(Photo by Joel Muniz on Unsplash)
This story is part of TRACE (Toward Response and Community Equity), a year-long series that will track how and where the region’s government, philanthropic, civic and private sector is working toward a more just recovery.
Amid the euphoric hopefulness of COVID fading, there is a quiet obituary being prepared for the region’s nonprofit sector whose finances have been devastated by the demands of the pandemic.
“This anticipated rise in nonprofit morbidity and mortality rates associated with the COVID-19 pandemic will not receive media attention commensurate with that of individual lives lost, nor likely with the coverage that will be afforded large corporations that are similarly imperiled.”
That is from the most recent report on the financial state of the region’s nonprofit community from the Greater Philadelphia Repositioning Fund, a pooled fund of philanthropic partners — including HealthSpark Foundation, the Philadelphia Foundation and the United Way of Greater Philadelphia and Southern New Jersey — that encourages and supports restructuring opportunities among regional nonprofit organizations.
But first, a flashback.
Russell Johnson, president & CEO of HealthSpark Foundation, recounted the story of the 2015 bankruptcy of the largest social service nonprofit in New York — FEGS. It shocked the nonprofit sector and raised questions about the financial stability of organizations whose mission was to help the least financially stable. What was finally uncovered made no one comfortable, Johnson recalled. As many as 40% of NYC nonprofits had no cash reserves, which meant the organizations were living paycheck to paycheck, and about 10% were insolvent — their liabilities outstripped their assets.
In response, Johnson helped create the Greater Philadelphia Repositioning Fund and led a team to undertake a similar study of local nonprofits — The Financial Health of Philadelphia-Area Nonprofits — and came up with essentially the same results in 2017 that was discovered in NYC two years earlier: “almost half of area nonprofits are running at a loss or at least producing no surplus.”
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They also found a sector unable to withstand shocks. For example, it was forecasted that a 5% decrease in government funding would result in 20% of the nonprofits that currently reported a surplus moving into deficits, and 4% moving into insolvency within five years.
The Greater Philadelphia Repositioning Fund undertook an update of the 2017 report using 2018 IRS 990 data which was issued in November 2020. On the upside, there had been improvements including a 21% increase in total revenues, a 31% increase in net philanthropy and almost a doubling of months of operating reserves from 1.6 months to three months.
However, the report continued, net income decreased by 8% and the combined deficit of the area’s nonprofits had more than doubled from $38 million in 2014 to $100 million in 2018. “[B]ut of even greater concern, the percentage of all health and human services organizations that are insolvent also remained constant at 13%,” the report warned.
The report was also using pre-COVID-19 data, begging the question — could such a fragile sector survive the challenges of a pandemic?
While the statistics to answer that question are still being collected, nonprofit obituaries are being readied.
“Yet, despite the cornerstone role nonprofits play in our communities, our report demonstrates that the nonprofit sector is at imminent risk.”
— Greater Philadelphia Repositioning Fund report
“When COVID hit, nobody knew all that it would be,” said Johnson, adding that early predictions had the problem lasting through the summer of 2020 before it ended, and life returned to its old normal.
However, the days of COVID have been long and the nonprofit sector’s pandemic heroics have been well-documented. Need skyrocketed and nonprofits pivoted to provide essentials to families, many newly impoverished by the collapsed economy.
There was also an outpouring of response funding from the philanthropic community, corporations, and individual donors.
According to the Center for High Impact Philanthropy $40 million in COVID funding was dispensed throughout the region by 13 response funds. Johnson said the HealthSpark Foundation led efforts to raise $1 million which was dispensed mostly in $5,000 increments to frontline nonprofits in Montgomery County who were focused on basic needs and “desperate for cash.”
Yet, the lesson COVID-19 has made clear is that the nonprofit sector, while much needed, is under-resourced and as financially fragile as some of its own clients.
Returning to a new normal will mean returning to an old reality of financial pressures including government contracts that underpay for services, changing priorities of donors and the philanthropic community, living with less than a month of cash, delaying payments to vendors, spending down restricted funds and not investing money for emergencies.
“At best, 20-40% of organizations appear to be financially strong, defined as having more than six months of unrestricted net assets,” according to the report.
A month earlier, in October 2020, the Impacts of COVID-19 on Pennsylvania Nonprofits report showed revenue losses of $612 million and new operating expenses of $95.3 million. Eight out of 10 of the state’s nonprofits had experienced a loss in revenues. The greatest share of revenue loss was reported by the smaller nonprofits — those with operating budgets of less than $100,000.
Of New Jersey’s nonprofits, 70% are predicting that demand for their services will rise in the coming year and almost 60% are expecting increased expenses, while less than 40% think that their funding will increase.
Anne L. Gingerich, executive director of the Pennsylvania Association of Nonprofit Organizations (PANO) said one solution was an increased flexibility in funding for nonprofits.
“Broadly define funding streams so that nonprofits can use dollars for everything from salary incentives to PPE equipment and more. Also, additional reporting flexibility, (e.g., putting some criteria in place so that grants of say, under $10,000 may not require three-, six- and 12-month reports). These are understandable but time-consuming requirements that take workers away from providing service,” she explained in an email.
The other concern is jobs. In 2010, the Philadelphia Foundation reported that there were 242,000 nonprofit employees in the region working for over 15,000 nonprofits making $11 billion in annual wages.
In September, the total nonprofit national workforce was almost 8% below pre-COVID numbers and that 49% of nonprofit employees said they anticipated more staff cuts and layoffs in 2021.
Johnson said that moving forward, if nonprofits are to survive, they will have to take the time to hold difficult conversations such as asking introspective questions about the relevance of their mission post-pandemic. Agencies also need to evaluate their effectiveness and use the answers to plot a future direction. “You ask yourself not only what can you do better, but for whom is what you do ‘better’ and how do you know?” Johnson said.
Other nonprofit experts contend that nonprofits will have to recruit financial risk managers to their boards to help them gather the expertise to tackle the uncertainty that confronts them.
Additional funding is also becoming available.
A second round of applications has opened for the COVID-19 Prevention & Response Fund , a community-led effort to invest in neighborhood-based solutions to urgent needs related to COVID-19. The Fund supports COVID-19 education, vaccine access, health resources, and outreach activities in priority communities in the Greater Philadelphia region. Grants primarily target community-based organizations with budgets under $2.5 million. Details about the Fund’s second round application process can be found on Philanthropy Network’s website . The deadline to apply is Friday, June 11, 2021 at 5 p.m.
Ultimately, the goal is to keep the nonprofit sector from dying a death of despair, especially given the safety net role its organizations play.
“Nonetheless, the disappearance of many nonprofits from the landscape will be sorely felt by individuals seeking their services, whether they be social, educational, cultural, or spiritual in nature. And it will, again, likely be some of the nation’s most disenfranchised people who will bear the brunt of these organizational failures, thereby perpetuating the injustices of social, economic, and racial inequity.”
— Greater Philadelphia Repositioning Fund report
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