Social Currency

This month, NFF released its fifth annual State of the Nonprofit Sector Survey. Of the nearly 6000 respondents, more than 900 hailed from the arts and culture sector, representing 47 states.

The data provide a wealth of information about how arts and culture organizations are managing through an unprecedented time of economic and artistic flux. Current trends point to lasting changes in the way the sector operates and is funded. The arts specific survey results are available in their entirety here. I also encourage you to check out our online Survey Analyzer, where you can further filter the data by state, sector, operating expense and other dimensions.

These are the headlines.

Arts & culture organizations continue to operate with thin margins and low liquidity: 

“As the economy declined, we chose to sustain programs as much as possible to help maintain our local economic impact and community service. Consequently, we depleted our cash reserves that were normally used for capital maintenance and expansion projects. Today, these reserves are completely wiped out and our capital needs are mounting up.”

--Arts, Culture & Humanities NPO, FL

  • 42% of survey respondents reported an operating surplus in 2012, compared to 44% in the previous year.
  • The outlook for 2013 is more uncertain: just 28% predict ending the year with a surplus. 50% say 2013 will be the same as or harder than 2012.
  • The sector remains divided between the 'haves' and 'have nots': 60% of arts organizations reported three months or less of cash on hand. While 20% added to reserve funds in 2012, an equal number drew down already limited liquidity.
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A piece in yesterday's New York Times sounded a note that's all too familiar to our consultants at Nonprofit Finance Fund.  "For Arts Institutions, Thinking Big Can Be Suicidal” highlighted a new study by the Cultural Policy Center at The University of Chicago showing that the enthusiasm for fancy new buildings and extensive renovations has put an incredible strain on arts institutions.   

This Edifice Complex is indeed omnipresent in the cultural sector. In our 30-plus years advising and financing arts organizations at NFF, we’ve seen scores of organizations jeopardize the long-term vibrancy of their programs because they focused on getting the building built rather than having a healthy organization inside it. In our experience, the institutions that undertake facility expansion successfully run capital campaigns that place the facility expansion in the context of the organization’s overall vision and strategy. These campaigns have several things in common.

First, they are grounded in a reality-based business plan, meaning the organization has done a reasonable job of market-testing demand for its expanded programs within the new space. Because growth of artistic programming rarely, if ever, leads to increased earned revenue sufficient to cover expense growth, successful organizations are able to attract a “market” of reliable paying customers and donors who together will meet the larger institution’s full annual operating costs…every year, forever.

Second, we are increasingly seeing campaigns that include two or more years of flexible capital to pay for the temporary deficits likely to be incurred as the organization’s programs grow ahead of revenue expansion.

Third, the campaigns go beyond fundraising for classic restricted endowments (which need to be quite sizable to generate meaningful annual income) to include one or more cash reserves that can be designated by the board of directors, then spent and replenished for a number of purposes, including the long-term care and feeding of the facility, future rainy days and creative risk taking.

There are many organizations that complete beautiful building projects without having achieved all of the above. Many of them are in an annual struggle to pay their bills and maintain their facilities while delivering imaginative artistic programming. Our advice to our clients, with great respect for their desire to remain energized, competitive and relevant, is summed up well by Duncan Webb in the New York Times article, “Don’t build what you can’t sustain.”

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Learn more about NFF's work with arts organizations here.     


Great art is often created without lots of money and can be enjoyed for many years. Great arts organizations without the right kinds and amounts of money, however, struggle to see another day.

Mission success for nonprofit arts organizations is reflected in the creation, sharing and appreciation of meaningful work.  Each organization has a different artistic vision and goals, as well as its own strategy for reaching and engaging audiences.  Behind every successful organizational strategy there should be a sound approach to obtaining and stewarding the financial resources required to support mission execution over time. This is a capitalization plan. At its essence, a capitalization plan serves as a roadmap for ensuring an organization has the cash and other assets it needs to manage risk and pursue opportunity.

Strategic plans often lack a rigorous financial foundation. They fail to consider the long-term financial resources needed to support program goals. And when they do include a financial plan, they often conflate regular revenue (ongoing) with capital (periodic), or neglect capital needs altogether.  While financial projections that quantify the future revenue and expenses associated with a strategy are critical components of any strategic plan, they are not enough.  Consideration must also be given to the organization’s long-term balance sheet –or capitalization– needs. 

A capitalization plan is really just an approach to building the right balance sheet. It should consider the kinds and degrees of artistic and organizational risk an organization can and wishes to tolerate, as well as the creative ambitions to which its leaders aspire.  Specifically, a capitalization plan should address an organization’s financial health and goals in the following three areas: liquidity, adaptability and durability.

  • Liquidity: having adequate cash to meet ongoing operating needs
  • Adaptability: access to flexible funds to adjust to evolving circumstances
  • Durability: assets to address a range of future needs

Capitalization planning is not one-size fits all

While the amount of adequate liquidity may differ by organization, cash is king for all nonprofits, regardless of size. Many organizations also need periodic access to flexible capital to pay for adaptation –whether related to growth, restructuring, program revitalization or even downsizing. 

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Today, with the help of a particular kind of money--Change Capital--Alvin Ailey American Dance Foundation is attracting new revenue by building a technology platform and internal capabilities that maximize opportunities for patron and audience engagement.  Merce Cunningham Dance Foundation is raising money upfront to wind down its operations in a graceful way and leave a meaningful legacy. 

These are success stories.  But, when grantmakers and grantseekers fail to make the distinction between different kinds of revenue and capital, the consequences can be dire: desired outcomes aren’t met, organizational infrastructure is hollowed out, and communities go underserved.  Given these risks, the nonprofit field and funder community need greater clarity about the role of each type of money and what they can separately and collectively achieve. 

First, some definitions:

General Operating Support

GOS is unrestricted revenue, meaning it can be spent at the organization’s discretion – on anything. It might be used to fund programming, to offset administrative salaries or to pay the rent.  In a universe where many grants are tied exclusively to specific programs or projects—often without paying for an appropriate share of the infrastructure required to deliver them—GOS is a rare form of flexible revenue that can pay for mission-critical expenses that few (sadly) are yet willing to support. As such, annual GOS is an essential element of a healthy revenue mix for any organization. It is typically raised from select foundations as well as individuals and corporations, often through special events.

Capacity Building Revenue

Grants for capacity building, whether formally restricted or not, are revenue typically earmarked for building new organizational knowledge, staff and infrastructure. Board development, expansion of the marketing department and the purchase of new technology would all qualify as capacity building expenses.  GOS is often but not always used to pay for capacity-building activities. In that sense, the two can overlap. The difference is that capacity building dollars usually have a specific non-programmatic intention.  They are typically raised from foundations.

Change Capital

Change capital is a concept we developed at NFF to describe a flexible form of capital, distinct from revenue.

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Attendance at the TCG Fall Forum on Governance is comprised of primarily executive directors and board members, with a sprinkling of representation from artists and staff members from the nonprofit theater world.  So, after a day of terrific conversations, it was with great pleasure that I gathered a handful of them together for a panel discussion: “So You Have a Deficit, Now What?”  What followed was a refreshingly frank discussion punctuated with practical lessons applicable to the work of any nonprofit administrator: 

Preliminaries
We began with a few general concepts:

  • Talk of deficits demands a consideration of assets, but some valuable assets don’t appear on a balance sheet.   Assets can also include intangibles such as:  audiences, knowledge, staff members, a board of directors, openness to change, technological tools and savvy, diversity of background and age among your staff, board and stakeholders, civic and business partners, your “brand”, organizational self awareness, and, critically, when seeking to overcome deficits, knowing your impact. 
  • When considering “health” metrics at NFF, we think in terms of “months of cash” on an Unrestricted Liquid Net Assets (ULNA) basis.  If you strip away all of the buildings, property, equipment, temporarily restricted, and permanently restricted items from your Net Assets, how much cash is left for operations?  It can vary, but a rough starting point for an ideal is a 3 month cash/ULNA reserve.  
  • Deficits can be “financed” through a variety of means including: accounts payable, mortgage debt, drawing on reserves, foregone wages, employee furloughs, and over-extended lines of credit.  It can be difficult to ascertain whether an organization is operating at a deficit, and structural operating deficits can be masked by a period of operating at sub-par capacity levels in order to keep expenses in-line. This will not be sustainable.

Managing Costs and Revenue

Tracy E. Long, General Manager of Adirondack Theatre Festival started off the panel by describing an initiative to overcome a $29,000 shortfall on a prior year’s performance, an 8% deficit on the annual budget.  While the scale may seem relatively small, the deficit posed a significant challenge to their cash flow and was an ongoing concern.  Long took on the deficit by addressing both revenue and costs: 

Revenue side

  • Increase ticket revenue on the margin by raising ticket prices by $3 each.
  • Develop theater projects with partners to share costs but generate new and increased revenue.
  • Respond to board member interest in hosting a “Brewfest” with board member spouses and another nonprofit to generate fundraising revenue. 

Cost Side

  • Decrease rehearsal periods for plays that could still be produced effectively with shorter advance time,.
  • Change the design on printed materials to result in lower printing costs.
  • Cut the full-time production manager and move to a “variable” staffing method – hiring as needed for theater tech and sharing the management tasks among the remaining staff.

Accumulated vs. Structural Deficits
Michael Gennaro, Executive Director, Trinity Repertory Company, began by making two important points:

  • Even well managed companies are beginning to fail.
  • Accumulated deficits and structural deficits are different and managing them requires different strategies. 

Michael drew from his experience with the Pennsylvania Ballet as his first example.  When he went there he found an accumulated deficit of $2 million on a $6 million operating budget.  In that instance Michael suggests the first step is to analyze what makes up the debt you are inheriting and evaluate any creative strategies you can employ to get rid of it.  At the Pennsylvania Ballet, the debt was almost completely financed through accounts payable, so Michael negotiated a “work-out” with the vendors to pay a percentage on the dollar of outstanding bills and thus retire the deficit.

In his current tenure as the Executive Director at Trinity Rep, he inherited a more challenging scenario:  Three separate lines of credit were maxed out or frozen, and the building required an expensive update to meet fire code standards.  Together, they amounted to more than $3 million dollars of accumulated deficit with the cost of deferred upgrades to the building generating a structural deficit.  In this instance he took the following steps:

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Will a community revitalization strategy centered on the arts awaken us from the economic doldrums?  If the first 34 ArtPlace projects are representative of that approach, then the answer is yes. 

It’s hard not to feel worn down by the news lately.  The statistics are sobering – our unemployment rate is still above 9% and the poverty rate rose to 15.1% - the highest level in almost two decades.  The stock market is down since January of this year, and it’s not clear that President Obama’s jobs bill will make it through Congress successfully.  In our work with nonprofits all around the country, we are seeing this news unfold right in front of our eyes – with continued weakness across the sector.

ArtPlace

But in New York City, an abandoned East Harlem school will soon offer 90 housing units for artists and 13,000 square feet of community space for arts-related non-profits – while simultaneously promoting the neighborhood as a major Latino cultural capital.  In Wilson, North Carolina, an Art Park is taking shape – featuring Vollis Simpson’s enormous whirligig sculptures—and spurring the development of an “industrial artisan district” that will both attract artists and provide skilled workforce training.  And in Detroit – where unemployment well exceeds the national average – the creation of the Sugar Hill Arts District is allowing for a rebirth of Detroit’s cultural identity.  A planned redevelopment of vacant property and an outdoor arts venue will create jobs and increase attraction to the downtown.  Likewise, adjacent to the Watts Towers in Los Angeles, three houses will be rehabilitated to showcase the work of visiting artists and attract new visitors. Projects like these – bubbling up around the nation –further validate the nonprofit (and now the cultural) sector’s role in boosting employment, revitalizing communities and realizing neighborhood change.  

And it’s not just grant money that will drive community and economic development.  As part of the ArtPlace initiative, NFF will also administer a $12 million loan pool available to organizations advancing place-based work.  What we have learned during NFF’s 30 year history as a lender and advisor to cultural organizations is that knowing how and when to use debt is a key component to managing an organization.  The loan pool will provide an opportunity for organizations possibly left out of the credit market to use debt as part of their strategy for growth and development. 

While creative placemaking is not a new vehicle for economic change, ArtPlace takes a novel approach – bringing together an innovative public-private partnership (with NEA and seven other supporting federal agencies), critical grant funds (ten private foundations), and access to credit (six financial institutions) so that a full complement of capital is available in making all of these communities vibrant places to work and live.   

We don’t need a golden ticket to realize successful economic development.  We need more of the innovation and partnership inherent in ArtPlace, and if we can foster more initiatives like this, I’m confident that we will succeed.

Twenty-five percent of annual operating expenses. That’s what the National Center for Charitable Statistics recommended in it's Operating Reserve Policy Toolkit for Nonprofit Organizations, published in September 2010 in partnership with the Center on Nonprofits and Philanthropy at the Urban Institute and United Way Worldwide.  Grantmakers in the Arts, in January 2010, launched their National Capitalization Project and at their October meeting in Chicago released a summary document which stressed the importance of well capitalized organizations and added, “…we repeatedly came back to the fact that the most common source of capital is accumulated surpluses. We agreed that getting organizations to achieve a surplus would require encouraging a significant shift in nonprofit practice and culture, a challenge we thought well worth undertaking.”

Nonprofit Finance Fund has long been a proponent of healthy balance sheets, but as the reports and recommendations mount, it’s clear that NFF is not alone in suggesting a course of action that considers the creation of reserves.  While reserves alone do not comprise total capital structure, they are an indicator of the degree to which an organization is prepared for the day to day and long term challenges they may face.   Capital structure is the nature, composition and magnitude of the assets, liabilities and net assets comprising the balance sheet – or in other words the financial and physical platform from which the organization’s mission is accomplished.

The provocative question is, how will nonprofits develop healthier balance sheets?  And perhaps more pointedly, how patient are we willing to be?  While generating operating surpluses may be ideal, it will take time and patience to realize a well capitalized sector utilizing this approach.  Our third annual national survey of over 1900 nonprofit leaders (funded by Bank of America) is telling on this point: 

Nonprofit Finance Fund

Annual Survey of Nonprofits 2011 (excerpted) 

All Nonprofits

Arts Nonprofits

Organizations reporting break-even or deficit levels in 2010

56%

59%

Organizations expecting 2011 results at or below break-even

70%

73%

Organizations closing the year within a 5% margin above or below break-even

56%

59%

Organizations expecting 2011 results within the 5% margin

60%

66%

Organizations with 3 months or less of cash in reserve at the time of survey (early 2011)

60%

65%

So, is capitalization via accumulation of operating surpluses the answer?  In simple terms, if we are waiting for the sector to build (or re-build) balance sheets independent of new philanthropic dollars, it will take a minimum of five years for those functioning at the 5% surplus level to generate even the equivalent of three months of additional cash reserves.

At NFF our recently released paper, The Case for Change Capital in the Arts, sets out a series of definitions, strategies, and sample cases from our work with Leading for the Future (funded by the Doris Duke Charitable Foundation) that can inform the conversation about capitalization.  In today’s economic environment, in the midst of the conversations and changing dynamics in the field about capitalization for nonprofits, the time for an equity ethic, an embrace of philanthropic equity if you will has arrived.   While we have many tools to teach nonprofits how to create new strategies for operating that generate surpluses, the sector has been struggling for a long time with inadequate capitalization.   Asking nonprofit leaders to generate operating surpluses to build healthy balance sheets will also require asking ourselves if we are providing the proper support for that expectation to be realized.

National Black Arts Festival, one of the ten arts organizations participating in our Leading For the Future (LFF) initiative (with Doris Duke Charitable Foundation),  produced a fabulous video about their efforts to expand outreach to new audiences using Change Capital.  You can see the list of other participating organizations here and read some of the early lessons of the LFF initiative in the Case for Change Capital report and Financial Reporting Done Right, a companion guide to accounting for capital in nonprofit organizations.

 

Last week, we published a series of documents stemming from the early results of our Leading For the Future initiative, funded by Doris Duke Charitable Foundation.  You can download the Case for Change Capital in the Arts here and the companion document, Financial Reporting Done Right, right here.  Together they showcase the lessons of the work done so far and provide a road map for foundations and their grantees who might like to put some of the lessons into practice themselves.  The Case for Change Capital in the Arts made Nell Edgington's 10 Great Social Innovation Reads for May and got a thorough airing on Andrew Taylor's Artful Manager blog as well.   

In late April, we gathered the participants in the initiative together in New York City to talk about how their capitalization experiments are going.  We had a chance to interview two of the organizations in greater depth.  Earlier this week, we posted Rebecca Thomas' interview with Charles Dillingham of Center Theatre Group.   Below, you'll find Rodney Christopher's interview with Polly Carl and Martha Lavey of Steppenwolf Theatre Company who share how they've invested their change capital over the last two years.  

 

Last week, we announced a new series of publications laying out an approach to providing and accounting for influxes of capital in nonprofit organizations, with a particular focus on arts organizations.  The publications stem from early results we're seeing from a five-year initiative called Leading For the Future, which we've undertaken with support from the Doris Duke Charitable Foundation. (Read more about it and download those publications here!)  In April, we held a gathering of the arts organizations participating in the initiative, and we had a chance to talk to two of the groups, Steppenwolf Theatre Company and Center Theatre Group.  Below is the interview our Rebecca Thomas did with Charles Dillingham of Center Theatre Group: