The financial health of Philly nonprofits isn’t looking good. Here’s how to fix that

Here’s the thing: When looked at broadly or in aggregate, the nonprofit sector in Philadelphia actually isn’t doing too bad financially, according to a recently published report examining the financial health of local nonprofits.

The report, funded by The Philadelphia Foundation and produced by management consulting firm Oliver Wyman, nonprofit merchant bank SeaChange Capital Partners and nonprofit database GuideStar, states almost $16 billion in local revenue with an 11 percent margin of net income. Nonprofits also have an average of 10 weeks of expenses via cash in the bank.

But John MacIntosh, a partner and board member at SeaChange and one of the report’s authors, warned nonprofit leaders, board members and funders present at an early morning presentation of the report this past Monday not to look at the sector as a whole. In reality, he said, “when someone tells you about ‘the sector,’ just leave the room.”

Because when you get to the nitty gritty details of the report that look at the individual organizational level — and the fact that there is such a wide range of nonprofits doing all kinds of good work — that’s where things start looking more grim.

A few of the more pertinent findings:

• More than 40 percent of the nonprofits are running at a loss or producing no surplus funds at all.
• Fewer than 40 percent of organizations have more than six months of cash or operating reserves, while a quarter of nonprofits have a month or less in cash reserves.
• Around 7 percent of the region’s nonprofits are insolvent, which means their liabilities exceed their assets, and for health and human services orgs, that rate is 13 percent.
• Speaking of those health and human services orgs: Philanthropy for that industry is pretty low, with the median such nonprofit earning only 4.7 percent of its revenue from philanthropy. Compare that to the average environmental and arts, culture and humanities nonprofit earning 50 percent of revenue from donations.
• Almost 70 percent of nonprofits have operating budgets of less than $1 million while only 8 percent have budgets of $10 million or more. But when it comes to providing services, the smallest 50 percent of the orgs contributed less than 5 percent altogether, while the largest 10 percent provided almost 85 percent of all services.

Click here to sign up to download the full report, titled “The Financial Health of Philadelphia Area Nonprofits.”

Some caveats with which MacIntosh prefaced his presentation included that this report is using data from 2014 IRS Form 990 data, which doesn’t take into account the 2015 Pennsylvania budget impasse that hit many local nonprofits hard. Also, he made sure to mention that Form 990 data “isn’t perfect but is as good as it gets,” considering the last report that ever compiled this kind of financial data for nonprofits, also commissioned by The Philadelphia Foundation, was back in 2010.

(Eds and meds were also taken out of the report, two nonprofit industries for which Philly is especially known.)

Things could definitely be better. But as MacIntosh also stated, the fact that nonprofits are struggling financially should not come with “any surprise or shame” — the work is hard and funding often comes from “cost-minus” sources, such as government contracts in the form of reimbursements. Indeed, large organizations, categorized by having operating budgets of $10 million or more, are “overwhelmingly funded by the government,” he said.

That can be a problem. The report outlines how a 5 percent reduction in government funding could push close to 20 percent of nonprofits from earning a surplus to a deficit and turn an additional 5 percent to insolvency in less than five years.

During a panel discussion hosted by Nonprofit Repositioning Fund Director Nadya Shmavonian following the presentation, Urban Affairs Coalition (UAC) President and CEO Sharmain Matlock-Turner detailed how government contracts can often lead to more complications than solutions for many programs and smaller orgs.

“That meant you needed to figure out where to find the money, spend the money, deliver on the goods and services and then submit a report and then have someone review it and then have someone think about how long it was going to take for you to ultimately receive a check or financial transfer,” Matlock-Turner said. UAC started its fiscal sponsorship program specifically to help these entities deal with the shortcomings of government contracts.

Nadya Shmavonian, John MacIntosh, Sharmain Matlock-Turner, David Griffith and Jeannine Lisitski. (Photo by Albert Hong)

So, what are the next steps? How to improve this seemingly dire situation? MacIntosh laid it out plain and simple: risk management.

As the data shows, many nonprofits are struggling to keep the lights on, let alone come up with effective programming helping those who need it most, something MacIntosh said he personally saw several nonprofits in New York fall victim to (he called it the “zombie” problem). So it’s become that much more important for nonprofits to start thinking and talking about contingency plans.

Board members, trustees, funders, etc., need to have what can be uncomfortable conversations about all the worst-case scenarios. Funding should also be reconsidered when it comes to things like nonprofit overhead.

Even after all is said and done, MacIntosh stressed how “it may not be enough” to save a failing organization — but organizational survival shouldn’t necessarily be the top priority for nonprofits.

"Sometimes the right answer to take that mission forward is to move the organizational boundaries, to consolidate with somebody else."

“Sometimes the right answer to take that mission forward is to move the organizational boundaries, to consolidate with somebody else,” MacIntosh said, “even to dissolve in an orderly way while you still have the time and capacity to make wise choices rather than hitting a wall, leaving the people you serve, your employees and even your board members in the lurch.”

(For anyone interested in having either MacIntosh or his fellow staff at SeaChange Capital Partners to come to your org and speak about this stuff, MacIntosh said to just drop him a line — info@seachangecap.org.)

David Griffith, executive director of Episcopal Community Services (ECS), said he learned from the report that nonprofits “compete way more than we should, and there is great wisdom in us forming partnerships and collaborations.” Case in point: ECS brought in a mental health service provider to help with its mission of ending intergenerational poverty, because it was something the ECS didn’t offer at that time.

And for Jeannine Lisitski, executive director of Women Against Abuse, which was the first Philly nonprofit to win the Lipman Family Prize this past summer, it’s more important now than ever for nonprofits have a laser-sharp focus on their missions.

“We need to embed ourselves wherever the folks are that need us the most and make it more efficient,” Lisitski said, “to be there and intervene.”