News and analysis
January 15, 2012

Federal Cuts Likely to Shut Down Some Charities, Report Warns

Courtesy of Vinfen

The Art Connection, a project of the charity Vinfen, has raised the group’s profile with state agencies.

Joan Thompson has been at the helm of the Mayflower Retired & Senior Volunteer Program for more than 35 years, but even she concedes that the charity’s days may be numbered.

The Massachusetts nonprofit, which connects older people to volunteer opportunities, saw a 20-percent cut in its grant from the Corporation for National and Community Service this year. The cut was a significant blow, since the grant makes up about 70 percent of the charity’s $160,000 budget. But with the country facing years of budget austerity, Ms. Thompson thinks federal support may dwindle further in coming years.

“The changes are coming faster than we have ever experienced them before,” she says. “We may have to look at possibilities that haven’t been on the radar screen.”

The charity’s board has considered abandoning its quest for federal funds in favor of a new financial approach that could be self-sustaining, such as helping companies develop volunteer programs and charging them a fee, she says. But the board has also discussed the possibility of simply shutting the charity.

Bleak Forecast

Many more charities that rely heavily on government support may soon be forced to confront similarly wrenching questions, according to a report to be issued this week by the Bridge­span Group.

The report argues that the country’s well-known fiscal challenges—including record budget deficits, spiraling health-care costs, and the demographic challenge of paying for Social Security and Medicare as baby boomers begin retiring en masse—make it all but inevitable that human-services charities will face additional cuts in the years ahead.

The report marks a departure for Bridgespan, a nonprofit consulting group in Boston, which since 2008 has issued reports on how charities can best manage in the tough economy.

The new report argues that for many organizations routine belt-tightening won’t be enough, and that charities must take bolder steps, including advocating for fundamental changes in how government funds are distributed and reshaping their services so they can grab a slice of budgets that may continue to grow, such as health-care aid.

The title of the report, “The View From the Cliff: Government-Funded Nonprofits Are Looking Out on Steep Cuts and an Uncertain Future,” underscores the bleak message.

“The idea of 'tough times’ suggests that they’ll get better at some point,” says Daniel Stid, a partner at Bridgespan and a co-author of the report. “Our view is that when you look at the bills that the government has coming due, and the resources they have available to pay those bills, there’s no way to make the math work.”

The Bridgespan report is based on survey responses from 68 human-service charities that rely on government revenues for more than half of their budgets. Bridgespan conducted interviews with leaders of 17 of the organizations, and it agreed not to quote them by name to “ensure candor.” But leaders of a half-dozen of the organizations agreed to speak on the record to The Chronicle.

The current reality for many of the organizations isn’t all bad. The groups that reported having received increased government support since 2008—24 of those in the study—was nearly as many as those that said they received less (26).

Still, the charities’ leaders expect the situation to get much worse. Sixty-one of them agreed that federal cuts will “cause significant problems for our organization as we seek to fund our mission.”

Even though many of those who responded anticipate trouble ahead, they are unsure how they should help their organizations prepare for it. Only 37 of the human-service leaders agreed that their organizations have “an adequate understanding” of how the cuts will affect them.

Greater Advocacy

The Bridgespan report notes that there are no easy answers for charities that rely heavily on government money. The usual steps—reducing staff, freezing salaries, looking for administrative efficiencies—may not be enough.

“In many instances, cinching the belt ever tighter will still fall short of the restructuring that will ultimately be required,” the report says.

The study lists only two broad approaches to help solve the impending fiscal crisis facing many nonprofit groups. The first is to have government differentiate between high-performing organizations and those that achieve less-glowing results. Cuts would fall harder on the groups that don’t demonstrate strong accomplishments. But despite some promising experimentation at the federal level—such as the Social Innovation Fund and the Investing in Innovation Fund—the vast majority of government agencies do not make such distinctions.

“The rubber meets the road at the state and local levels,” Mr. Stid says. “If state and local administrators aren’t following through in shifting resources to proven programs, it won’t really make much difference.”

Charities can help push for such changes by investing in advocacy, the report notes. Four years ago, the board of Jewish Family Services of Los Angeles created a new position, director of public policy, after realizing the importance of having a full-time person to interact with officials of the government, which provides a third of the charity’s budget.

Nancy Volpert, hired to fill that position, hasn’t exactly been able to staunch the bleeding: The charity has 320 staff members today, 100 fewer than it employed when she was hired fours ago, primarily because of the loss of some state and local grants and contracts. But the charity hopes that the stronger relationships with government officials that Ms. Volpert is developing will lead to better outcomes.

“The fact that we have Nancy on staff as public-policy director illustrates that we’re spending our time and energy and resources to help government understand what it is we do,” says Susie Forer-Dehrey, the charity’s chief operating officer. “This isn’t a one-time deal.”

The second broad approach that might help human-service charities survive steep cuts is to tap into new sources of revenue, especially government programs designed to curb health-care costs.

Vinfen, a charity that provides services to the mentally ill and people with developmental disabilities in Massachusetts and Connecticut, has seen its $114-million budget rise about 3 percent a year since 2008. Yet with state agencies providing 90 percent of the charity’s revenue, Elizabeth Glaser, Vinfen’s chief operating officer, says it’s “naïve to imagine that there won’t be significant cuts some way, somehow.”

Vinfen is considering adding a new program, home health care, to tap into health-care spending, the one item in federal and state budgets that seems to relentlessly rise. Medicare has provided incentives for the creation of “accountable care organizations”—groups of health-care providers that keep quality high while lowering costs—and many human-services charities are angling for a piece of the action.

“Everybody is jockeying for position, as you can imagine,” Ms. Glaser says. “But you don’t even know who to go sweet talk.”

Shift in Strategy

Riverbend Community Mental Health, in Concord, N.H., is embracing a similar strategy. The organization has seen its budget drop 5 percent in the past three years, and it has laid off nearly 10 percent of its staff in that time. Declining state support also forced the charity to close a 13-bed residential facility, a move that is costing the state serious money. The operating costs of the Riverbend facility were less than $200 per person per night, compared with $950 per night at the state psychiatric hospital, says Louis Josephson, Riverbend’s president.

Mr. Josephson says his lobbying efforts with state officials are “tarred as self-interested,” so he’s hoping to win a contract with one of the new accountable-care groups to prove that his organization can drive down health costs. In the Concord area, the top 1 percent of the 11,000 people on Medicare consume 18 percent of the program’s resources; 85 percent of the patients in that top 1 percent have a mental-health problem, Mr. Josephson says.

“For my field, it’s a whole new way to show our value and bring down health-care costs,” he says. “I’m hopeful that the breakthroughs we find in that arena will wake up policy makers.”

The Bridgespan experts say charities can also improve their position by thinking of government agencies as their customers. A charity might try to reduce the impact of cuts by coming up with innovations that help meet state agencies’ goals.

Vinfen recently created an arts program in Connecticut that provides therapy and job skills to developmentally disabled clients. The program has been praised by Connecticut officials, and may open the door to more contracts with the state.

“It’s helped to solidify our reputation, and improves the likelihood of expanding services, because the Department of Developmental Service knows we’re being creative in doing good things for their clients,” Ms. Glaser says.