Social Currency

Contributed by Beth Bowsky, Policy Specialist - Government-Nonprofit Contracting, at the National Council of Nonprofits.

NFF’s website is likely seeing an uptick in hits since the release of the 2015 State of the Sector Survey—and half of them are probably mine, returning to pull out some additional valuable nugget of information. The data collected each year through this survey are vital for nonprofit advocacy, and that advocacy is essential for nonprofits to be able to achieve their missions.

One of those priceless pieces of information is that, more than half of the time, governments at all levels reimburse nonprofits 9 percent or less for their indirect costs. Even worse, roughly one-third of nonprofits receive 3 percent or less. Nonprofits are well aware of the fact that they frequently do not receive reimbursement for their full costs of providing services, but they often do not relate this to insufficient reimbursement for indirect costs—those expenses necessary for the efficient and effective operation of their organization. Although indirect costs may not be the only costs for which a nonprofit receives inadequate reimbursement, they generally are a substantial portion of the shortfall between actual costs and what governments pay. 

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NFF's Community Resilience Fund was launched to provide New York City service providers with advice and money to help them survive and thrive in a constantly changing environment. As part of the our series of blogs about the Community Resilience Fund, in this post we share Part 1 of the story the New York City Anti-Violence Project (“AVP”) as it uses a Change Capital grant secure through the initiative to revamp its business for the benefit of its clients.  We consider: What challenges did AVP face? What was AVP's plan for change?  How did the Change Capital Grant help position its business model toward greater sustainability? Our hope is that this post and others in the series provide a look at how change capital and strategic investments of expertise and resources can begin to repair a fraying social safety net and inspire positive organizational and social change.

The New York City Anti-Violence Project (“AVP”) is an advocacy and social service organization with a mission “to empower lesbian, gay, bisexual, transgender, queer and HIV-affected communities and allies to end all forms of violence through organizing and education, and to support survivors through counseling and advocacy.”  In 2013, AVP was selected as one of 17 organizations participating in the Community Resilience Fund (CRF), a $3.5 million initiative designed to strengthen nonprofits’ ability to respond to an environment of constant change.  Under CRF, AVP received approximately 9 months of customized advisory services from NFF and a Change Capital grant of $250,000.

AVP faced a number of financial challenges, including a lack of clarity around the true cost of running its programs, which resulted in operational deficits. AVP also had very limited access to flexible funds or financial resources. This lack of clarity about program economics, coupled with a lack of access to flexible resources, made it difficult for AVP reliably cover its operating costs, manage cash flow or make the upfront investments (including strategic hires) that are needed to pursue new strategies. 

In response to this risky operating reality, AVP’s Executive Director, Sharon Stapel, and CFO, Carla Smith, focused on securing new grants and contracts.  Unfortunately, as is often the case in our sector, many of these program-related funding opportunities also required AVP to take on new expenses. As a result, while new money was coming in the door and the organization was growing its programmatic reach, the strategy of securing more grants didn’t help AVP mitigate the deficits it was generating.

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ECE Report Cover PageHigh-quality early care and education (ECE) programs have been proven to create positive outcomes for children—especially among those living in poverty. Yet many children from low-income families have a hard time accessing quality child care, and miss the critical developmental growth and foundation needed for academic and life success. Nonprofit Finance Fund (NFF) is pleased to share our new report, Overcoming Barriers to Expanding High-Quality Early Care & Education in Southeastern Pennsylvania, funded by the William Penn Foundation. Based on NFF’s research and analysis of 147 nonprofit child care centers in Southeastern Pennsylvania, the report demystifies the financial, business and systemic barriers to expanding high-quality care—and begins to identify how to increase access for more children. 

Our research revealed:

  • Providers often face financial disincentives to operate programs that meet high-quality standards, given the true costs to deliver quality care and the limitations of revenue opportunities.
  • Existing revenue sources rarely allow high-quality programs, particularly those serving low-income children, to address the relatively high fixed costs of care.
  • Government reimbursements do not cover the full costs of care for low-income children—leaving a structural operating gap for each child served (this gap increases with each additional child served). 
  • Efforts to scale and grow high-quality programs will need to address the additional, permanent funding requirements for growing programs in order to maintain operational sustainability.

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NFF formally released the 2015 State of the Sector Survey results in April. This post, part two of a series of survey-related blog posts, will explore this year’s data beyond the national results. We’ll also be collaborating with peer organizations to share how our survey data continues to elevate, inform, and corroborate parallel work in the field. Read our first post here.

This year, NFF heard from 5,451 organizations from around the country and from a variety of sub-sectors. Every year we publish our findings in aggregate, but we always like to peek under the hood for stories that might be lost at the national level. Below, we’ve taken a closer look at trends in the organizational demographics, and the operational and financial health according to the budget size of various organizations. We found that organizations simultaneously face comparable and unique challenges depending on their size (as measured by annual operating expense). For the purposes of this analysis, nonprofits (NPOs) were grouped into distinct budget bands to better understand their operating realities.

Organizational Profile
The survey asked organizations to select their total annual operating expense for fiscal year (FY) 2014.  We aggregated the following budget bands to simplify our analysis: $0-50k and $50-100k, $1-2m and $2-5m, as well as $10-20m and greater than $20m.


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By Hez G. Norton, Third Sector New England

This past fall, Third Sector New England conducted a study of leadership in New England. We surveyed 877 leaders – primarily executive directors – and 330 board members of nonprofit organizations to advance our collective understanding of nonprofit leadership in New England – who these leaders are and the challenges they face. The Nonprofit Finance Fund (NFF) conducts a similar national survey with a broader range of questions that assess the state of the sector as a whole, and examine a mix of programmatic, operational, and financial indicators. While the surveys are distinct and conducted separately, their respective core findings support and buttress each other in profound ways.

In the past several years, literature about the nonprofit sector has been filled with predictions of key trends that would decrease the sector’s effectiveness. For example, as the recession kicked in, observers inside and outside the sector posited that it would lead to a wave of closures and mergers of nonprofits. But guess what? The number of nonprofits has shot up since 2008. As of late 2014 there were 73,410 reporting nonprofits in New England, up from 44,688 in 2008[1].  People who see a need and have the wherewithal to start new nonprofits are still doing it; and some of these new nonprofits are exhibiting high levels of growth, innovation and impact.

The ongoing, against-the-odds resiliency of nonprofits in New England and across the country is remarkable to see. But as Leadership New England shows, and NFF’s survey confirms, it is a very fragile resiliency. The sector’s success and impact continue to rely on unsustainable trends, including: overworked and underpaid leaders and staff, a never-ending fight to balance shaky budgets with fickle funding streams, and little money for professional development and growth. These are not new challenges for the sector, yet they continue to be chronic issues. NFF’s State of the Sector Survey echoes these findings and continues to be a national bellwether, both nationally and locally, capturing the unique challenges the sector faces. 

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Nonprofit Finance Fund asked this question of 17 human services organizations who applied to take part in our NYC Community Resilience Fund (CRF), a $3.5 million initiative to help them find answers to this question.  In the coming months, NFF will publish a series of online articles to share stories, insights and lessons from the initiative and to discuss the issues and questions that we heard across the sector:

  • Is our business model viable? How can we go about improving our business model?
  • What can we do to invest in our long-term stability?
  • Are there any innovative strategies for generating earned income?
  • How do we know whether or not we should take on a grant or contract?
  • What’s the true cost of our services?
  • What would it look like if we were appropriately capitalized?

When NFF launched CRF In 2013, the Affordable Care Act, Superstorm Sandy, and a new City administration—not to mention the lingering effects of the recession—were sending shockwaves of change across the nonprofit community in New York City.  Organizations struggled to keep up with ever-increasing demand from their clients, while navigating the financial challenges—and potential opportunities—generated by these shockwaves.  Through our work with dozens of frontline organizations across the city, NFF saw that organizations were struggling to survive, let alone thrive, in these circumstances.

While the work we did directly with these organizations was important, equally important is sharing what we’ve learned with the broader community.  The experiences of these organizations are likely to resonate with many others who provide basic needs to vulnerable communities. Through the upcoming blog series, organizations facing similar questions may find insight into how they might better navigate through their own shockwaves.

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Hillary PenningtonHilary Pennington is Vice President of the Ford Foundation's Education, Creativity and Free Expression program. She is an expert on postsecondary education and intergenerational change. In this latest installment in our series of conversations with foundation leaders, Hilary and NFF CEO Antony Bugg-Levine discuss how to improve funder/nonprofit dynamics.

 

Antony Bugg-Levine: Our latest State of the Sector Survey results continue to show nonprofits reporting discomfort discussing core aspects of their financial state honestly with their funders. Yet we’re also seeing some foundations partner with nonprofits in new ways to overcome common constraints. What worries you, and what excites you, about the ways foundations support nonprofits?

Hilary Pennington: I've been thinking about the perennial way in which foundations starve nonprofits through "project-itis" -- consistently funding them to do particular kinds of projects without paying attention to the organization as a whole, and what it takes for it to be a sustainable and durable organization. It does seem as if there is a beginning of a healthy pushback on this issue, that people are more willing to say that unrestricted does not mean unaccountable, and there are ways to work together.

Many of Ford's particular kinds of grantees, including advocacy organizations and social justice organizations, are always going to be disproportionately dependent on foundations. So the challenge for us is: how do we keep that relationship alive, not on autopilot, both for us and the grantees?

Core support can be critical for building organizations, but it can also create a kind of dependence, and in some cases, an expectation of continued support at the same levels.  It may be more useful for a funder and nonprofit to admit to each other, at the beginning, that it will likely not be a "forever" arrangement. As such, a funder has an obligation to help the grantee grow their resources. You have an obligation to advocate for them, introduce them to other funders, and to be an opportunity-spotter for areas of growth and development.

How do you ensure that a grant that is unrestricted is not unaccountable? In my earlier conversation with Ben Cameron of the Doris Duke Foundation, he spoke eloquently about how to achieve that balance in arts organizations. With the social justice organizations you work with, what have you learned in terms of what works and what doesn't work to enable the funder/nonprofit relationship to be one that is empowering and trustful but one that also includes mutual accountability?

Ideally, you establish a relationship of trust so that a grantee can safely say, "we gave you this plan, and we thought were going to be on track for reaching it, but because of these reasons, it is not turning out the way we expected." Sometimes, it is about seizing opportunities. For example, there are nonprofits that are part of the social justice movement that may find there is a moment that happens -- in this case, events in Ferguson and elsewhere -- where the work they do is poised for a breakthrough. So you also want an organization, particularly one where funding is very project-based, to feel safe saying, "we may want to consider a different growth trajectory. If we had an infusion of capital, here is what we would do, and how we would use it to take advantage of this unexpected moment of potential."

One of the only ways you get these kinds of relationships is to invest time. Ideally, you the funder need to be physically in the space of the grantees' organization, not always in your own offices. You have to ask the questions and create a feeling of safety that someone could answer them. You need to ask the leader, "what do you need?" "what is going on?" "what aren't you getting?" and things like that.

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NFF's 2015 State of the Nonprofit Sector Survey results are out! Full survey results are available at nff.org/survey! Filter the data yourself with our Survey Analyzer.

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"Although we manage to keep our financial heads above water – [our greatest challenge] is the uncertainty and constancy of operating on such a knife edge." - Arts, Culture, and Humanities organization, WA

In 2014, the social sector generated stories of both promising innovation and overwhelming challenges. In fundraising, the ALS Ice Bucket Challenge, which raised over $100 million from 3 million donors, reminded us of the power of individual giving and the underutilized potential of social media. In the same year, New York City’s largest human services agency reached the brink of bankruptcy after providing essential services for 80 years.  Over 100,000 clients are suddenly facing a disruption in services, coming to the end of what was for many a decades-long relationship with the agency.

NFF’s 2015 State of the Nonprofit Sector Survey focuses on the underlying causes of these dynamics by exploring the programmatic, financial, and operational issues facing nonprofits across the U.S. We launched the Survey in 2008, when economic crisis threatened the viability of many organizations. Seven years later, results from 5,451 respondents show some indications of recovery, stabilization, and growth. Nonprofits are adding jobs, engaging in strategic conversations such as leadership succession planning, and looking to retain their workforce. Yet as they raise their sights from the focus on short-term crisis, many are confronting the troubling reality that current practices cannot sustain organizations in the long-term or meet the needs of the communities they serve now. Many organizations have stumbled out of crisis looking to make the necessary investments to secure their long-term future. And it is a hard road ahead.

Below we’ve highlighted this year’s key findings. Stay tuned for additional research and analysis in the upcoming months!

Key Findings

"Currently there are over 1,000 households on our waitlist for 90 units of affordable housing." 
- Community Development organization, MA

Under-resourced communities are going without because nonprofits can't meet demand. Americans - particularly those in low-income communities - are still struggling to secure jobs, affordable housing, and healthcare.   

  • 76% of nonprofits reported an increase in demand for services - the 7th year that a majority have reported increases.
  • 52% couldn't meet demand, the third year in a row that more than half of nonprofits couldn't meet demand.
  • Of those who reported that they could not meet demand, 71% said that client needs go unmet when they can't provide services. 

"If we have a program that needs $40K to operate, we ask for $40K and the funder gives us $5K, the funder still expects the same type of programming as the $40K budget but for their $5K investment." - Youth Development organization, MA 

Recovery of the U.S. economy hasn't addressed the systemic and perpetual funding challenges facing nonprofits. While we are seeing some positive economic indicators, in many cases nonprofits are still hampered by insufficient funding and a lack of investment in long-term sustainability. 

  • For some nonprofits, financial health indicators have improved: 47% ended 2014 with a surplus, the highest in the history of our survey. 
  • However, 53% are reporting 3 months or less cash-on-hand  
  • Nonprofits said that top challenges were:
    • Achieving long-term sustainability (32%)
    • The ability to offer competitive pay and/or retain staff (25%)
    • Raising funding that covers full costs (19%) 

Nonprofits are navigating a time of immense need and change, while pursuing ways to build long-term sustainability and viability. Nonprofits continue to prove their ability to survive and thrive in tough conditions. They are working to ensure their ability to meet community needs now and in the years to come. Here are some of the ways they are investing in their futures:

  • 51% collaborated with another organization to improve or increase services offered.  
  • 44% hired staff for new positions.  
  • 33% upgraded hardware or software to improve service or program delivery. 
  • 29% conducted long-term strategic or financial planning.

This blog was originally posted on payforsuccess.org and can be found here.

White House Pay for Success Regional Summits: Fostering Dialogue and Building Momentum to Create Better Outcomes for Communities Across the U.S.

Nonprofit Finance Fund recently partnered with the White House Office of Social Innovation and the Laura and John Arnold Foundation to host a series of regional summits focused on Pay for Success (PFS) financing. PFS is an innovative funding model that helps improve the lives of those in need by driving government resources toward better, more effective programs. Under PFS, government officials identify high-quality programs and strong service providers, and tap mission driven investors to cover the upfront costs of those programs. The government then works with an independent evaluator to establish specific program goals. If those predetermined goals are achieved, the government repays those who made the original investment.

Seven PFS projects have been launched to date in the United States, and more than 30 are in the exploration phase. These initiatives are designed to address some of the country’s most pressing social issues, including homelessness, unemployment, child welfare, early education, recidivism, and public health. 

The regional PFS Summits were conducted to share information about current projects in an effort to advance the model thoughtfully. More than 400 representatives from federal, state, and local governments, nonprofit service providers, academia, philanthropic foundations, and impact investors attended the summits held in three cities that are at the forefront of PFS: Bridgeport, Connecticut; Chicago, Illinois; and Salt Lake City, Utah.

Several key themes emerged from this series of summits, and we have listed the top 10 takeaways from our discussions about opportunities, challenges, and next steps in PFS development.

  1. Federal support catalyzes the development of the PFS field, but state and local activity is where the on-the-ground change occurs in communities across the U.S.
  2. Definitions of “success” fall across a spectrum. For some governments, capturing cost-savings is required for PFS projects, but others are willing to pay based on the value of improving efficiencies and capturing long-term societal benefit. 
  3. Data is critical. Uneven availability of evidence and performance data on social services and a lack of access and ability to analyze administrative data are barriers, but partnering with evaluators and academia to learn about “what works” can push the field forward.
  4. PFS can help scale existing and rigorously evaluated programs, but is also a vehicle to build the evidence base for promising, innovative approaches. 
  5. With deep ties to neighborhoods and communities in need, service providers are the lynchpin to delivering on outcomes, and they must be at the table. Bolstering the financial, operational, performance management and leadership capacities of nonprofits is critical for adaptation in an outcomes-driven environment, PFS and beyond. 
  6. Philanthropy can play a number of roles to support the nascent field: from convener to field builder to advocate to capacity builder to investor.
  7. Project templates and document transparency can drive transaction costs down and shorten lengthy timelines for future projects.
  8. Elected government leaders can champion PFS efforts, but ongoing support and education for agency and career staff is required to affect long-term systems change beyond election cycles.
  9. Implementation matters: recognizing that no U.S. project has shown results thus far, it is critical to obtain real-time feedback from existing projects in an effort to improve future iterations of PFS activity.
  10. PFS is one piece of a broader systems change effort across government and providers to use data-driven, evidence based approaches for our communities’ most challenging social issues.

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Nonprofit organizations (501 (c) 3s) experience a unique set of financial problems that stem from both how the sector operates outside the traditional rules of supply and demand and the way our culture views philanthropy. Often, nonprofits enter the market when for-profit and governmental sectors can’t, won’t or shouldn’t, generally due to a gap or failure in the market economy. Their customers are often unable to pay for the services that they provide, and demand for services often goes UP as ability to pay goes down.

This systemic flaw is why nonprofits use two tools to subsidize their operations: tax exemption and access to tax-advantaged charitable contributions. Unfortunately, this system has its drawbacks, and many of them stem from an antiquated ideology our society has about what it means to be ‘nonprofit.’ For example, ‘surpluses’ (AKA ‘profits’) are often looked at critically and seen as antithetical to the authentic mission-driven organization. Expenditures on ‘overhead’ are also called into question, perceived as a sign that an organization is not spending their money on their mission. This ideology has serious consequences for nonprofit health—and their ability to fulfill their mission. Without surpluses, nonprofits struggle to achieve long-term stability and are frequently operating from month-to-month, without the breathing room to plan for the future of their organizations and the long-term impact of the work they do. Programmatic growth also often increases the need for fundraising and decreases “self-sufficiency.”

Nonprofit leaders live with these management realities every day. To cope with the organizational implications, however, takes a unique set of financial disciplines that often get overlooked when mission is the primary focus. Below, we share a few foundational finance tips as a refresher to help new or emerging leaders remember to keep business and finance as an integral part of decision-making.

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