News and analysis
April 07, 2014

Many Groups Seek New Sources of Funds as Economy Recovers, Study Finds

Courtesy of Boys & Girls Club of Greater Nashua

When the Boys & Girls Club of Greater Nashua, in New Hampshire, lost a federal grant that supported its arts programs five years ago, the club had to lay off its dance director and rely on intermittent volunteers. Its arts offerings became sporadic, and some teenage girls stopped coming to the club.

Last year brought another blow from a once-dependable source of funds: The local United Way cut its operating support in half, a $50,000 hit to the Boys & Girls Club’s bottom line.

Now the club is trying to put such frustrating financial gyrations in the past, with a bold effort to quintuple its endowment, from $3-million to $15-millon, in the next five years.

Such an endowment could provide income of about $750,000 a year, nearly a third of what the club expects to be spending by 2019.

“That would allow us to sustain our programs even if an important grant were to go away,” says Patricia Casey, the club’s chief development officer. “We never want to have to close a mission-critical program because of funding sources we can’t control. When we lose those kids, they don’t come back.”

Risky Changes

A study of more than 5,000 charities released today by the Nonprofit Finance Fund suggests that the New Hampshire group is one of many nonprofits that are seeking new financial models.

Though many groups hoped the economic recovery would help shore up their finances, the study shows they are realizing that the financial downturn wasn’t the only source of their financial woes. As a result, they are trying to fashion new approaches to avoid relying so heavily on traditional sources of support like government grants and contracts.

The survey doesn’t paint an especially dire picture for current finances; 71 percent of charities said they either broke even or had a budget surplus last year.

But 41 percent of the groups reported long-term financial sustainability as their greatest challenge. And 47 percent said they planned to engage in long-term strategic or financial planning in the coming year.

Antony Bugg-Levine, the Nonprofit Finance Fund’s chief executive, says that in his organization’s work with charities, he sees wariness about the traditional systems of financing that nonprofits have long relied upon.

Government support, for example, remains among the biggest source of funds, but it is often described by charity leaders as “risky.” Even so, the charities jumping into new strategies are doing so without an established playbook, he concedes.

“They’re trading a system that they know doesn’t work for one that they don’t know but hope will work,” Mr. Bugg-Levine says. “There’s a lot of risk in this change for nonprofits.”

Demand for charitable services continues to rise even as the economy improves, the survey found.

Eighty percent of groups reported an increase in demand in 2013, and 56 percent said they were unable to meet demand—the highest proportion of groups unable to do so in the six years the fund has conducted the survey.

The rising demand may seem counterintuitive, given the strengthening economy, but Mr. Bugg-Levine says that some recent data from New York City, where he works, is in line with the survey results: Homeless shelters in the city housed a record 53,615 people in January, and more than one in four homeless families are headed by a working adult.

“We’re out of the crisis in terms of job creation, but we also know what’s going on around the country in terms of income inequality,” Mr. Bugg-Levine says.

Urban Corps of San Diego County, which operates a charter school and provides “green” job training, runs programs for 200 troubled young people—and has a waiting list just as long.

Robert Chávez, the chief executive officer, says he hopes to build more relationships with local contractors and businesses seeking to hire corps members for recycling and habitat-preservation projects.

“Our ultimate goal is to be 100-percent sustainable through fee-for-service contracts,” Mr. Chávez says.

Grants and government contracts would become the “cherry on top” of that earned income, and would be used to provide extras for students, such as college scholarships.

Mr. Bugg-Levine points out that not all charities experimenting with new financing models will find success.

While not commenting on the Urban Corps’ plans specifically, he says he views the survey finding that 26 percent of groups intend to pursue an earned-income venture in 2014 as “a worrisome trend.”

“Most nonprofits are not well placed to do better than the average small businessman in their community,” he says.

What’s more important, he says, is the changing zeitgeist among nonprofits, and the awareness that new approaches are necessary. Charities might be better off trying to demonstrate the impact of their programs, he argues, so that they can seek support from the increasing number of foundations and government agencies exploring “pay for performance” projects.

Paying for Data

But the survey data raise questions about whether charities will have enough money to pay for independent appraisals of their program outcomes.

Seventy percent of charities in the survey said their donors typically requested data documenting the impact of their programs. But just as many groups said the cost of such analysis was rarely or never covered by the donors asking for those records.

Mr. Bugg-Levine argues that foundations could see more impact by providing funds to help charities pay for such assessments. “It’s the ability to prove impact that can help change the political conversation around public funding for these organizations,” he says.

Nontraditional Pitches

Don’t expect charities to propose that idea to their supporters.

While 53 percent of groups reported that they could have an “open dialogue” with donors about expanding programs, far fewer were comfortable engaging supporters on topics like general operating support (32 percent), multiyear grants (20 percent), or flexible capital for growth (9 percent).

That may be because nonprofits have learned that they won’t get much of a hearing when they stray from the traditional pitch for program support.

E3 Alliance, a nonprofit collaborative working to improve the education system in central Texas, set out several years ago to increase the number of high-school students who take challenging math and science courses by cajoling college engineering deans to give college credit to high-school students who complete such courses.

But Susan Dawson, the alliance’s president, says Austin philanthropists had no interest in supporting an “operating reserve” that the group needed to cover the costs of staff time spent ironing out agreements with universities.

“They wanted to help us recruit more students into the pipeline,” Ms. Dawson says. “But I do have to pay for our time working with college professors. It’s more nebulous, more complex, and more time-consuming, but it’s a key steppingstone.”

Kerry Sullivan, president of the Bank of America Charitable Foundation, a longtime sponsor of the Nonprofit Finance Fund’s survey, says the new data should prompt grant makers to “fundamentally rethink” how they work with nonprofits.

“The philanthropic community, now more than ever, has a responsibility to ensure that investments are supporting organizational efforts to generate measurable outcomes and drive impact,” she says.

Long-Term Planning

But the nonprofits themselves ultimately bear the responsibility for identifying a path to sustainability, Mr. Bugg-Levine points out. And he is encouraged that nearly half the charities in the survey say they’re engaged in long-term planning.

Tech Impact, a Philadelphia charity, was founded more than a decade ago to provide technology support to nonprofits, and it serves as the de facto IT department for more than 100 charities.

But in the past three years, it has added another service: job-training programs that help low-income youths enter tech careers.

Patrick Callihan, Tech Impact’s executive director, says the charity recently decided that it could make the greatest difference by investing more heavily in its job-training program.

The charity already works with youths in Philadelphia and Wilmington, Del., and it is likely to move to Las Vegas next. Tech Impact is paying for that expansion by eliminating the subsidy it once provided to lower the cost of its consulting services with nonprofits.

“We’re now shifting that work to be as close to break-even as possible,” says Mr. Callihan, noting that the charity’s fees are much lower than those charged by for-profit consultants.

While some groups tap government contracts to help cover the cost of job-placement programs, Tech Impact isn’t interested in that approach.

Some contracts require that students receive a job placement within 30 days, and Mr. Callihan says he has learned that many of the employers who hire disadvantaged youths want to test them first in an internship. That can make it hard to collect under the government contracts.

“Thirty days sounds good on paper, but it doesn’t always work that way,” Mr. Callihan says. “Government funding is risky funding in many ways.”

The Struggle to Aid All Who Need Help Worsens

In the years since the recession officially ended, the share of nonprofits that can’t meet growing demands for services has intensified. Nearly 60 percent say they doubt they’ll be able to serve everyone who seeks aid in 2014.

Top 3 Actions Charities Are Taking to Bolster Finances

Top 3 Obstacles Organizations Face in Measuring Results

Biggest Challenges Nonprofits Say They Encounter

How Nonprofit Budgets Are Faring

Source: Nonprofit Finance Fund