http://www.citylimits.org/content/articles/viewarticle.cfm?article_id=3794

City Limits WEEKLY #700

August 31, 2009

Nonprofits' Outlook after a Year of Living Dangerously

These are nerve-racking times in New York City's largest private employment sector, delivering crucial social services. And next year looks worse. > By Anne Noyes Saini

[photo] A line formed last Thursday for the food pantry at the Bed-Stuy Campaign Against Hunger. Photos by Alissa Ambrose

Nearly a year after the global financial crisis brought Wall Street to its knees, a banking comeback may be underway, with several major U.S. banks reporting sizable profits for the second quarter of 2009. Though economic news remains rather gloomy in the main, other fragile signs of recovery can be found here and there.

But for New York City’s nonprofit sector—the city’s largest private employer —there is no recovery in sight. Last fall, as the stock market crashed, charitable giving declined for the first time since 1987, when another major stock market crash occurred. Meanwhile, New Yorkers hurt by the deepening recession pushed demand for social services provided by nonprofits to new highs.

A survey of nearly 250 executive directors of New York City human services nonprofits, conducted in June by the Human Services Council of New York City and Baruch College’s Center for Nonprofit Strategy and Management, found that 80 percent of the organizations surveyed had lost at least some private funding in the last year. That survey, to be released in full on September 9, also found that two-thirds of respondents had seen decreases in their public funding.

It's a follow-up to an earlier report, conducted in January 2009 as part of Baruch and the Human Services Council’s annual survey of the city’s nonprofit executives, in which 85 percent of respondents reported seeing increased numbers of clients in 2008.

But if 2009 has been rough, the outlook for nonprofits in 2010 and beyond is even worse. Foundations are expected to reduce grantmaking even further, and drastic cuts to city- and state-funded human services programs are widely expected.

“We have a perfect storm,” said Michael Clark, executive director of the Nonprofit Coordinating Committee of New York. “We have shrinking revenues and then we have rising demand, so it’s about as bad a bind as you can be in.”

The new normal, part one: Lower funding

When the markets crashed in the fall of 2008, U.S. foundations lost about one-quarter of their assets, on average. In response, roughly two-thirds of all foundations nationwide cut their charitable giving in 2009. According to the Foundation Center – a New York City-based philanthropy hub with international reach – overall foundation grantmaking will decline by as much as 13 percent this year.

Reliable data on New York City-based foundations is hard to come by, but Steven Lawrence, senior director of research at the Foundation Center, suspects that the city’s foundations are struggling more than others across the country. “Given the fact that the financial services sector was at the heart of the crisis and is at the heart of wealth generation for New Yorkers, we expect that there will be a disproportionate effect on New York City area foundations,” said Lawrence. “It’s going to be a more challenging time for New York City area nonprofits than for other cities.”

As the recession deepened, corporations feeling the pinch were forced to cut costs – and donations. Some Wall Street firms, major donors in the past, closed their doors or were acquired by other firms, leading to sudden shortfalls in charitable giving. Individual investors with diminished stock portfolios also reduced their donations.

“A lot of people said, ‘under other circumstances we would’ve given twice or three times as much, but we’re not we’re not certain where things are going to be, and we have a lot more people asking,’” said Harvey Lawrence, president and CEO of the Brownsville Multi-Service Family Health Center. “These are folks who, if they gave $5,000 this time, would’ve originally given $25,000. That’s the kind of difference the economy has made.”

So far, city nonprofits have not seen significant cuts to state and city government contracts. But a variety of other problems, such as longer payment delays from government for publicly-funded programs, reduced or withdrawn bank credit lines, and increasing operating expenses – especially employee healthcare costs – have taxed nonprofits’ cash flow at time when many can least afford it. “They have thinner cash flow and less reserves than they’ve had before—less reserves than are healthy for an organization,” said Jack Krauskopf, director of the Baruch College nonprofit center that co-sponsored the study to be released next week.

A Nonprofit Finance Fund survey released in March found that more than one-third of respondents in New York state had only enough operating cash to cover one month of expenses. Another 30 percent of New York respondents had under three months’ worth of cash on hand. “The liquidity and funding environment is so much more dire than usual,” said Kristin Giantris, the NYC-based vice president of the northeast region of the Nonprofit Finance Fund. “Organizations’ valleys are longer and deeper.”

The new normal, part two: Spiking demand

As unemployment in New York City continued to increase into the first half of 2009, nonprofits throughout the city – especially those providing emergency food assistance, foreclosure and eviction counseling, and workforce development – saw demand for their services grow by leaps and bounds. Despite receiving increased funding from the federal stimulus program, the Food Bank For New York City has struggled over the past year to stay ahead of the growing demand for food. “Our member organizations are still turning people away,” said Áine Duggan, the Food Bank’s vice president of research, policy and education.

Meanwhile, at the food rescue organization City Harvest, all 600 member agencies – including soup kitchens, food pantries, and other emergency food programs throughout the city – have reported serving more people. “They’re overwhelmed in some cases,” said Pat Barrick, who manages City Harvest’s fundraising. “There are many more families, many more children. People who don’t have a clue about the emergency food system are all of the sudden finding themselves in line.”

CAMBA, a Brooklyn-based organization that provides a wide range of human services, is struggling to keep up with the increased demand for legal services. “We absolutely are not meeting the need in any of our programs. We’re turning people away,” said Kathleen Masters, CAMBA’s deputy executive director and general counsel. “In legal services we probably see twice as many people as we can actually represent.”

The legal services unit at Gay Men’s Health Crisis has seen a similar increase in demand. This year, the unit handled more than 150 bankruptcy cases, up from a past average of two to three bankruptcies per year. During the same period, the number of people enrolled in the organization’s workforce development program quadrupled.

But nothing could have prepared chief operating officer Janet Weinberg for the sudden spike in attendance at GMHC’s free meal program, which now serves roughly 350 people each day – many of whom cannot take their HIV or AIDS medication without food. “Last January, one dinner at the end of the month before the benefits checks came out, we had 600 people come in for dinner,” Weinberg said. “That’s simply hunger, and that was unprecedented.”

The sector’s changing, but not shrinking yet

One year into the financial crisis, New York City’s nonprofit sector is badly stressed, but largely intact. In fact, while the city as a whole lost 110,000 payroll jobs between July 2008 and June 2009, locally based health, human services and cultural nonprofits actually added 9,700 jobs in that period – a 1.7 percent increase from the previous year.

Still, the city’s 42,000 nonprofits, and the foundations that fund them, have seen a handful of notable closures. The JEHT Foundation, which funded democracy and criminal justice efforts, ceased operations last December when its sole donor lost all of the foundation’s assets through the crimes of convicted investor Bernard L. Madoff, and the Brooklyn-based Center for the Urban Environment closed abruptly in April, citing “funding delays and shortfalls.”

But while outright closures remain rare, some of the city’s nonprofits have had to eliminate whole programs and other services they deliver to their clients.

At the end of June, Insideschools.org, which provides independent reviews of the city’s public schools, laid off all four of the on-staff journalists who had been researching and writing the site’s school reviews. The layoffs came after the site’s budget was reduced by nearly three-quarters when its deal with a children’s magazine was canceled. The site remains alive, if changed, through volunteer efforts.

Last month, the Brooklyn Bureau of Community Service closed its WeCARE welfare-to-work program for disabled adults, laying off all of the program’s 40 staff members. According to executive director Alan Goodman, cuts to the program’s new contract for 2010 no longer covered the Bureau’s operating costs.

[photo] Volunteers water the "Victory garden" at the Bed-Stuy Campaign Against Hunger, which was planted to supplement dwindling food reserves.

Citing similar reasons, Green Chimneys, a youth services agency, closed its Runaway Homeless Youth Transitional Independent Living program in June. “We received an offer of funding that was way less than we had been getting for the last three years,” said Theresa Nolan, division director of Green Chimneys' New York City programs. “It was way less than it takes to run the program, so we did not accept it and had to make the difficult decision to close the program.”

For now, such closures and program cuts are still the exception, not the rule. “So far, somehow, I think a lot of people are hanging on,” said Fran Barrett, executive director of the Community Resource Exchange, which provides technical assistance to nonprofits. “I think that next year, you get to a point where you can’t hang on anymore, and that’s what I think is probably ahead of us.”

But Paul Light, a professor of public service at NYU’s Wagner School – who has predicted a “withering” or “winnowing” of the city’s nonprofit sector, offered another explanation for the seeming lack of closures, so far. “The data just isn’t very good,” Light said. “The top-line story is we don’t know much…. If a nonprofit fails in the forest, does anybody hear it? We may have a lot of smaller nonprofits closing, but nobody knows it.”

The Nonprofit Coordinating Committee’s Michael Clark agreed, noting that it’s difficult to track the vast majority of nonprofits, which are very small – those with annual budgets of less than $1 million. “We don’t have a lot of data on what’s happening to these organizations. They don’t respond to surveys. They are locally supported and locally funded, so they are not competing for government grants and foundation funding.”

The reality that the sector added jobs last year sets it apart as one of the few whose overall workforce hasn’t shrunk. “While certain nonprofits have been hit by the funding squeeze, overall there hasn’t been contraction in the sector,” said James Parrott, deputy director and chief economist at the Fiscal Policy Institute. “One of the reasons why there haven't been big layoffs in health and human services is because the federal stimulus made a big difference in that area.”

Still, more than half of the 250 organizations that took part in the survey by the Human Services Council and Baruch reported laying off at least some staff in the past year.

Such stories are easy to come by: In June, the American Red Cross of Greater New York laid off 25 percent of its staff, in order to offset a shortfall in donations. Around the same time, Gay Men’s Health Crisis cut its staff by 20 percent. Faced with a 20 percent funding cut that targeted its tax assistance program last fall, the Food Bank was forced to reduce paid staff for that program by one-fifth and recruit volunteers to fill the gaps.

The cuts inevitably take a toll on the services nonprofits provide. At the Educational Alliance, for example, recent cuts to the organization’s city childcare contract have left a mark. “Our approach was to do everything we could to avoid diminishing the quality of the program,” said associate executive director Danny Rosenthal. “But we’re not magicians, and I don’t think we can maintain the same level of excellence that we had prior.”

“There is cheery talk about doing more with less,” the Nonprofit Coordinating Committee’s Michael Clark notes. “But the reality is we do less with less. When all is said and done, if your staff shrinks, you’re going to do less.”

Bright spots, too

While most of the city’s nonprofits have struggled since the economy soured, a handful of organizations have seen gains.

AIDS Walk New York, an annual fundraiser for Gay Men’s Health Crisis, saw corporate donations increase by 10 percent this year. Meanwhile, the Brownsville Multi-Service Family Health Center received a big funding boost in the form of a new $5 million state grant, which will be used to open a satellite center in East New York and construct a new oral surgery unit. City Harvest also finished the 2009 fiscal year slightly ahead of its projected budget—thanks to an unusually successful direct mail campaign and several big, one-time foundation grants. And earlier this spring, the Bed-Stuy Campaign Against Hunger saw its budget double after a Daily News article highlighted the food pantry’s financial plight. The pantry had been on the verge of closing, but the story attracted an outpouring of individual donations, as well as new funding from city foundations.

Private and public funders have helped to minimize the nonprofits’ pain by focusing on keeping money flowing to organizations that provide “frontline” human services like emergency food and housing, legal advice, foreclosure counseling and workforce development. This year and next, federal stimulus dollars will play an important role, helping to fill gaps in city and state budgets that otherwise might have resulted in drastic cuts to human services programs.

Foundations have also stepped in to help nonprofits weather the economic storm. More are allowing their grants to be used for general operating expenses. Others have shifted their grantmaking priorities altogether – at least temporarily – to fund human services organizations that provide basic services for people hit hard by the recession. “The number of foundations providing human services support has increased,” noted Sigurd Nilsen, director of policy research at the Council on Foundations. “More foundations are maintaining or increasing their grantmaking in this area than are maintaining or increasing their grantmaking overall. You can interpret that as a shift.”

This summer, the Staten Island Foundation awarded $170,000 in emergency grants to 34 organizations. The new grant program provides funding that can be used to cover operating expenses. The New York Foundation also has also allowed the nonprofits it funds to convert existing grants to general support. “We’ve had to change the way we do our work,” said executive director Maria Mottola. “With every group, at some point the current economic situation is going to be a factor.”

One of the biggest boosts to New York City nonprofits came in February, when the New York Community Trust awarded more than $7 million to eight key nonprofits that work to alleviate hunger, homelessness and foreclosures. The grants were announced earlier in the year in order to get funds to struggling nonprofits as quickly as possible. “Our strategy is to help the ‘mothership’ organizations, which know how to use the money wisely to help their members,” said Trust spokeswoman Amy Wolf. “The idea is that these big groups really know what their constituents need, so it’s more effective to give them larger sums of money and have them distribute that.”

“The New York Community Trust stepped up big time. They frontloaded their grants and they made larger grants and they made grants to what they called a ‘safety net,’ so they funded all these really crucial frontline services for poor communities,” Community Resource Exchange’s Fran Barrett noted. “They were just heroic.”

Barrett and other nonprofit leaders also praised Mayor Bloomberg’s efforts to help the city’s nonprofits cope with the effects of the economic downturn. In April, the mayor announced a slate of new initiatives aimed at improving the way the city and the nonprofit sector, which contracts to provide most of the city’s human services, work together. The measures more than double the funding for bridge loans through the New York City Returnable Grant Fund and, for the first time, give nonprofits access to the city’s Capital Access Revolving Loan Guaranty Program. The initiatives will also institute long-awaited reforms to the city’s contracting process.

Deputy Mayor for Health and Human Services Linda Gibbs, who is overseeing the city’s effort, is working with nonprofit leaders to implement immediate changes and formulate and execute longer-term reforms. Since April, when 311 began providing dedicated assistance to nonprofits, operators have received calls from approximately 500 nonprofits. The city’s Returnable Grant Fund has also issued 25 bridge loans, worth $5 million, since July 1.

Extensive reforms to the city’s contract system, however, will require more time. In the meantime, the city has appointed a Nonprofit Contract Facilitator within the Mayor’s Office of Contract Services, who will act as a single source of help and information for nonprofits navigating the city’s cumbersome contracting system. And now, for the first time, nonprofits can monitor the status of their contracts online. “Many of these things we were able to implement quickly,” said Gibbs. “On the other hand, the city’s procurement process is a long-term reform. Those things are, by definition, harder to implement and take longer.”

Allison Sesso, deputy executive director of the Human Services Council, praised the administration, pointing out the necessity of its interest in helping nonprofits, which contract with the city to provide the lion’s share of social services. “I give them tremendous credit for taking this on,” Sesso said. “They’re trying to convene the sector and figure out how government can be helpful because they rely on us to provide social services.”

But Don Crocker, executive director of the Support Center for Nonprofit Management, questions the city’s ability to enact significant contracting reforms. “It will be a real challenge to make these [initiatives] work. ... The city is a big bureaucracy, and it’s hard to change it ... there is no real history of communication between large [city] agencies,” Crocker said. “This is a good start, but I worry about it falling short.”

[photo] Gardener Lester McMillian and Rev. Melony Samuels in their garden.

Meanwhile, others in the nonprofit community have expressed doubts that the city will sustain its assistance to the sector after the fall elections and beyond—especially if city budget deficits increase.

With or without outside help, however, New York City’s nonprofits are adapting to the challenges brought on by the financial crisis, with a variety of new business models and strategies. At the Bed-Stuy Campaign Against Hunger, for example, executive director Rev. Melony Samuels has tried everything from planting a “Victory garden” to supply the pantry with extra produce, to launching an all-out marketing offensive—complete with new letterhead, business cards, and a redesigned website.

“We have really tried to make ourselves far more marketable [to donors],” Rev. Samuels said. “We can’t think, ‘Well, we’re just a pantry.’ We’re running a business here. Yes we have to show compassion, but in order to feed these people who are depending on us, we have to change the way we think.” See sidebar.

Darker days expected

The current stress on New York City’s nonprofits is likely to worsen before it subsides. In particular, 2010 and 2011 are predicted to be especially rough years. With the temporary infusion of federal stimulus money nearing its cutoff and both the city and state projecting large deficits, across-the-board budget cuts are almost certain.

Nancy Wackstein, executive director of United Neighborhood Houses, expects a budget modification to come as soon as January. “There are not a lot of revenue options left. ... Some of this inevitably will end up in cuts to contracts,” Wackstein said. “It’s been tough this year, but it hasn’t been horrible. I think next year will be horrible in terms of being able to maintain services for people in need.”

The Nonprofit Finance Fund’s Kristin Giantris agreed. “It’s the 2010 year that is actually the harder year,” she said. “This is when the decisions become much more strategic, and some nonprofits may have to cut into the bone. It’s really 2010 that worries us more than the last year.”

At the Bed-Stuy Campaign Against Hunger, Rev. Samuels expects the demand for food to jump by as much as 30 percent within the next few months. “I know it’s going to get worse. In the summer months, our numbers usually go down. This year, they have not,” she said. “If the numbers have not gone down in the summer months, that tells me it’s going to get worse [in the fall].”

Gary Carter, Little Sisters Family Health Service’s executive director, has already prepared a contingency plan that calls for cuts to both programs and staff. “My plan for 2010 is that every program is going to experience a layoff, unless the economy changes drastically,” he said.

The situation is similar at Queens Community House. “I think that we’ll see bigger cuts—I think they’re putting it off. I think we’re going to lose some services across the board,” said executive director Irma Rodriguez. “If we’re not successful in raising unrestricted money, we’ll definitely be cutting programs. There is no fat left.”

But Janet Weinberg at Gay Men’s Health Crisis is ready to fight for the organization’s funding. “Our representatives will be hearing from me,” she said. “We’re planning on visitations to elected officials for that very purpose.”

What will New York City’s nonprofit sector look like following the recovery—if and when it comes?

There are, of course, some dire predictions.

“Something really serious needs to change right away, or we’re going to see half of the [city’s] small arts organizations die in the next twenty-four months or less,” said Kevin Cunningham, executive artistic director of 3-Legged Dog, a nonprofit theater group in lower Manhattan. “If we don’t want New York City to turn into a northeastern version of Houston, Texas, we need to take some kind of action.”

Others offer a more nuanced take.

“There will be fewer independent organizations, but I think there will be more networked organizations,” Community Resource Exchange’s Fran Barrett notes. “I think we will find some way to share back office and infrastructure, and much of that will be solved by the for-profit sector offering solutions.”

“I do think we’ll look different on the other side,” Giantris adds. “We’ll see some consolidation. We’ll see organizations redefine their programmatic objectives and organization structures, but the sector is not going anywhere.”

But Dr. Elizabeth Boris, director of the Urban Institute’s Center on Nonprofits and Philanthropy in Washington, sees the crisis itself—not the prospect of recovery—as the true opportunity.

“If the services nonprofits are providing are vital, then they have to be treated as vital and prioritized,” she says. “I don’t think the case has been made as to the cost of this hand-to-mouth approach, but this recession might do it. Maybe we can come to a more rational system…to make sure these services are on a more robust and sustainable economic platform.”

“Is this,” Dr. Boris asks, “the way we want to provide the safety net and essential community services?”

- Anne Noyes Saini