News and analysis
February 02, 2012

Some Fear Hull House Closure Is an Omen for Struggling Charities

Paul Beaty/AP Images

On the last day of work, a Hull House Association employee adds her signature to one of the Chicago charity’s banners.

The financial collapse of Chicago’s Jane Addams Hull House Association shocked nonprofit workers around the country when the institution dismissed its 300 employees and shut its doors last month.

The closing was particularly jolting to many in the charity world because of the association’s iconic status: It dates back to America’s pioneer social-service charity, one that created the prototype many nonprofits follow to this day.

Hull House, started in 1889 by the sociologist Jane Addams, began as a settlement house that worked to “Americanize” Chicago’s immigrants and help the city’s poorest citizens improve their lives. Ms. Addams’ work on issues involving women, children, and public health proved widely influential; she won a Nobel Peace Prize for her efforts in 1931.

But in the 21st century, Hull House Association struggled to balance greater client needs with financial woes driven in part by declining government aid that the charity relied on for nearly 85 percent of its $23-million budget. Missteps by the group’s leadership, say inside and outside observers, also contributed to the fate of the organization.

Whatever the particular details of Hull House’s story, it may be only the highest-profile casualty so far of forces that could reshape urban social-service groups nationwide.

“It’s an explosion of need. The full effect of the recession is just now being felt,” says Terry Mazany, chief executive of the Chicago Community Trust. “If 123-year-old Hull House, with its revered name and legacy, can be taken down, then any organization is at risk.”

A Coming 'Train Wreck’

Mr. Mazany sees a “slow-motion train wreck” ahead, and organizations with revenue between $10-million and $50-million are likely to face an especially hard time coping with the economic downturn. Groups larger than that can more easily spread the costs associated with closing some programs, he says, and they can attract very good, creative managers. Smaller charities simply have less flexibility.

His grant-making organization usually works with one or two troubled social-service groups a year, he says, helping them make operational changes to stay afloat. But less than two months into 2012, the trust is already working with seven charities at risk of closure.

Many charities are hurting now, he says, because they went into debt during the mid-2000s, aggressively expanding and building new facilities. But now many are receiving less government support and are struggling to survive. Some waited too long before reaching out for help, Mr. Mazany says.

And some, he adds, came to depend so much on government funds that they have forgotten how to raise money locally.

Stephen Saunders, who took control of Hull House’s board 18 months ago, when, he says, the organization was already in deep crisis. He estimates that the charity’s debt was approximately $3-million and growing, owed to vendors and landlords all over Chicago, where the association’s programs in foster care, child care, domestic violence, job training, homeless services, small-business development and other areas pepper Chicago’s urban landscape.

The organization operated during its final nine months without a CEO, he says, after the top executive left in the spring. He says the charity didn’t have enough money to hire a replacement.

At the same time, the board was coming to realize that previous financial reports, often arriving late, had sugar-coated the situation, Mr. Saunders says. Opportunities to make hard decisions had passed.

“There were pivotal moments during the last decade when the board should have made different, tougher decisions, but didn’t,” says Mr. Saunders, an architect. The charity’s staff members kept a positive attitude, he says, and the board took its cues from them.

Crisis Deepened

Even so, the association did pare itself from a $40-million nonprofit to one running on a budget of $23-million over the past decade. It eliminated programs that couldn’t attract enough money to operate and consolidated social-service locations to reduce operating costs.

But “we should have narrowed our focus even more,” Mr. Saunders acknowledges.

The 30 board members tried to raise money through several campaigns and to put a recovery plan in place, but it was all too little, too late. Most board members didn’t have the personal resources to write big checks, or friends who could. Board members were asked to give $5,000 and raise $5,000 each year, and for some that was a stretch, Mr. Saunders says.

By late 2011, he says they were worn out and tapped out, and the debt kept growing.

Though it tried to find merger partners in its final two months, Hull House simply had too much debt, Mr. Saunders says. The group planned to file for bankruptcy.

“If someone had given us a $2-million check, that would have given us time to right the ship,” he says, adding that he would have hired a good fund-raising consultant, sought more help from private donors, and set a goal of reducing the share of government support from 85 percent to 75 percent.

But nobody wrote that check.

'Living on the Edge’

Mr. Mazany agrees that a big check might have bought time, but it wouldn’t have eliminated the need for restructuring or a merger.

Another view of what happened comes from Clarence Wood, 71, who retired in April after a decade as chief executive of Hull House.

“We had new board members who were more corporate in their experience,” says Mr. Wood, who has worked for charities for 45 years. “They didn’t understand that the reason the staff members like me were staying positive in attitude was that we are very used to social-service agencies being always on the brink of destruction. They bailed out too soon.”

The culture gap between staff and the board was evident in fundraising issues, he says.

“Over the years, I would often have to call someone in state government or elsewhere and tell them they had to get a grant or a check to us sooner rather than later because we were on the edge,” Mr. Wood says. “Some of the board members didn’t get the idea of living on the edge. They were coming out of an economy where, if your house is under water, you walk away from it. The fact is, some of us had learned to breathe under water, and they didn’t understand that.”

Mr. Wood says he suggested two potential merger partners to the board, but the board rejected them. However, he acknowledges that those potential partners had serious financial woes of their own at the time.

The former executive says the financial reports presented to the board were accurate and timely, but he knows the board might have expected a different management approach.

Mr. Wood agrees with Mr. Saunders that the board was exhausted, but he says that was no excuse to stop trying. Had he stayed, he says, he would have called for help from many quarters—and he believes it would have come.

More Closures Expected

Most, but not all, of the 40 programs Hull House offered have been picked up by other social-service groups in Chicago, mainly Metropolitan Family Services and Uhlich Children’s Advantage Network. Mr. Saunders hopes the name Hull House will reemerge through one of the surviving Chicago organizations. Right now, though, the name would just be a magnet for collection agencies, he says.

“Hull House is not an isolated situation,” says Irv Katz, president of National Human Services Assembly, an umbrella group for social-service charities. “I have witnessed a couple national groups that should have merged, but, out of stubbornness or arrogance, allowed themselves to go too far down the tube rather than look for a partner.”

When the news broke that Metropolitan Family Services would take over serving some of Hull House’s 14,000 clients, three other charities approached Metropolitan’s leader, Ricardo (Ric) Estrada.

“They were saying, well, if you are talking to Hull House, will you talk to us, too?” he says. “They were shopping themselves around. I have no doubt that we will see more closures.”

Social-service nonprofits that are surviving the economic downturn, Mr. Estrada says, have some common denominators. They “have strong boards, with civic leaders who have been asking the hard questions as well as contributing financially themselves,” he says. “They have been willing to cut programs and merge before they accumulate too much debt.”