked how he successfully corralled dozens of superstars ranging from Michael Jackson and Bruce Springsteen to Bob Dylan and Diana Ross, Jones said he taped a sign to the door of the recording studio that read: "Check your ego at the door."

Checking egos at the door was the key to our successful merger with Fenway Health in 2013. And it was the key to our mergers with The Strongest Link in 2011 and with Cambridge Cares About AIDS in 2010.

There is just no place for egos in nonprofit mergers. Instead of thinking "How does this merger affect me?" board members and senior staff must evaluate every merger-related decision by asking, "How does this enhance our organization’s ability to meet its mission?" At AIDS Action Committee, we developed a set of criteria that required us to document how a merger would improve client quality of care, ensure organizational sustainability, and allow us to continue to tackle the root causes of HIV/AIDS. It was paramount that our mission was preserved; organizational integrity or the future role of board members or senior staff was secondary.

But there are other important factors to achieving a successful merger. The process must be based in a strong strategic vision and plan. In our case, it started with the board and senior management recognizing that despite success in reducing new infections in Massachusetts by 52 percent over the last 15 years, which will save the state more than $2.4 billion in HIV-related health care costs—public attention to the issue and public and private funding were waning.

In Massachusetts over the same 15 years, funding for HIV/AIDS-related services was cut by nearly 40 percent, and the number of people living with HIV/AIDS increased 44 percent. This confluence of events put a greater burden on already strained providers and services. In 2012, after conducting a detailed strategic planning process, we realized that AIDS Action needed to partner with an organization that could either horizontally or vertically broaden the delivery of HIV-related community support services.

The strategic plan included goals and objectives for any potential alliance and a set of criteria by which to evaluate alternatives. We reached out to many organizations and engaged in conversations with several. Fenway Health best met our needs: it already served those living with HIV/AIDS; it had extensive knowledge of the health system and its reimbursement structure; and it had research capacity to demonstrate the value of our services to improving health outcomes and reducing health care costs. Leaders at AIDS Action and Fenway Health were interested in creating a model of care that integrated medical and community support services applicable to all chronic and behavioral diseases. AIDS Action would preserve its mission and create a health care platform that could enable ongoing funding streams, even as public funding of individual diseases like HIV/AIDS disappears.

Another key factor for a successful merger: Leadership roles must be resolved early in the process. If the CEOs of the two organizations are competing for one top position, the process ultimately will break down. Difficult conversations, such as what the roles, responsibilities, and reporting arrangements will be of the two existing executives after the merger, must be had early on in the discussion as critical issues are identified. The natural temptation will be to delay these discussions and decisions. But if leadership issues are left unresolved, they can derail final discussions. If necessary, hire an outside consultant to ensure that these discussions—and other difficult strategic decisions—are made in a timely fashion.

Finally: Make organizational culture a part of your due diligence process. In many ways, this is the great intangible of merging two organizations. But you must consider whether there is real potential for the two workplaces to eventually mesh together. Ideally, the process of business, operational, and programmatic exploration will give each organization a feel for whether the two workplace cultures are compatible. In most cases, you will not get a definitive answer to this question.

Merging a nonprofit is very much like deciding you have dated long enough and it is time to get married. You can never know everything about your fiancé or about another organization with which you are negotiating, but at some point you decide to trust your instincts. In the end, no one can tell you whether a merger is the right thing to do. It is a difficult and complex process. Do you have a shared vision for what life could be like together? Can you stay true to yourself and your mission but also be a part of a team? Can you have difficult conversations? Do your personalities and styles complement each other? At some point, you must ask whether mutual needs can be met. And if the answer is yes, you make that leap of faith and move forward.

Rebecca Haag has been CEO of AIDS Action Committee of Massachusetts for 11 years and will be stepping down this spring. Before coming to AIDS Action, she served on senior management teams in a variety of corporate and government settings including advertising, financial services, and consulting sectors.